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SKR+Co Alert: 1099 reporting, charitable IRA distributions, late tax season opening and more!
January 24, 2013
Form 1099-related questions on your business tax return
The deadline (January 31) is quickly approaching for businesses to issue Form(s) 1099 when applicable. And this year, the IRS may be looking more closely at how the two questions added to the business tax return are answered. This article explains when Form 1099 must be filed, the due dates and penalties involved, as well as how to file.
Newly revived "charitable IRA rollovers" – Time is running out
The American Taxpayer Relief Act of 2012 (ATRA) revives for 2012 and 2013 the opportunity to make tax-free IRA distributions (up to $100,000 per year) for charitable purposes. If you’re age 70½ or older, you can make a direct contribution from your IRA to a qualified charitable organization without owing any income tax on the distribution. This “charitable IRA rollover” can be used to satisfy required minimum distributions.
To help taxpayers take advantage of the 2012 revival, ATRA allows a charitable rollover made in January 2013 to be treated for tax purposes as if it had been made Dec. 31, 2012. And if you took an IRA distribution in December 2012 and contribute it to charity in January 2013, the “direct contribution” requirement is waived; you can contribute the distribution to a qualified charity in January 2013 and treat it as a 2012 direct contribution, provided the other requirements are met.
New, simplified option for claiming home office deduction
Owners of home-based businesses and home-based workers will have a simpler option to figure the deduction for business use of the home, beginning with the 2013 tax return. The new optional method allows home-based businesses to deduct up to $1,500, based on $5 per square foot and up to 300 square feet. For more information, please read the IRS announcement from January 15, 2013.
Late tax season opening for many, but don't delay!
Due to the late passage of the American Tax Relief Act (ATRA), the Internal Revenue Service announced that it will open tax season for individual filers on January 30th. In addition, many forms are still in the process of being revised and will not be available until a later date. And, you may once again have a delay in receiving your 1099s from your brokerage firm.
That being said, as our clients, we strongly suggest that you not delay in gathering your tax information and sending it in to us to begin preparing the return. Even if you have not yet received everything, there is much that we can do today to get your tax return ready for filing which will make the process much quicker once the forms are ready.
If you have questions about how the filing delays may impact you, please contact us.
Please let us know if we can answer any questions or help in any way. You can contact us at (719) 630-1186 or through ourSecure Email.
SKR+Co Alert: Specific American Taxpayer Relief Act Changes Affecting Individuals & Businesses
January 11, 2013
Last week's e-blast included an overview of the key changes under The American Taxpayer Relief Act of 2012 (ATRA), signed into law Jan. 2, 2013 to address the “fiscal cliff”. This e-blast contains much more detailed information regarding these changes.
Despite some legislative relief, many individuals will see higher taxes in 2013
The American Taxpayer Relief Act of 2012 does, as its name implies, provide substantial tax relief to many taxpayers. But while higher-income taxpayers will enjoy some benefits, they’ll also see some tax increases. This article provides a closer look at ATRA’s most important changes for individuals, along with the tax planning implications.
2013 tax law changes may warrant a review of your estate plan
The ATRA provides substantial estate tax relief compared to the changes that otherwise would have gone into effect in 2013. In addition, it provides increased estate tax law certainty. Nevertheless, ATRA isn’t all positive for estate planning: It increases the estate tax rate compared to the 2012 estate tax law regime. The many changes going into effect in 2013 may warrant an estate plan review. This article details some of the most important changes to consider.
American Taxpayer Relief Act will save taxes for many businesses
The ATRA extends and enhances many breaks for businesses. In particular, it provides incentives for businesses to invest in assets, research and people. This article provides an overview of ATRA’s most important changes for businesses, along with the implications for 2012 tax returns and tax planning for 2013 and beyond.
We've added a Tax Law Change Update to our website that provides an overview of changes resulting from the American Tax Relief Act.
We’ve recently made some major updates to our Web Tax Guide: We added aTax Law Change Update(see above), incorporated updates throughout the guide in light of the ATRA changes, and added information about 2013 exemptions, limits, and thresholds released by the IRS.
Please let us know if you have any questions about these resources, articles, or how the recent tax law changes might affect you. You can contact us at (719) 630-1186 or through our Secure Email.
SKR+Co Alert: Immediate Payroll and Sales Tax Increases & Overview of Just Passed American Tax Relief Act
January 2, 2013
Social Security tax rates go back upandEl Paso County sales tax also increases, effective Jan. 1, 2013
One itemnotincluded in the American Tax Relief Act was an extension of the two percent employee payroll tax cut for social security, implemented in 2010. The rate was 4.2% and will now return to 6.2% on wages earned beginning Jan. 1, 2013. Therefore, employers should make sure their payroll software is updated for the new rate. (QuickBooks, for example, will calculate withholding at the new rate if the Payroll Update is run.)For more information, please click hereor seeIRS Notice 1036.
Additionally, El Paso County's sales tax rate has also increased, effective Jan. 1, 2013. The rate is now 1.23% from the prior rate of 1.00%. Businesses currently charging sales tax need to update their applicable software and their reporting for this new rate.For more information on the new rate, click here.
What the fiscal cliff deal – passage of the American Tax Relief Act (ATRA) – means for you
After much contention and negotiation, President Obama and Congress finally came to agreement on legislation to address the “fiscal cliff.” The American Tax Relief Act (ATRA) prevents income tax rate increases for all but approximately the top 2% of taxpayers. ATRA also extends other income tax breaks for individuals and businesses and addresses the alternative minimum tax (AMT) and the estate tax. This article provides an overview of some of the act’s key tax law changes.
We hope to send you more detailed information regarding how ATRA affects individuals, businesses, and estate planning next week.
Happy New Year!
All of us at Stockman Kast Ryan + CO wish our clients and friends a very happy, healthy, and prosperous 2013. We look forward to helping you achieve your goals this year and for many years to come.
If you would like to contact us for any reason, please feel free to call us at (719) 630-1186 or email us through ourSecure Email. We look forward to serving you!
The IRS provides guidance on additional 0.9% Medicare tax
On Nov. 30, the IRS issued proposed regulations regarding the 0.9% Additional Hospital Insurance Tax on High-Income Taxpayers (commonly referred to as the additional Medicare tax), which takes effect Jan. 1, 2013. This article details how the tax may affect individuals, employers and payroll service providers.
The IRS provides guidance for new 3.8% tax on investment income
Recently, the IRS issued proposed regulations regarding the new 3.8% net investment income tax (NIIT, also known as the Medicare contribution tax) that was created by the Health Care and Education Reconciliation Act of 2010 and takes effect Jan. 1, 2013. This article details what investment income is subject to the tax and how to calculate it.
Incorrect notices sent by the Colorado Department of Revenue
When the Colorado Department of Revenue (CDOR) implemented a new computer system recently, it created mismatches in information. As a result, numerous notices have been generated, many of which are incorrect.
Many of you have called and are concerned because you received a tax notice from CDOR. We're seeing notices disallowing Enterprise Zone credits, credit for taxes paid to another state, Colorado Source capital gains, some issues related to withholding from your W-2, as well as other situations.
Be careful not to jump to conclusions because in most cases, the information filed with CDOR was correct. However, it sometimes costs more to contest the notice than to simply let the credit be disallowed, for example.
If you receive such a notice, call your tax accountant and let us help you determine the facts and what action, if any, should be taken in your specific situation.
2012 Gift tax annual exclusion: Use it or lose it
The 2012 gift tax annual exclusion allows you to give up to $13,000 per recipient tax-free without using up any of your lifetime gift tax exemption. If you and your spouse “split” the gift, you can give $26,000 per recipient. The exclusion is scheduled to increase to $14,000 ($28,000 for split gifts) in 2013.
The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.
But you need to use your 2012 exclusion by Dec. 31 or you’ll lose it. The exclusion doesn’t carry from one year to the next. For example, if you don’t make an annual exclusion gift to your grandson this year, you can’t add $13,000 to your 2013 exclusion to make a $27,000 tax-free gift to him next year.
Year-End Tax Planning
With so much uncertainty regarding taxes and the fiscal cliff, now is a great time to come in and talk through the issues that affect your situation.
Donating Appreciated Property to Charity
The tax law imposes stringent requirements for deducting charitable gifts of property. The rules are especially tough when donating appreciated property. If taxpayers don’t observe all of them, the tax deduction may be reduced or even eliminated.A recent U.S. Tax Court case dramatically illustrates this point. This article discusses the tax benefits of donating appreciated property to charity and details the case of Mohamed v. Commissioner.
Beginning on Jan. 1, 2013, the standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes will be:
56.5 cents per mile for business miles driven.
24 cents per mile driven for medical or moving purposes.
14 cents per mile driven in service of charitable organizations.
We welcome the opportunity to talk with you about your specific needs or to answer your questions, You can contact us at (719) 630-1186 or through our Secure Email.
Quantifying the cost and benefits of social media fans
Having people "like" you on popular social media sites may cost more than you think and is worth tracking. The fourth annual Nonprofit Social Network Benchmark Report found that the average cost of a "like" on Facebook was $3.50, while the average cost of a Twitter "follower" was $2.05. The report surveyed more than 3,500 nonprofit professionals about their organization's use of social media to build their supporter base.
Don't let the costs scare you off, though. The survey also found that the average yearlong value of a supporter acquired via Facebook — that is, the amount of revenue received from a supporter over the 12 months following acquisition — was almost $215. It's no surprise, then, that 81% of the respondents deemed their social network communities as somewhat or very valuable.
Accounting body explores nonprofit financial reporting
The Financial Accounting Standards Board (FASB) is conducting two projects directly related to nonprofits. The "Not-for-Profit Financial Reporting: Financial Statements" project is re-examining existing accounting standards for organizations' financial statements, with a focus on improving 1) net asset classification requirements, and 2) the information provided in financial statements and notes about liquidity, financial performance and cash flows. FASB will likely propose a revised standard and request feedback in the future.
FASB also is conducting a research project called "Not-for-Profit Financial Reporting: Other Financial Communications." That project is looking at other types of communications nonprofits use to tell their financial stories. FASB's staff, for example, is reviewing existing best practices followed by organizations to determine how such communications may enhance the understanding of donors, creditors and other stakeholders of the organizations' financial health and performance.
Does dual-channel fundraising pay?
A study of donors to the national humanitarian organization CARE suggests that engaging donors through both online and offline approaches can pay off for nonprofits. According to the study, dual-channel donors (those who give both online and offline) have the highest annual donor value, returning about 46% more value than donors giving only through direct mail.
The study also found that dual-channel donors gave almost as much through offline channels as offline-only donors ($74 vs. $85). This led the researchers to conclude that adding digital channels of donation doesn't materially cannibalize revenue from direct mail. Moreover, traditional offline direct response donors who were engaged through online communications demonstrated higher retention rates than offline donors not engaged online.
Are you covered? Internal controls fight technology-related fraud
The ability to accept and make online payments and maintain databases with detailed profiles of constituents offers obvious benefits to nonprofits under constant time and money pressures. But it may also be subject to fraud attempts that can dodge your traditional internal controls. Fortunately, measures are available to combat these risks.
Making online disbursements
Many nonprofits are now paying their bills online, rather than mailing payments. Of course, the ability to make online payments essentially makes the employee who does so a check signer who can, in turn, make unauthorized payments. Similarly, the employee who oversees direct deposit payroll transactions may choose to pay “ghost” employees, give unauthorized raises or otherwise divert funds.
If your not-for-profit makes these types of online disbursements, ensure that all payments are subject to an independent review by a different employee. The reviewer can check payments online or examine the bank statements for discrepancies. The reviewer should also study payroll reports that come straight from the payroll system (vs. coming from the employee who oversees payroll). Of course, the reviewer should be aware that those two employees might be working together to commit fraud. Your bank also might offer verification services to confirm that payments are authorized before they clear.
Accepting payments
One of the most significant changes in how nonprofits conduct business in recent years has been the widespread adoption of systems that allow online payments for event registrations, membership fees, product purchases and donations. These payments generally are deposited directly into an organization’s bank account.
The risk is that the employee responsible for the online payment system could redirect the ultimate destination of payments. If the accounting department records income based on bank deposits, this fraud could go undetected. To close this control gap, make sure you take the added step of reconciling the bank deposits against online income from the donor system.
Protecting privacy
Many nonprofits possess their members’ and donors’ credit card information and other personal data, making them potential targets for both internal and external hackers and fraudsters. Imagine the consequences if criminals were to access your constituents’ data. It could be disastrous in terms of remedial costs, legal liability and reputational damage.
Perhaps the most effective privacy control is adherence to the Payment Card Industry (PCI) Data Security Standard (DSS). DSS applies to all entities that store, process or transmit credit cardholder data and outlines technical and operational system requirements to protect that data. Although DSS isn’t technically a law, several states have enacted legislation mandating compliance with some of its provisions.
The DSS requirements vary depending on the number and type of credit card transactions an organization conducts, both online and offline. It’s a good idea, though, to take steps to comply with the strictest requirements, including:
Installing and maintaining a firewall to protect cardholder data,
Encrypting the transmission of cardholder data,
Restricting access to cardholder data with unique IDs and on the basis of “need to know,” and
Using and regularly updating antivirus software.
Although it isn’t a requirement, PCI also strongly recommends “segmenting” (or isolating) the cardholder data environment from the rest of your network. (To learn more, visit https://www.pcisecuritystandards.org/.)
Proceed with caution
There’s no turning back from the technological advances nonprofits are currently enjoying. The key is to remain vigilant against the evolving risk of fraud.
Employees vs. independent contractors
Classify your workers per IRS guidelines
The IRS has publicly stated it plans to crack down on organizations that improperly classify workers as independent contractors instead of employees. Are you confident your employee classifications would stand up to IRS scrutiny?
Understand the requirements
If a worker is an employee, your nonprofit must provide a Form W-2 annually and withhold income tax and the employee’s portion of Social Security and Medicare taxes from the employee’s pay. You also must pay the employer portion of Social Security, Medicare and unemployment taxes on the employee’s wages.
If a worker is an independent contractor, your organization generally should provide a Form 1099-MISC, which reports the amount you’ve paid to the person that year. The independent contractor is responsible for paying employment taxes (both the employee and employer portions) and income taxes on his or her own.
While the IRS generally should receive the same amount of total income and employment taxes regardless of whether someone is an employee or an independent contractor, the agency has found that it’s more difficult to collect from independent contractors. Thus, the IRS tends to favor employee status.
Should the IRS determine you’ve improperly classified an employee as an independent contractor, you may be held liable for that worker’s applicable employment taxes.
Take the test
To determine whether a worker is an employee or an independent contractor, you must consider your nonprofit’s degree of control and the person’s level of independence. The IRS has assembled a number of questions to help employers decide. Commonly referred to as the “20-factor test” or “common law rule,” the questions revolve around:
Whether your organization has the right to control the individual and how that person performs his or her duties (that is, behavioral control),
Whether there’s a written contract between the individual and your nonprofit, and if the person receives employee benefits (that is, type of relationship), and
Which aspects of the business relationship your organization controls (that is, financial control).
The IRS has suggested asking certain questions when determining status. For example, must a worker follow someone else’s instructions regarding when, where and how he or she completes work? If so, the person is probably an employee.
More examples: Employees are typically trained how to perform a given job, whereas independent contractors are expected to already know how to do it. Independent contractors must pay their own assistants. And someone who retains the ability to set his or her own daily hours (within reason) is generally regarded as an independent contractor.
Another factor to consider is whether the person works for more than one business at a time, which would indicate contractor status. Someone paid by the hour, week or month (rather than by the job), on the other hand, typically signals employee status.
Let the IRS help
If you’re unsure whether an individual should be classified as an employee or an independent contractor, you can complete Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding,” and the IRS will decide for you. The process is free, though it might take six months or more to receive the determination.
Organizations that inadvertently misclassify an employee as an independent contractor may be able to mitigate the consequences under the IRS’s Voluntary Classification Settlement Program. Ask your tax advisor for details.
Meeting the challenge
The IRS has reported that it loses millions in unpaid taxes and uncollected penalties for misclassified workers each year — and is looking to get it back. Make sure your nonprofit is following the rules.
The value of donated property is in the eye of the marketplace
Nonprofits often struggle with valuing noncash and in-kind donations, including the value of houses or other buildings. Whether for record-keeping purposes or when helping donors understand proper valuation for their charitable tax deductions, the task isn’t easy.
Although the amount that a donor can deduct generally is based on the donation’s fair market value (FMV), there’s no single formula for calculating FMV for every type of gift. (Note: This article focuses on valuing gifts for tax purposes rather than financial accounting purposes.)
FMV basics
The IRS defines FMV as the price that property would sell for on the open market. (A donor can’t claim a deduction for the contribution of services.) For example, if a donor contributes used clothes, the FMV would be the price that typical buyers actually pay for clothes of the same age, condition, style and use.
If the property is subject to any type of restriction on use, the FMV must reflect that restriction. Say a donor contributes land to your not-for-profit and restricts its use to agricultural purposes. The land must be valued for agricultural purposes, even though it would have a higher FMV for nonagricultural purposes.
Ultimately, FMV must consider all facts and circumstances connected with the property, such as its desirability, use and scarcity.
3 FMV factors
According to the IRS, there are three particularly relevant FMV factors:
1. Cost or selling price. The cost of the item to the donor or the actual selling price received by your organization may be the best indication of the item’s FMV. Because market conditions can change, though, the cost or price becomes less important the further in time the purchase or sale was from the date of contribution.
For example, you may have paid $2,500 for a top-of-the-line computer in 2005. But that computer certainly isn’t worth $2,500 in 2012 because it’s no longer top of the line. It may still have some value, though.
A documented arm’s-length offer to buy the property close to the contribution date may help prove its value to the IRS. The offer must have been made by a third party willing and able to complete the transaction.
2. Comparable sales. The sales price of a property similar to the donated property often is critical in determining FMV. The weight that the IRS gives to a comparable sale depends on:
The degree of similarity between the property sold and the donated property,
The time of the sale,
The circumstances of the sale (was it at arm’s length?), and
The market conditions.
The degree of similarity must be close enough that reasonably well-informed buyers or sellers of the donated property would have considered that selling price. The greater the number of similar sales for comparable selling prices, the stronger the evidence of the FMV.
It’s important, though, that the transactions take place in an open market. If the sales were made in a market that was artificially supported or stimulated, they might not be representative or indicative of the FMV. For example, liquidation sale prices typically don’t indicate FMV.
3. Replacement cost. FMV should consider the cost of buying, building or manufacturing property akin to the donated item, but the replacement cost must have a reasonable relationship with the FMV. And if the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important to FMV.
Gifts of inventory
If a business contributes inventory, it can deduct the smaller of its FMV on the day of the contribution or the inventory’s basis. (The basis of donated inventory is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution.) If the cost of donated inventory isn’t included in the opening inventory, its basis is zero and the business can’t claim a deduction.
Inventory that may receive a better valuation than other inventory includes that which is used solely for the care of the ill, needy or infants; book inventory or food for public schools; and scientific property for research. The special provisions for books, food, and inventory for the care of the ill, needy or infants expired at the end of 2011 and have not been extended; however, they have been extended retroactively in the past. In addition, certain industries, such as the pharmaceutical industry, have specific standards for valuing donated inventory.
An important reminder
Even if a donor can’t deduct a noncash or in-kind donation (usually a piece of tangible property or property rights), in some instances you may need to record the donation on your financial statements. Recognize such donations (including the donation of services) at their fair value, or what it would cost if your not-for-profit were to buy the donation outright from an unrelated third party.
SKR+Co Alert: Warning of recent scam, plus 2012 tax planning strategies
November 20, 2012
The 2012 election: What does it mean for tax planning?
This year, uncertainty over the future of federal tax policy has made tax planning a challenge. The election eliminated three big unknowns: who will occupy the Oval Office, which party will control the Senate and which party will control the House. But a great deal of uncertainty remains over what sort of tax legislation lawmakers will pass — and when. This article reviews the tax law changes set to go into effect in 2013 if Congress fails to act, and it details possible year end tax planning strategies to implement.
Warning of deceptive solicitations to Colorado business owners
We want you to be aware of a possibly deceptive solicitation issued by “Compliance Services” to Colorado businesses, including several of our clients. The entity has mailed solicitations titled “Annual Minutes Requirement Statement Directors and Shareholders”, seeking a $125 fee to prepare annual minutes. According to Secretary of State Scott Gessler, "Though most corporations are required to keep records of annual minutes, they are not required to file these records with any third party."
If you have already sent a check to this company, you may want to take action such as placing a stop payment on that check.
We had wonderful turnout at our recent tax seminar – thank you to all of you who came. The slides are now available for download on our website home page, or you can click here:
This time of year, we receive many questions about keeping tax records. So we want to remind you that we have published a Records Retention Schedule on our website, and you can download it here:
We welcome the opportunity to talk with you about your specific needs or to answer your questions. You can contact us at (719) 630-1186 or through our Secure Email.
SKR+Co Alert: Fiscal Cliff Seminar and Post-Election News
November 7, 2012
The Fiscal Cliff: Tax changes are coming – Are you ready?
Don't miss our next tax seminar, coming on Monday, Nov. 12th!
2013 promises great uncertainty for individuals, business owners, real estate professionals, and investors. The approaching “fiscal cliff,” new tax provisions of the Affordable Care Act coming into effect, and other beneficial tax provisions expiring contribute to this uncertainty.
This seminar will help you understand these changes and their potential effects on you and your investments and the planning opportunities available today for mitigating the consequences of a rising tax rate environment. For more information on this FREE seminar, Click Here.
Registration is required due to limited seating. REGISTER HERE
Post-Election News
President Obama’s reelection combined with Senate and House election results that leave both chambers of Congress at nearly the status quo means that much uncertainty about tax law changes remains. This alert provides a brief overview of the election results, their tax impact and the outlook for 2013.
