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Our commitment is to you and as such we have created a website that brings you the resources and information that we think is most important to today’s middle market business owner and their advisors. As the Federal, state and local governments draft new policies that impact the business community, we will provide the information here – and most often we will also have a brief review of the implications for you. Please visit this page whenever you are looking for the latest accounting and tax and business pronouncements!
New Law Requires 1099s for Goods and Services Starting in 2012
Under a provision in the new health care reform law, self-employed individuals, small businesses and charities will be required to provide 1099 forms to every vendor from whom they buy more than $600 in goods, beginning in 2012. In order to minimize the burden that complying with this will bring, the Internal Revenue Service is considering exempting some small-business purchases made with credit or debit cards (as they will already receive a record of those transactions from financial institutions, starting in 2011). We will keep you posted on any changes to the new provision.
Synopsis of Some Critical Topics for the Newly passed Health-Care Reform-Act
Ninth Circuit Says Late-Filing Penalty Amount is Mandatory
Even though your nonprofit organization is exempt from paying income tax, you are required annually to file Form 990 and there are consequences for not filing or late filing..
Just this month, the Ninth Circuit Court of Appeals held that courts and the IRS have no discretion to reduce the amount of the late filling penalty for tax-exempt organizations, overruling a previous district court decision (Section 6652).
For those nonprofit organizations that file late, Section 6652 provides this formula for determining the late-filing penalty:
· For exempt organizations with more than $1 million or less in receipts, the formula calls for a penalty of $20 per day, up to $10,000 or 5% of the organization’s gross receipts, whichever is less.
· For exempt organizations with more than $1 million in receipts, the formula calls for a penalty of $100 per day, up to $50,000.
The Ninth Circuit found that in providing the formula, the Code section “uses mandatory language in all respects, leaving the IRS no discretion in deciding in deciding how much penalty to impose.” The court pointed to the words, “there shall be paid,” in Section 6652 ©(1) and said “this language does not confer on the agency discretion to decide how much ought to be paid.” Posted 3/18/2010
New Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers
Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law on March 18. 2010.
Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2% payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after the date of enactment. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2% share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.
In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.
The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. (Family members and other relatives do not qualify).
The new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.
Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.
Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010. Revised forms and further details on these two new tax provisions will be posted on IRS.gov during the next few weeks.
For further information call us at 973-994-9494.
"IRS Explains Significant Changes to 2009 Form 990" Posted 3/4/2010 The Internal Revenue Service has just issued the final 2009 versions of Forms 990 and 990-EZ along with instructions for comlpetion and a detailed explanation of the significant changes that have been made. These changes were made so that the new form is designed to promote more uniform reporting by exempt organizations. Most tax exempt organizations must file an annual information return with the IRS. Exemptions to this rule include churches and certain political organizations. Form 990 MUST be filed by an organization that is exempt from tax under IRC 501 (a) that has gross receipts of $500,000 or more or total assets of $1.25 million or more at the end of the tax year. Organizations with smaller gross receipts and assets can choose to file Form 990-EZ. Those with gross receipts under $25,000 can choose to file Form 990-N electronic Notice (e-Postcard) for Tax Exempt Organizations Not required to File Form 990 or 990-EZ. Remember - an organization that fails to file an annual return or notice for three consecutive years as is required by federal law will lose its tax exempt status! Once this happens, it will have to reapply with the IRS to regain its tax - exempt status. Any income received between the revocation date and renewed exemption may be taxable. As we said, there are a number of critical changes to the 2009 Forms 990 and 990-EZ. For more information, please feel free to call our ofice at 973-994-9494 or visit the IRS at www.IRS.gov./charities for a detailed description.
"Five Ways to Offset Education Costs" posted 3/4/2010 In response to the incredible cost of obtaining a college education today, the IRS has just published "Five Ways to Offset Education Costs" to help students and parents looking for ways to help them manage the cost of today's tuition.
Please note: You cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year. You also cannot claim any of the credits if you claim tuition and fees deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit. For more information, see Publication 970, Tax Benefits for Education, which can be obtained online at IRS.gov or by calling the IRS at 800-TAX-FORM (800-829-3676)
Effective with plan yeaars beginning on or after January 1, 2009, all pension and welfare plans are required to submit their annual returns (Form 5500 or 5500-SF) electronically through an all-electronic system called EFAST2. The Sponsor of the Plan must register as the "Filing Signer" on the DOL's EFAST2 system. The returns can no longer be filed by paper, unless you are filing Form 5500-EZ. As a new user of EFAST2, you will need to register to access the filing system before Form 5500 can be filed. The registration process must be done online but is simple and will take only a few minutes to complete. During the registration process you will be assigned a User ID, PIN and create a password. The registration link can be found at www.efast.dol.gov The PIN assigned is confidential and is not allowed to be shared with anyone; including your CPA who prepares your return. You will be asked to accept a PIN Agreement to not share your PIN with anyone. This is why each Plan Administrator (or other signer) must register and obtain a PIN which will be used to electronically sign the returns in order to satisfy the annual reporting requirements under ERISA and the Internal Revenue Code. Your CPA will work out the details with you on how to enter the password from EFAST2 into their tax software. During registration you will be asked to select your type of user. You should select 'filing signer'. According to the DOL website base of frequently asked questions: (http://www.dol.gov/ebsa/faqs/faq) Filing Signers can sign Form 5500/5500-SF filings. Signers must ensure that the filing information is correct prior to its submission. The signer's signature indicates that to the best of the signer's knowledge and belief the filing is true, correct, and complete. Signers include Plan Administrators, Employers/Plan Sponsors, and Direct Filing Entities. If your Plan does not qualify to file form 5500-EZ, it may qualify to file a new two-page short form filing, 5500_SF. Eligible small plan filers may be able to take advantage of this reduced reporting, but are still required to register for credentials with the Department of Labor as described above. If you would like to discuss the specifics of your Plan's filing, or if you have any questions or concerns regarding this new procedure, please contact our office.
Posted 1/7/10
Five Filing Facts for Recently Married or Divorced Taxpayers If you were married or divorced recently, there are a couple of things you'll want to do to ensure the name on your tax return matches the name registered with the Social Security Administration. Here are five facts from the IRS for recently married or divorced taxpayers. Following these steps will help avoid problems when you file your tax return.
http://www.socialsecurity.gov/online/ss-5.pdf
Estate Tax Update Posted 1/15/2010 In spite of all the predictions to the contrary, Congress has allowed the 2001 Tax Act to remain in place. This means that for the year 2010 - but not for subsequent years - unless Congress takes action, then:
For most of us, the two significant facts are that the federal estate tax and the GST will be repealed for the estates of persons dying after December 31, 2009. The House of Representatives passed a bill in December extending the current (2009) provisions with a top rate of 45% and a $3,500,000 exemption amount, as the administration had requested, but the Senate failed to act. We expect that attempts will be made in 2010 to enact similar legislation, likely retroactive to January 1, but when that might occur is unclear. However, many have questioned the constitutionality of a retroactive tax bill even if enacted. If Congress fails to act in 2010, the pre-2001 tax law, with a top estate and gift tax rate of 55% and a $1,000,000 exemption amount, will return for estates of persons dying after December 31, 2010 as will the GST tax. This has federal implications only and does not affect state estate taxes. That is, New Jersey continues with the same 16% top rate, but a $675,000 exemption amount. We are currently exploring the tax planning opportunities resulting from the repeal but this is a difficult task since it is unclear what Congress will actually do, and whether or not any attempts at retroactive changes will be upheld when challenged in the courts. We continue to monitor the situation and we encourage you to contact us if you would like to discuss how this impacts your personal situation. We can be reached at 973-994-9494 or by e-mail at ken.hydock@sobel-cpa.com Please note: Research for this update and some of the details provided here were reprinted from information supplied through Integrity Advisors Pension Consultants.
First Year for No Cost of Living Adjustment in Social Securty Benefits Since 1975
Posted 11/03/09 With consumer prices down over the past year, monthly Social Security and Supplemental Security Income benefits for more than 57 million Americans will not automatically increase in 2010. This will be the first year without an automatic Cost-of-Living Adjustment (COLA) since they went into effect in 1975. "Social Security is doing its job helping Americans maintain their standard of living," Michael J. Asture, Commissioner of Social Security said. "Last year when consumer prices spiked, largely as a result of higher gas prices, beneficiaries received a 5.8 percent COLA, the largest increase since 1982. This year, in light of the human need, we need to support President Obama's call for us to make another $250 recovery payment for 57 million Americans." The Social Security Act provides that Social Security and Supplemental Security Income benefits increase automatically each year if there is an increse in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year to the third quarter of the current year. This year there was no increase in the CPI-W from the third quarter of 2008 to the third quarter of 2009. In addition, because there was no increase in the CPI-W this year, under the law the starting point for determinations regarding a possible 2011 COLA will remain the third quarter of 2008. Some other changes that would normally take effect in January 2010 based on the increase in average wages also will not take effect, even though average wages did increase. Since there is no COLA, the statue prohibits an increase in the maxium amount of earnings subject to the Social Security tax as well as the retirement earnings test exempt amounts. These amounts will remain unchanged in 2010. The attached fact sheet provides more information on 2010 Social Security changes. Information about Medicare changes for 2010, when available, will be found at www.Medicare.gov For additional information about the 2010 COLA, go to www.socialsecurity.gov/cola
Washington - The Internal Revenue Service recently announced that taxpayers who buy a new passenger vehicle this year may be entitled to deduct state and local sales and excise taxes paid on the purchase on their 2009 tax returns next year.
"For those thinking about buying a new car this year, this deduction may give them a little more drive to make their purchase this year," said IRS Commissioner Doug Shulman. "This deduction enables taxpayers to buy now and get cash back later on their tax returns." The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. IRS also alerted taxpayers that the vehicle must be purchased after February 16, 2009, and before January 1, 2010, to qualify for the deduction. The special deduction is available regardless of whether a taxpayer itemized deductions on their return. The IRS reminded taxpayers the deduction may not be taken on 2008 tax return. Posted 10/27/09
N.J. Court Unveils Mandatory CLE Plan: 24 Hours Every Two Years
In an article authored by Michael Booth, published in the New Jersey Law Journal on October 8, 2009, he states, "After two years of fact finding and deliberation, New Jersey's Supreme Court announced Thursday that it will require mandatory continuing legal education for all plenary-licensed attorneys, starting next year. Under the plan proposed by the justices [see notice to the bar], attorneys licensed to practice in New Jersey, including judges, law school professors and limited license in-house counsel, will have to take 24 hours of continuing legal education every two years. By the same stroke, the Court will abolish the skills and methods course now required of all newly admitted attorneys."
New Federal Trade Commission Rules Will Be Enforced by August 1, 2009
Businesses of all sizes that extend credit to consumers are now required by the FTC to develop, adopt and implement a written program to detect and respond to patterns, practices or specific activities (deemed to be “red flags”) encountered in the course of doing business that indicate the possible existence of identity theft. Failure to comply with this “red flag rule” rule may result in regulatory enforcement action against your business, including civil penalties calculated on a per violation basis, as well as the possibility of punitive damages and/or an obligation to pay the prosecution's attorneys' fees. If you think that this does not apply to your company, you should know that the new rule applies to businesses of all sizes and defines the term "creditor" broadly. In order for you to ensure compliance with the Red Flag Rule, a senior officer of your company is responsible for the oversight, development, implementation and administration of your program, including: -Performing an identity theft risk assessment -Developing and implementing a written program to detect and respondto the identified red flags -Providing adequate training to employees to effectively implement the program -Taking reasonable steps to insure that any third party serviceprovider that the business allows to access any covered accounts for billing, collection or other purposes, complies with the Red Flag Rule and the company’s program -Periodically updating the program to reflect changes in risks to both the customers and to the overall safety and soundness of the business from identity theft. Failure to comply with the “Red Flag Rule” can lead to regulatory enforcement action and civil monetary. The information provided here is not to be taken as legal advice, so, if you are not sure if you fall under this FTC ruling, please call Darryl Neier at the Sobel & Co. Fraud and Forensic Group at 973-994-9494 or click here to e-mail questions to darryl.neier@sobel-cpa.com. He will be glad to help you. Click here to learn more about our Fraud and Forensic Services
On June 29, 2009, New Jersey Governor Jon S. Corzine signed into law budget legislation that enacts higher cigarette, tobacco, and top-tier personal income taxes, extends a corporate income tax surcharge, and preserves the property tax rebates for lower and middle-income and disabled and senior taxpayers. The IRS announced a program for those taxpayers who have not previously complied with rules concerning disclosure of foreign bank or brokerage accounts
The IRS announced a program for those taxpayers who have not previously complied with rules concerning disclosure of foreign bank or brokerage accounts. Under this program the taxpayers have until September 23, 2009 to disclose all accounts to IRS, file and pay amended tax returns for the last six years (including penalties & interest) and pay an additional penalty of 20% of the highest balance of the accounts in the last six years. In return, the IRS will not recommend to the Department of Justice that the taxpayer be criminally prosecuted (but please note that this is not a guarantee of no prosecution). The taxpayer will also need to file amended state tax returns for all years not closed by the statute of limitations (generally three years) and possibly deals with non-prosecution issues from states, if the tax is large enough to get their attention Legal advice may be warranted in many situations, as disclosure of possible criminal activities (including non-filing of foreign account disclosure forms) to a non-attorney is not privileged. Taxpayers who conduct business or make sales in more than one state should be alert to issues regarding taxation in states other than their "home" state due to budget crisis. States are now making collection of taxes an important issue and large penalties and interest payments can be due by late filers. States are inventing more ways to claim jurisdiction of out of state businesses and state legislators find the idea of collecting taxes from those who have no vote in their state very appealing!
Governor Announces Filing Deadline Extended for Homestead Rebate and Senior Freeze Program On May 29, 2009, Governor Jon S. Corzine announced that the deadline for New Jersey’s senior and disabled homeowners to file 2008 Homestead Rebate applications has been extended to August 17, 2009. The deadline for filing a 2008 Senior Freeze (Property Tax Reimbursement) application has also been extended to August 17. The original deadline for filing 2008 applications for both programs was June 1, 2009.
The New Jersey Tax Amnesty Program will be in effect from Governor Jon S. Corzine recently signed a bill into law that authorizes a Tax Amnesty Program for New Jersey. The Amnesty Program will begin on May 4, 2009, and end on June 15, 2009.
In accordance with the law, “amnesty …shall apply only to State tax liabilities for tax returns due on or after January 1, 2002 and prior to February 1, 2009 and shall not extend to any taxpayer who at the time of payment is under criminal investigation or charge for any State tax matter.” click here to read the rest of this article
There were a number of important tax developments in the first quarter of 2009, and while the new law tax changes in the American Recovery and Reinvestment Act of 2009 got the most attention, many other developments occurred that may also significantly affect you. Clarifying guidance on waivers of RMDs for 2009. Retirement plan account participants, IRA owners, and their beneficiaries do not have to take required minimum distributions (RMDs) for 2009. The IRS has issued guidance clarifying that:
Getting maximum advantage from the homebuyer credit. In two separate pieces of guidance, the IRS has explained how to take maximum advantage of the credit for first-time homebuyers. The credit is the lesser of 10% of the purchase price or $8,000 for a qualifying 2009 purchase ($7,500 for a qualifying 2008 purchase). The credit is refundable, meaning you get it even if you don't owe taxes. The credit has to be paid back for a home purchased in 2008 but generally not for one purchased in 2009. Acredit for a 2009 purchase can be claimed on the 2008 return. In a news release, the IRS has explained the several different ways that individuals who recently purchased a home or are considering buying one in the next few months can claim the up-to-$8,000 credit for 2009 home purchases including getting an extension, filing now and amending later, amending a previously filed 2008 return or claiming the credit on a 2009 return where higher income in 2008 would reduce the credit under so-called phase out rules. In separate guidance, the IRS explained how unmarried co-owners can get the maximum credit amount. click here to read the rest of this article
Health Savings Accounts
Health Savings Accounts (HSAs) are tax-exempt savings accounts used to pay for qualified medical expenses. Due to the recent demand of consumer-directed health plans and with households bearing more health care risk burdens, HSAs, which were signed into law on December 8, 2003, were designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis. On a whole, these plans are intended to reduce health care spending and encourage more consumer control. HSAs allow the consumer to deposit funds into the account on a tax-free basis, as well as withdraw funds without any tax consequences as long as the funds are used for qualified medical expenses. Employers may also deposit money into an employee’s HSA on a tax-free basis. The funds in the account can be invested and any earnings will not be taxed. Unused funds roll over from one year to the next and accumulate. HSAs must be used in conjunction with high-deductible health plans (HDHP). These plans have low monthly premiums, yet high deductibles. These HSA-eligible plans constitute a small but growing share of the private insurance market. According to the U.S. Department of the Treasury, individuals that are eligible for HSAs are those that are covered by a HDHP, are not covered by any other health insurance, are not enrolled in Medicare (therefore, must be under the age of 65), and cannot be claimed as a dependent on someone else’s tax return. There are no income limits on who may contribute to a HSA. An individual may be enrolled in specific disease or illness insurance and accident, disability, dental care, vision care and long-term care insurance and still be eligible for a health savings account. High Deductible Health Plans (HDHPs) A high-deductible health plan usually costs less than traditional health care coverage costs. Money saved on insurance can therefore be put into the HSA. For the 2009 calendar year, the minimum deductible for HDHPs is $1,150 for self-only coverage and $2,300 for family coverage.1 HDHPs are required to meet certain criteria, including minimum deductible amounts, which are higher than health plan deductibles on average and maximum limits on enrollee out-of-pocket spending. These amounts are annually adjusted for inflation. HSA-eligible plans are sold either to individuals or through group plans (those offered through employers). HSA Contribution Rules Contributions to HSAs can be made by the individual or employer or both. For 2009, the maximum annual HSA contribution is $3,000 for self-only coverage and $5,950 for family coverage.2 Individuals over the age of 55 can contribute an additional $1,000 to their accounts in 2009 and going forward. These amounts can come from all sources—contributions can be made on behalf of an individual and then can be deducted by that individual. Contributions made by the employer are not taxable to the employees and are simply excluded from income and wages. Contributions made by the individual himself are considered “above-the-line” deductions. Contributions must be discontinued once an individual is enrolled in any type of Medicare, at the age of 65. Contributions to the HSA in excess of the contribution limits must be withdrawn by the individual or they are subject to a six percent excise tax. Eligibility to contribute to an HSA is determined by the effective date of HDHP coverage. However, in 2007 and for the future, if someone is covered on December 1, they are treated as an eligible individual for the entire year. Nevertheless, if an individual ceases to be eligible during the following year, the excess over the pro-rated contribution is included in income and is subject to an additional ten 10% tax. The amount contributed to an HSA is not determined by the date of establishing the account. Medical expenses incurred before the establishment of the account cannot be reimbursed from the account. HSA Distributions Distributions from the HSA are tax-free if they are withdrawn solely for qualified medical expenses. Over-the-counter drugs are now included in these expenses. Qualified medical expenses must be incurred on or after the date the HSA was established. Tax-free distributions can be taken for qualified medical expenses of the individual covered by the high deductible and the spouse and any dependent of the individual (even if they are not covered by the HDHP). If any funds are withdrawn from the account that are not used for qualified medical expenses, this amount must be included in income, therefore will be subject to tax, and subjected to a 10% penalty tax (except if the person dies or becomes disabled or is 65 years old). HSA distributions can be used to reimburse prior years’ expenses as long as these expenses were incurred on or after the date of the establishment of the HSA. Traditional medical costs such as diagnosis, treatment of disease and routine medical visits are allowable for HSA payments. Additionally, many expenses that might not be covered by traditional health insurance plans, such as prescription drugs, some non-prescription drugs, eye care, dental care, COBRA premiums, acupuncture, Braille books, midwife services, seeing-eye dogs and qualified long-term care services, can be paid for through HSA accounts. How These Accounts Work HSA accounts are owned by the individual, not the employer. This allows the individual to decide whether they would like to contribute, how much to use for medical expenses, which medical expenses to pay from the account, whether to pay for medical expenses from the account or to save the account for future use, which company will hold the account and what type of investments to use to grow the account. HSA accounts can be set us through banks, credit unions, insurance companies or entities already approved by the IRS, as well as through one’s employer. Like IRAs, HSAs can grow through investment earnings; they have the same investment options, same investment limitations and the same restrictions on self-dealing as with IRAs. Since HSAs are owned by the account holder and the accounts are “portable,” individuals may keep their accounts even if they switch jobs or are no longer enrolled in an HSA-eligible health plan. HSAs work in this way: individuals first spend from their HSA. If the HSA funds are exhausted before reaching the deductible, the individual must pay out-of-pocket. Once the deductible is reached, the insurance pays for all of the remaining costs. For 2009, the maximum annual out-of-pocket amount is $5,800 (for self-only coverage) and $11,600 (for family coverage).3 Comparison to Flexible Spending Accounts (FSAs) The tax benefits on HSAs and FSAs are similar, but there are several differences between the two plans. Unlike in FSAs where “use it or lose it” rules apply, in HSAs, unspent balances in accounts remain in the account until spent—they roll-over to future years. Funds in the FSA must be spent by the end of the plan year or they are lost. For FSAs, individuals do not need to be enrolled in a high deductible health plan, unlike HSAs. Health savings accounts encourage account holders to spend their funds more wisely on their medical care. From Employer’s Point of View Employers may offer their employees HSAs as an alternative to traditional health insurance, increasing their own flexibility in managing health care costs. The benefits for an employer include lower premiums on employees’ health plans, lower payroll taxes (any HSA contributions made by employers are pre-tax or tax-deductible) and key recruiting incentives. Employers may contribute as little or as much as they would like to their employees’ HSAs, as long as the contributions do not exceed the annual statutory limit. Employer contributions must be comparable for all employees within the same category of coverage (i.e. self-only vs. family coverage and full-time vs. part-time employees). Since employees self-administer their HSA, there are minimal administrative costs for the employer. Benefits of Health Savings Accounts Many experts are recommending health savings accounts to help solve the retirement equation. An HSA can provide a valuable source of retirement income alongside a 401(k) and individual retirement account. HSAs offer a triple tax advantage—money contributed to the account is tax free, the account grows tax free and withdrawals for medical expenses are not taxed either.4 There are no time restraints on HSA withdrawals, unlike IRAs where investors are required to make mandatory distributions at age 70 1/2. Proponents of HSAs, those who support consumer-directed health care, believe that these accounts will make consumers more cost-conscious, ultimately saving money for themselves and their employers. Opponents of HSAs argue that when only healthy individuals enroll in these plans, the risk pool of traditional insurance plans will become diluted with a sicker, more medically expensive population. In effect, these traditional plans will then have to increase cost sharing, potentially leading to a higher number of unemployed.5 Some critics believe HSAs will simply become a tax shelter for the wealthy, some think that patients are ill-equipped to judge proper care and that strong consumer choices may result in delay of needed care. Health savings accounts seem most beneficial for single adults and high-income families. Trends According to a report by the United States Government Accountability Office compiled in April 2008, the number of individuals covered by HDHPs has increased significantly between 2004 and 2007, from .4 million to about 4.5 million, yet this still comprises a small share of individuals with private health coverage (about 2% of the population with health insurance in 2006).6 Participation in HSAs has also increased greatly and industry estimates suggest continued growth in HSA participation. However, not as many individuals, upon having established a HDHP, enrolled in an HSA concurrently. The taxpayers with the highest HSA activity were those with higher incomes on average than other tax filers. The average AGI for filers with health savings accounts was approximately $139,000 compared with $57,000 for all other filers. These income differences existed across all age groups.7 Most participants in HDHP plans recommend them only for healthy consumers, but not for those who use maintenance medication, have a chronic condition, have children or do not have the funds to meet the high deductible. HDHP plans are generally popular with employers because they are a way to cut health care costs. HSAs seem very advantageous to employers and insurers. However, HDHP plans are not immune from premium increases. Blue Cross/Blue Shield confirmed that premiums for its HDHPs rise in tandem with older plans.8 Consumer-directed plans encourage individuals to manage their own spending; however, a dearth of medical information available makes it difficult for consumers to shop around for care. Most insurers or health care programs do not disclose prices of different services, which adds to the difficulty of making informed spending decisions when a consumer has a HSA/HDHP.
New Provisions Affecting Your Personal & Business Taxes The American Recovery and Reinvestment Act of 2009, which became law on February 17, 2009, has numerous provisions affecting income taxes for individuals and their businesses. The following summary contains information on those provisions which we believe to be of importance to you, and is not intended to be a complete description of all the tax provisions in the Act. Provisions Affecting Your Personal Income Tax Returns • The “Making Work Pay Credit” will provide up to a $400 tax credit for singles or $800 for couples filing jointly. The credit is 6.2% of earned income and phases out at Adjusted Gross Income (AGI) of $75,000 for singles or $150,000 for married filing jointly. This year's credit will be received through a reduction in employee withholding and self-employed required estimated tax payments, and will not be a check as it was for last year’s stimulus payment. • Economic Recovery Payments of $250 will be sent to recipients of Social Security, SSI, Railroad Retirement and Veterans Disability Compensation Benefits, but for those who work it will be offset by any Make Work Pay Credit. Details as to how and when this payment will be made are not yet available. • Federal and State Pensioners will receive a one-time refundable tax credit for those not eligible for Social Security Benefits. It is also reduced to the extent of any allowable Making Work Pay Credit. This primarily affects retired government employees who were not subject to social security during their working lives. • The First-Time Home Buyer's Credit is increased to $8,000 for purchases between January 1, 2009 and December 1, 2009 and is limited to first-time home buyers (defined as someone who hasn't owned a home in the three years before the purchase). The most important change made by the Act is that the new credit does not have to be repaid. The home must be occupied as the buyer's principal residence within 24 months of the purchase. The credit phases out for taxpayers with adjusted gross incomes in excess of $75,000 ($150,000 in the case of a joint return). The credit is refundable and is recaptured if the home is sold within 36 months of the purchase date. A buyer who purchases a home after January 1, 2009 under the new rules can claim the credit on a 2008 return to speed receipt of the credit. A buyer who purchased a home before January 1, 2009, must go with the old "interest free loan" credit. • Sales Tax on Vehicle Purchases is deductible in calculating adjusted gross income. For 2009, this legislation allows all taxpayers a deduction for state, local, and excise taxes paid on the purchase of a new car or light truck. The deduction phases out at AGI levels of $125,000 for singles or $250,000 for married filing jointly, and is available only as to the tax paid on the first $49,500 of vehicle cost. • Alternative Minimum Tax Relief (AMT) is extended for 2009. The legislation increases the AMT exemptions for 2009 to $46,700 for individuals and $70,950 for joint filers, which is slightly more than the 2008 levels. Beginning in 2009, nonrefundable personal tax credits are allowed in calculating alternative minimum tax, so that taxpayers subject to AMT will be able to take advantage of these credits. • The American Opportunity Education Tax Credit is allowed for up to four years of undergraduate education. For 2009 and 2010 the maximum credit will be $2,500 in each year, of which 40% of the credit is refundable (allowed even if the credit exceeds the tax). The credit phases out at adjusted gross income levels between $80,000 and $90,000 for singles and $160,000 and $180,000 for married filing jointly. This credit replaces the HOPE credit. • A Student Computer Purchase (including software, printers, monitors and other peripherals) may be treated as a qualified education expense for Section 529 plans in 2009 and 2010. This permits penalty and tax-free withdrawals from 529 plans to pay for these educational expenses. • Under COBRA Premium Assistance for the Unemployed the federal government will subsidize 65 percent of COBRA premiums for employees who are involuntary terminated between September 1, 2008, and December 31, 2009. The new provisions will become effective March 1, 2009. The former employer will pay 100% of the premiums and then take a payroll tax credit for 65% of the premiums, with the ex-employee paying the ex-employer 35% of the premiums. There will be some new administrative burdens associated with this process. The subsidy phases out between $125,000 and $145,000 for singles and between $250,000 and $290,000 for married filing jointly. For those whose benefit is phased out, the employer will pay the full premium, and the employee will pay 35% of the premium, but the IRS will collect the “excess subsidy” from the employee. Plan sponsors which include union trust funds and for-profit, tax-exempt, church and governmental employers, will be responsible for quickly administering the new provisions and will need to work closely with their COBRA administrators to accomplish this. • Health Coverage Tax Credit -- effective May 1, 2009, the health coverage tax credit is increased from 65% to 80% of the individual's premiums for qualified health insurance of specific family members. The increased credit expires in 2011. • Child Tax Credit—The amount refundable is now 15% of the taxpayer’s earned income in excess of $3,000 for 2009 and 2010. Previously it was the excess over $8,500. • The Earned Income Tax Credit will increase in 2009 & 2010, for families with three or more children. They will be entitled to a credit of 45% of the family’s adjusted gross income up top $12,570, and the credit will start to phase out at adjusted gross income of $21,420. Provisions Affecting Your Business Income Tax Return • The Act extends some deductions which were scheduled to expire at the end of 2008. These include a special depreciation deduction (bonus depreciation) of 50% of cost for business personal property and limited types of business real estate. Also extended is the Section 179 deduction, which permits a current deduction of up to $250,000 of business personal property, for those businesses which purchase not more than $800,000 of business personal property. • An additional extension is an election to accelerate AMT or R&D credits for those taxpayers who elect not to use bonus depreciation. The amount of credits that can be accelerate is based upon the amount of property purchased that is eligible for the bonus depreciation, and is further limited to the lower of $30 million or 6% of historic AMT and R&D credits. • The net operating loss incurred in 2008 can be carried back to five, four or three years, (at the taxpayer’s election) instead of the two years normally permitted for a business with gross receipts not exceeding $15 million. • Estimated Tax payments for 2009 are potentially reduced. If an individual has adjusted gross income below $500,000 and more than 50% of that income is from a small business, the individual will not incur a penalty for underestimating it taxes if at least 90% of the prior year’s tax or 90% of the current years tax, (whichever is lesser) is paid. • As far as Small Business Stock capital gains, an individual who invests in the stock of a small business and holds the stock for at least five years may exclude up to 75% of the gain realized on the sale of that stock (subject to certain requirements). This provision is effective for investments made after the date of enactment and before January 1, 2011. For this purpose, a small business is defined as a corporation with less than $50 million in gross assets. Since stock purchased in 2009 cannot be sold until 2014 to meet the five year requirement, future changes in the tax law could affect this provision. • The holding period to avoid S Corporation built-in gains tax is temporarily reduced from ten to seven years. Prior to this Act, a C corporation converting to S corporation status had wait at least ten years to avoid tax on any built in gains in the assets. The legislation reduces the threshold to seven years, but only for sales of the S corporation stock occurring in 2009 and 2010. • The Enhanced Work Opportunity Credit is expanded to add to the categories of out-of-work individuals for which an employer can obtain the Work Opportunity Credit, which now includes unemployed veterans and disconnected youth. There are specific rules and limits for both groups. This credit is available for 2009 and 2010, and for any employee who started work after 2008. • While under current law a taxpayer generally has income where the taxpayer cancels or repurchases its debt for an amount less than its adjusted issue price. The amount of cancellation of debt income ("CODI") is the excess of the old debt's adjusted issue price over the repurchase price. Certain businesses will be allowed to recognize CODI over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011. This may provide an opportunity for some debt issuers to buy back their obligations at current discounted levels and delay recognition of the resulting cancellation of indebtedness income. This provision is primarily of use to companies with publicly traded debt, or perhaps bank debt where the bank would accept a discount for early payment.
Community Benefit Standard
For the past four decades, the Community Benefit Standard (established by the IRS as Revenue Ruling 69-545) has served as an important function for hospitals; it aligns the overall mission of community service and charitable obligations as part of a hospital’s tax exempt status. In the "Community Benefit Standard" the IRS acknowledged that, "the promotion of health is one of the purposes in the general law of charity that is deemed beneficial to the community as a whole even though the class of beneficiaries eligible to receive a direct benefit from its activities does not include all members of the community, such as indigent members of the community, provided that the class is not so small that its relief is not of benefit to the community." In today’s challenging economy, one United States senator has chosen to raise the bar, ensuring compliance before giving away millions more in tax dollars. Senator Charles Grassley (R - Iowa) has proposed two amendments to the current economic stimulus bill. His goal is to establish quantitative rules regarding charity care and community benefit standards for non-profit hospitals and accountability measures for failing to meet those standards. As of 2008, the IRS introduced an optional Schedule H (a component of Form 990) for non-profit hospitals. Beginning in 2009, Schedule H will be mandatory for all 501(c)(3) hospital filers. Non-profit hospitals need to address the following key areas: • Implement Charity Care Policy Please note - compliance with the IRS Revenue Ruling 69-545, the "Community Benefit Standard" is mandatory for all hospitals that attain tax exempt status under statute code 501(c)(3).
Compliance With Section 404a Is Mandatory For All Filers!
A recent Alert from the Center for Audit Quality, issued on 12/31/08, addresses the following key areas:
The SEC has already noted during inspections of non-accelerated filers ("Small Cap Companies") that there have been deficient 404a disclosures. With that in mind, these important issues must be given immediate attention and consideration.
FASB Codification To Supersede Current US GAAP
The FASB recently announced that on 1 July 2009, the FASB Accounting Standards Codification (Codification) is expected to officially become the single source of authoritative nongovernmental US GAAP. The Codification will supersede current US GAAP, including FASB, AICPA, EITF, and related literature. The Codification is not intended to change US GAAP; instead it reorganizes the thousands of US GAAP pronouncements into approximately 90 Accounting Topics, and displays all Topics using a consistent structure. Certain SEC guidance also will be included in the Codification and will follow a similar topical structure in separate SEC sections. The Codification will require a significant change in both the research of accounting issues and in referencing the accounting literature. Because the existing authoritative guidance will no longer represent US GAAP on 1 July 2009, it is important that its constituents become familiar with the Codification structure now.
NJ Family Leave Act Goes Into Effect on July 1, 2009 The NJ Family Leave Act was signed by Gov. Corzine and will go into effect on July 1, 2009. It will provide eligible employees up to 6 weeks of partial paid family leave benefits to care for sick family members or a newborn or a newly adopted child. Employees must start contributing to the plan through payroll deductions, beginning on January 1, 2009. For 2009 the required withholding will be 0.09% of employees’ taxable wage of $28,900. The withholding rate will increase to 0.12% in 2010. Click here for full details (opens a PDF).
The Federal Research & Experimentation (R&E) Tax Credit Has Been Extended!
Expenditures incurred through December 31, 2009 and improvements made to the calculation of the credit for 2009 are included. As part of the "Emergency Economic Stabilization Act of 2008" (H.R. 1424), Congress and President Bush have extended, through December 31, 2009, the Federal tax benefit rewarding companies for investing in activities that focus on development or improvement to products, processes, techniques, formulas, or In addition, H.R. 1424 increases the Alternative Simplified Credit (ASC) from 12 to 14 percent for 2009 and repeals the Alternative Incremental Research Credit (AIRC) for 2009. Considerations Taxpayers must consider the effect of the retroactive extension of the R&E tax credit. Fiscal year taxpayers that have already filed their 2007 returns should consider filing amended tax returns for expenditures incurred after December 31, 2007 (the expiration of the credit prior to the enactment of H.R. 1424). In addition, taxpayers will want to consider the effect of the retroactive extension on estimated tax payments for 2008. The increase to the ASC from 12 to 14 percent is welcome, as many taxpayers are considering this relatively new method of calculating the R&E tax credit. The ASC, when elected, allows taxpayers to calculate the base research expenditures using 50 percent of a rolling average of the prior three years' qualified research expenditures, rather than carrying out the difficult task of calculating the company's qualified research expenditures incurred from 1984-1988. In addition, taxpayers currently using the AIRC should analyze which credit methodology (the traditional vs. the ASC) fits their facts and circumstances Due to the increased scrutiny taxpayers are currently experiencing in IRS exams, companies should review their existing documentation and methodology utilized to calculate its R&E tax credit claim to be certain adequate documentation to support its claim is available.
FIN 48 Announcement
At a meeting on October 1, the FASB decided not to exempt private companies, pass-through entities, and not-for-profit organizations from FIN 48 (Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes). There will be a one-year deferral for private pass-through entities, although the staff will study and seek public comments on this to be sure that the deferral will work as intended. Private companies will be exempt from some disclosure requirements in FIN 48 (Paragraphs 21(a) and (b)), but not from other disclosure requirements, including the controversial tax examiner wakeup call in 21(d) that requires reporting of anticipated changes in the accrual in the next 12 months (e.g. the statute is about to expire on an uncertain tax position). The FASB staff will provide guidance on the application of FIN 48 to pass-throughs.
President Signs Comprehensive Housing Legislation
Reacting to the continuing slumps in housing sales, rising unemployment numbers, and weakening credit markets, Congress passed the Housing and Economic Recovery Act of 2008 (H.R. 3221) and President Bush signed the measure into law on Wednesday, July 30, 2008. The legislation includes a $15.1 billion tax title, the Housing Assistance Tax Act of 2008, which will, in part:
The legislation also includes several revenue raising provisions and would also delay the phase-in of the world-wide interest allocation election enacted as part of the American Jobs Creation Act of 2004 for two years. For complete details, please call Sobel & Co. at 973-994-9494.
Extension Period Shortened for Partnerships, Estates and Trusts
The IRS has issued new regulations to reduce the automatic extension period to five months for income tax returns of partnerships, estates and trusts and for partnership withholding tax returns. Previously, the extension period was six months. Shortening the extension period by one month will help practitioners by requiring calendar-year partnership, estate and trust K-1s to be sent no later than September 15, a month before the October 15 extended due date for the individual taxpayers. Please note that the new regulations apply to returns due on or after January 1, 2009. This means that the original six month extension is still available for 2007 returns due in 2008. In addition, a six month extension until September 15 will continue to be available to S Corporations.
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