As a trusted tax advisor I am in the position of researching new proposed tax laws and passing that information on to my clients. Sometimes a new bill comes along that I feel is important for my clients and readers to get a heads up on due to the major tax implications. This latest bill has quietly moved through the House and is on its way up the ladder.

A bill titled “The American Jobs and Closing Tax Loopholes Act of 2010″ was passed by the house on 5/28/2010. The US House and Senate plans to raise the taxes of Small Business Owner S-Corporation’s starting in 2011 through H.R. 4213. This bill targets small personal and professional service businesses with 3 or fewer professionally skilled individuals (performing artists, athletes, accountants, lawyers, actuaries, architects, consultants, engineers, health professionals, veterinarians, lobbyists, brokers, and investment advisors) with the goal of raising over $11 billion in SECA Tax over the next 10 years!

So what does this mean to me?

The SECA tax is an additional 15.3% of taxable income earned by S-Corporations.  This is only the beginning of this far reaching SECA Tax.  If our elected officials pass this bill for small personal and professional service businesses, it is only a matter of time until a SECA tax is placed on all S-Corporations. The tax implications are huge! For example:  an S-Corporations owner who has a taxable income of $50,000 from his or her S-Corporation business could be taxed an additional $7,650 on top of the Federal Taxes.

What can I do?

It’s important to let your representative’s know how you feel about this bill, and quickly. Click the link below to contact your Senator now!  Let your Senator know if you don’t agree with H.R. 4213, “The American Jobs and Closing Tax Loopholes Act of 2010″, Section 413: the 15.3% SECA tax on S-Corporations could hurt small business in the United States.

To contact your senator:

http://www.senate.gov/general/contact_information/senators_cfm.cfm

Click here to read the white paper on this bill.

Whether you love it, hate it or are ambivalent towards it, the Patient Protection and Affordable Care Act was signed into law on March 23 will be affecting your life in some way over the next four years. As a rule, bills are generally quite convoluted and hard to understand; one of this size and with such far reaching affects, is no exception.

There is a great deal of misinformation and general confusion on this one due in part to the enormity of the task at hand and the fact that there is some ambiguity as to when and how these new rules will be implemented. The addition of several amendments plays a part in this confusion as well.

The law includes several health related provisions like expanding Medicaid eligibility, subsidizing insurance premiums, providing incentives for businesses to provide healthcare benefits, prohibiting denial of coverage/claims based on pre-existing conditions, establishing health insurance exchanges and support for medical research. The cost of these provisions is offset by taxes, fees and cost-saving measures. (_Wikipedia)

Because several States have begun litigation against this law, claiming it is a violation of state sovereignty, this law is still a bit up in the air and it is uncertain at this point that this law will stand “as is”. Today we’re taking a look at the law as it was written in an effort to help explain some of the major changes ahead.

Patient Protection and The Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (signed into law 3/23/10)
Patient Protection and The Affordable Care Act (H.R. 3590) passed senate 12/24/09
Affordable Health Care Act for America (H.R. 3962) passed house 11/7/09

General Provisions

• Requires most U.S. citizens and legal residents to carry health insurance
• Creates state-based health insurance exchanges where individuals may purchase coverage. Separate exchanges will be created for small businesses.
• Credits are available to people within 400% of the federal poverty level
• Large employees (50 or more employees) will be penalized $2,000 per FTE employee over who receive health insurance tax credits.  This excludes the first 30 employees
• Individual penalties: beginning in 2014 $95, or up to 1% of income, whichever is greater, on individuals who do not secure insurance; this will rise to$325 (or 2%) in 2015 and $695, or 2.5% of household income, for a single person up to $2,085 for a family by 2016.  Exemptions to the fine in cases of financial hardship or religious beliefs are permitted
• Small business tax credit is available to employers with 25 or less employees and average wages of less than $50,000
• New annual fees on manufacturers of pharmaceuticals ranging from $2.8 to $4.1 billion
• New annual fees on the health insurance industry ranging from $8 to $14.3 billion
• Expand Medicaid eligibility; individuals with income up to 133% of the poverty line qualify for coverage, including adults without dependent children.

Cost and Tax Benefits

• Dependent children will be allowed to remain on parents’ insurance until age 26: this employee benefit is excluded from W-2 income
• Free preventative care: in 2010 new healthcare plans must cover this and be exempt for deductible and other out-of-pocket
• No lifetime limits on insurance coverage
• Annual limits on new plans and existing employer plans are restricted. Annual coverage limits are eliminated in 2014.
• Under the Health Insurance Exchanges all new insurance plans will limit co-payments and deductibles
• Tax credits for people who can’t afford health insurance will start in 2014
• In 2010, insurers cannot deny coverage to children based on preexisting conditions.  In the future, this will cover all people.
• The threshold for itemized 1040 tax deductions increases from 7.5% to 10% of adjusted gross income for years 2013-2016
• Limit deductibles to $2,000 or $4,000 for families starting 2014

Benefit Tiers

• Bronze plan covers 60% of benefit costs
• Silver plan covers 70% of benefit costs
• Gold plan covers 80% of benefit costs
• Platinum plan covers 90% of benefit costs
• Catastrophic plan is available for individuals who are 30 or under

Medicare

• In 2010,  individuals with Medicare Part D affected by the coverage gap or “donut hole”  [link http://en.wikipedia.org/wiki/Medicare_Part_D_coverage_gap]  will  receive a $250 rebate;  50% of the gap will be eliminated in 2011, and will be totally eliminated by 2020
• In 2010 Medicare is expanded to small, rural hospitals and facilities
• In 2011, a 50% discount on brand name pharmaceuticals in the “donut hole”
• Medicare Part A tax rate increases by 0.9% for earnings above $200,000 for individuals ($250,000 for married) and there will be 3.8% tax on unearned income for high-income taxpayers starting in 2013

Exchanges

• State health insurance exchanges will be created for individuals and small businesses. This includes multi-state plans.
• Starting 2011 health insurance companies must file paperwork for premium increases and insurers with excessive premiums may be denied access to the new exchanges. Also, starting in 2011, standards for non-medical costs (overhead) will begin.

Community & Government Benefits

• Expanding Medicare to rural areas and small towns
• Increasing primary care and community health centers
• Investing to limit healthcare disparities among racial/ethnic groups and promote diversity of healthcare professionals
• A temporary credit program to encourage private investment in new therapies for disease treatment and prevention

In the last part of this series, we covered the consumer side of bad debt charge-offs and how the IRS handles that from a tax perspective. Today I want to delve into the business side of bad debt charge-offs. This side of things is usually quite complex and hard to generalize but I will attempt to keep my “tax guru” side in check and you on board.

Business Not What It Used To Be?

Let’s assume that we’re talking about a business (Corporation or LLC that is treated as an S-Corp for tax purposes) that has been hit hard by the recession and has run out of money to pay its creditors. Typically in cases like this the business will notify creditors who will then turn around and liquidate the business assets in order to attempt to recoup at least part of the debt owed. Once that happens the business is faced with a balance plus late fees and interest to cover.

Many times business owners will be able to negotiate a settlement far under the remaining balance owed and once that agreed upon price has been paid, the business owner will generally feel they have taken care of everything and their ordeal is over. Hooray!

But Wait! There’s More!

It’s not exactly time to celebrate yet. Come tax season the, now former, business owner receives a 1099-C for the canceled debt and interest. Now what to do? At this point the business owner would be wise to contact their accounting professional who will review the situation and offer advice on how much of that total will actually be taxable.

Their accounting professional will be able to determine this number by assessing the net worth of the business (a negative number at this point), the fair market value of any remaining business assets, and the amount of the canceled debt among other factors. Whatever the balance is, if any, is the amount of taxable income the business owner would be liable for paying taxes on.

The business owner may also be entitled to an ordinary business loss equal to the difference between the fair market value of business assets that were auctioned off (or the canceled debt, if less) and the cost of the assets to the owner.

Call Now And Save

As always there are a hundred different variables that will affect the outcome of a scenario like this; this example is a highly simplified version used to provide a general understanding of the concept and should not be taken as de facto for all situations.

My goal is to provide fair warning to business owners with a loss that they WILL have to deal with charged off debts when it comes time to handle their taxes. I also want to point out that it isn’t nearly as awful as it might first seem and, with the help of a professional, your tax liability may be significantly reduced or even eliminated. So don’t ignore those 1099-Cs, if you do it will create an even bigger and more expensive mess to straighten out.

So far we’ve discussed the American Opportunity Tax Credit (modified Hope Credit), the Lifetime Learning Credit and even Tuition & Fee Deductions. Today though, we’re going to cover the last in our 4 part series on education tax incentives—Student Loan Interest Deduction. The great thing about this deduction is that you can take this deduction even if you qualify for the other tax credits or deductions!

The Goods – Part 4

Usually personal interest paid on loans (other than certain mortgage interest) is not deductible. However, there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. This gives taxpayers with an adjusted gross income (MAGI) that is less than $70,000 ($145,000 if filing a joint return) the option to deduct interest on student loans from gross income, up to $2,500.

Highlights:

• Student must attend school at least 1/2 time
• The loan must be used to pay qualified education expenses for you, your spouse, or a person who was your dependent when you took the loan
• Interest must have been paid or incurred within a reasonable period of time before or after you took the loan
• You can claim this deduction even if you do not itemize deductions on Form 1040′s Schedule A
• Interest deduction can be applied to loans for graduate school

Qualified Education Expenses:

• Tuition & fees
• Room & board  (no greater than the cost included of attendance for a particular academic period & living arrangement of the student (determined by education institution), or the actual amount charged for resident housing operated by the educational institution)
• Books, supplies & equipment
• Other necessary expenses (such as transportation)

One caveat, the taxpayer cannot deduct student loan interest of a dependent unless the loan is in the taxpayer’s name. Also, loans from a related person or through a qualified employer plan are not qualified student loans for this deduction.

Side Note: Loan interest is completely separate. In fact, you can report both interest and tuition while attending the same school. This happens with many grad students who are paying interest on a school loan but still attending classes at the same college.

If this series has helped you make the decision to go back to school, we’d love to hear about it!

While we’ve been talking about the Lifetime Learning Credit and the American Opportunity Credit (Hope Credit, modified for 2009-10), I would be remiss to leave out other options for taxpayers who may not qualify for either credit. If you don’t qualify for anything else, you may not be left completely on your own; you may still be able to claim a small deduction for some education expenses.

The Goods – Part 3

This is the least desirable education tax benefit since it is a deduction rather than a credit. This means the taxpayer does not get back educational expenses dollar for dollar, but instead only gets back educational expenses at their marginal tax rate level (e.g. a taxpayer with $1,000 in tuition and in the 15% tax bracket would only get back $150 as a tax deduction).  The tuition and fees deduction can reduce the amount of income subject to tax buy up to $4,000, however, and is taken as an adjustment to income.

Highlights:

• You can claim this deduction even if you do not itemize (Schedule A, Form 1040)

Qualifications:

• You pay qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return
• Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance

Those Who Do Not Qualify:

• Your filing status is married filing separately
• Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption
• Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return)
• You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens
• You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid

So, although it is not nearly as beneficial as the other tax credits we discussed, it may be helpful to those who cannot take advantage of those other credits.

Next week we will cover Student Loan Interest Deductions, a great little deduction that applies to a wide variety of tax payers.

Last week we discussed the benefits of the American Opportunity Tax Credit (or modified Hope Credit, this week we are going to take a look at the Lifetime Learning Credit.

This federal tax credit will probably apply to a larger number of individuals as it is much more flexible. You aren’t required to be a part time student nor in your first four years of college or in a degree program, but you DO need taxable income for this credit to matter.

“Change does not necessarily assure progress, but progress implacably requires change. Education is essential to change, for education creates both new wants and the ability to satisfy them.” –Henry Steele Commager

The Goods – Part 2

The Lifetime Learning Credit of up to $2,000 per tax return is available for qualified education expenses paid for all enrolled students. Up to $4,000, if you happen to live in a Midwestern disaster area.

Highlights:

• Covers 20% of the first $10,000 in qualified education expenses (max. $2,000) or 40% for Midwest Disaster Area each year
• Degree status is not important
• There is no limit on the number of years the lifetime learning credit can be claimed for each student
• Only tuition and fees qualify
• Taxpayer may use payments made by dependents for the credit
• The amount of your lifetime learning credit for 2009 is gradually reduced (phased out) if or your modified adjusted gross income (MAGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return)
• This credit is applied per tax return NOT per student

Qualifications:

• You pay qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return

On a side note: If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.  However, if you have more than one student you can opt to take credits based on a per-student, per-year basis.

You cannot claim a credit if your MAGI is $60,000 or more ($120,000 or more if you file a joint return.)

So what if you don’t qualify for either of these two tax credits? Well, then  you will want to check out next week’s post covering the Tuition and Fees Deduction allowance.

Yes, we are back, rested and ready to hit the road running after a little break over the Holiday season!  To start off the new 2010 tax year, I wanted to cover a topic that will affect most taxpayers in a positive way , the Making Work Pay Tax Credit.

This tax credit is worth up to $400 for each individual taxpayer or up to $800 for married couples who file Married Filing Joint so it’s definitely worth checking out.

How it works:

This credit is 6.2% of a taxpayer’s income which maxes out at $400.  If you are married it works the same way, the credit is 6.2% of the couples total earned income with the maximum credit of $800.

Higher income taxpayers will be subject to the credit phasing out.  A single taxpayer will have their credit reduced by 2% of the amount of Modified Adjusted Gross Income (MAGI) if they make over $74,999 and the credit is completely phased out at $95,000.  If the taxpayers are Married Filing Joint they will have their credit reduced by 2% of the amount of Modified Adjusted Gross Income (MAGI) if they make over $149,999 and the credit is completely phased out at $190,000.

Earned income from wages or self employment taxable income is required for this credit.  However military personal who receive combat pay which is excluded from income are eligible for this credit.

You must be a US Citizen or a resident alien with a valid Social Security number to be eligible for the credit.  Dependents of taxpayers are not eligible for the credit.

Taxpayers who are Social Security recipients, retired railroad workers and disabled veterans are eligible for a 1 time $250 tax credit.  If they also work and meet the thresholds they may qualify for an additional $150 totaling $400 in a tax credit.  Unfortunately, if you received a pension and no earned income (or those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income), you will not be eligible for the Making Work Pay Credit.

This credit is claimed on Schedule M.

With the recent changes to the federal income tax withholding tables, some tax payers may find that too little was taken out of their paychecks over the tax year.  If you’re not eligible for the Making Work Pay tax credit, this could mean a smaller than usual refund OR you may even end up owing tax. There is special relief that the IRS may grant if an estimated tax penalty applies. If you receive a estimated tax penalty from the IRS you can request a waiver by filing form 2210.

If you are in one of these categories, keep an eye on your withholdings:

• Pensioners
• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Some Social Security recipients who work
• Workers without valid Social Security numbers

If you’re still not sure about your qualification for the Making Work Pay tax Credit or if you’ve got questions regarding your estimated tax penalty, I would highly recommend contacting your accounting or tax professional to guide you through this. Tax issues like these can become very complex and may be affected one way or the other by other factors within your financial situation. Most accountants and tax professionals offer a free initial consultation; at that point they can advise you on your options and let you know if they may be able to help you reduce your tax bill.

Uncle Sam isn't one to take "no" for an answer

I often have meetings with potential clients in my office that have seen these commercials and think our tax team can wave that same magic wand, putting together a winning Offer in Compromise (OIC) to settle their debt with the IRS, wiping the slate clean. Unfortunately, I then have to explain to them that this is often far from the truth.

If a person has a tax debt with the IRS there are options to repay the debt that the client may qualify for. Whether it is an OIC, a structured payment plan or some other program that allows the taxpayer to repay the IRS over a period of time depends on their particular situation.

The Offer in Compromise (OIC) is a program under 26 U.S.C. § 7122 which allows qualified individuals with an unpaid tax debt to negotiate a settled amount that is less than the total owed to clear the debt.

To qualify, at least 1 of 3 conditions must be met:

1. Doubt as to Liability
2. Doubt as to Collectability
3. Effective Tax Administration would create an economic hardship that would be unfair and inequitable

Very few cases actually meet one of the 3 conditions above in my experience.  A taxpayer would have to be considered permanently disabled, collect social security and have no possible way of ever paying the full tax amount back to have a good chance at having a full or partial OIC accepted by the IRS.

If you believe that you are a good candidate for the OIC, I recommend meeting with several tax professionals and doing your homework prior to paying a professional to attempt a OIC that may not get past the first interview with a OIC IRS Agent.

Well, there is one small ray of sunshine: Last week President Obama signed the unemployment extension legislation which provides for 14 weeks of extended benefit coverage for every state and an additional 6 weeks, for a total of 20 weeks, in high unemployment states where unemployment is over 8.5%.

The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.” –The Wall Street Journal

However (are you ready for the other shoe to drop?), there is something you (and many others) may not realize about those unemployment benefits you’re receiving; they are considered taxable income. For those who don’t know this, a nasty surprise is coming next April.

The reprieve of unemployment comes with some surprises

I know the typical reaction to this news is to burry ones head in the sand and hope you can deal with the consequences when the time comes. But, it doesn’t have to be like that. With a little knowledge and a few preventative measures, you can avoid that sucker punch.

Under the American Recovery and Reinvestment Act, enacted in the beginning of 2009, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of unemployment benefits when they file their 2009 tax return next year. If you are married, the exclusion applies to each spouse, separately if both are unemployed. Any additional amounts of unemployment benefits received in 2009 are subject to federal taxation, so you may want to consider withholding at least a small amount.

With 2009’s year end fast approaching, it is very important you start taking steps to reduce the size of your tax bill. It’s only a matter of time until we will have to repay what the government has borrowed and that means more agressive tax collections.

Here are a few individual tax incentives that you may want to consider for 2009:

• Itemized state and local sales tax deductions
• The $4,000 higher education tuition deduction
• The additional standard deduction for real property taxes
• The $250 teachers classroom expense deduction
• Prepaying certain expenses such as real estate taxes or mortgage interest
• Paying for spring college tuition in December 2009
• Year end charitable giving
• Residential energy property credits

These are some of the business tax tips and incentives that you may want to consider for 2009:

• Bonus depreciation and enhanced section 179 expensing of certain capital investments
• Additional Employer retirement contributions
• Paying bills due in January prior to 12/31
• Deferral of income until 1/1 of the new year
• Increase expenses by purchasing items in December that are needed in January
• Inventory write offs of items that are damaged or obsolete

Year end tax planning is highly individualized and has to take your personal situation into consideration. If you can, revisit your plan quarterly and adjust as new life circumstances come your way: employment status, family, investments, retirement, new tax laws, etc.

With all of the recent changes to the tax codes, I would highly suggest at least an initial consultation with your tax adviser, the cost will be nothing compared to the headaches that await you when negotiating with an IRS who has been commissioned by Congress to fill budget gaps with tax income due.

Make sure you have your “parachute” packed when making the leap from employee to sole proprietor!

This may be your first foray into realms outside of employment with little to no understanding of the tax implications involved in such ventures. Did you know that for most Sole Proprietors as much as 50.3% of every dollar of profit that they make could be owed to the IRS, Social Security and Medicare?

We understand it can be difficult knowing where to turn for accurate advice or information to educate yourself about your new circumstances. Here at Fredrick James Accounting, we embrace the mantra “knowledge is power”. Our focus is the empowerment through education of independent contractors, the self employed and small business owners to be able to make educated decisions regarding their tax liabilities

“I guarantee anyone who takes advantage of this consultation will save $300.00 dollars in taxes at a minimum, if their income is at least $3,000.00 and they follow my instructions, or I will refund their consultation fee.” –Fred Daus, CEO Fredrick James Accounting, Tax & Consulting

Our firm is now offering a 1-hour personal consultation & informative course that can save you a minimum of $300* on your taxes, guaranteed!

New to Self Employment Business Orientation: How To Avoid Tax Problems & Pave The Way To Success.

Get answers to your questions:

Deductions: what is and is not deductible

How much should I set aside for taxes, Medicare & Social Security?

Do I have to pay State Taxes?

Do I need to charge Sales Tax?

Do I have to make quarterly payments?

Do I qualify for the mileage deduction?

What can I do to reduce my tax liability?

One hour of your time will result in big tax benefits as you make every day decisions regarding your side job, self employment or small business. In this personalized, private session with CEO Fred Daus, he will go over the main topics that could affect you, answer any questions that you have and provide you with a business tax reference guide that will help you make good business decisions that will have positive tax results.

Sign up now or call our office at 727-474-0922 for more information!
Click the button to sign up and save at least $300* on your taxes or your money back, guaranteed.

We prefer to provide this service in person, however if you are not in the Tampa Bay area we would be happy to provide your consultation via phone or web meeting. Once notice of payment has been received by our office, we will contact you to schedule your appointment, thank you!

*The New to Self Employment Business Orientation will save you at least $300.00 dollars in taxes, if your income is at least $3,000.00 and you follow the instructions provided, or we will refund your consultation fee.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida. Visit our website www.FredrickJames.com or call 727-474-0922 for more information}