The nonrefundable Code Sec. 25C tax credit was originally enacted on a temporary basis. Most recently, Congress renewed and modified the residential energy property tax credit in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) through 2011.

2011 Rules
Under current law, the Code Sec. 25 tax credit provides a 10 percent credit for the purchase of qualified energy efficiency improvements to existing homes. A qualified energy efficiency improvement is any energy efficiency building envelope component:

• Meeting or exceeding criteria for the component established by the 2009 International Energy Conservation Code or, in the case of certain windows, skylights and doors, and metal roofs, meeting Energy Star requirements
• Installed in or on a dwelling located in the United States and owned and used by the taxpayer as the taxpayer’s principal residence
• Original use of which commences with the taxpayer
• The qualified energy-efficient improvement reasonably can be expected to remain in use for at least five years

 Examples of energy-efficient improvements include, but are not limited to, qualified electric heat pumps, certain furnaces, metal roofs meeting certain criteria, certain types of exterior windows and doors. In some cases, only the cost of the energy-efficient improvement is eligible for the Code Sec. 25C tax credit; installation costs are ineligible. For example, the costs associated with installing a qualified electric heat pump are eligible for the Code Sec. 25C tax credit but costs associated with installing a qualified metal roof are ineligible.

Lifetime Limits
The 2010 Tax Relief Act set the maximum Code Sec. 25C credit allowable is $500 over the lifetime of the taxpayer. The $500 amount must be reduced by the aggregate amount of previously allowed credits the taxpayer received in 2006, 2007, 2009, and 2010. This provision can complicate planning for the Code Sec. 25C credit because Congress made changes to the credit before and after 2009, particularly regarding the lifetime limit.

Let’s look at an example. Amanda qualified for a $400 Code Sec. 25C tax credit in 2006. The maximum credit allowable is $500 over her lifetime. This means that Amanda can get an additional Code Sec. 25C tax credit of up to $100 in 2011.

Under the 2010 Tax Relief Act, no more than $200 of the Code Sec. 25C credit may be attributable to expenditures on exterior windows and skylights. Taxpayers must reduce the $200 amount by the aggregate amount of previously allowed credits for windows and skylights that the taxpayer received in 2006, 2007, 2009, and 2010.

Dollar Limits
Additionally, certain dollar limitations apply to various improvements. For property placed in service in 2011, the dollar limits are $300 for any item of qualified energy-efficient property; $50 for an advanced main air circulating fan; and $150 for any qualified natural gas, propane or oil furnace or hot water boiler.

Energy Standards
Moreover, the qualified energy-efficient property must meet standards set by the by the 2009 International Energy Conservation Code (IECC). The 2010 Tax Relief Act treats exterior windows, skylights and exterior doors are qualified energy efficiency improvements if they meet the Energy Star Program requirements in 2011.

Certification Statements
Many energy-efficient improvements come with a manufacturer’s certification statement. The statement indicates if the improvement qualifies for the tax credit. It is not necessary to submit a copy of the manufacturer’s certification statement with the individual’s tax return, but taxpayers should keep a copy of the certification statement for their records.

Another Credit
The Code Sec. 25D tax credit also is intended to reward taxpayers for making certain energy-efficient improvements. The Code Sec. 25C tax credit covers items such as geothermal heat pumps, solar water heaters, solar panels, and small wind energy systems. Many of the rules for the Code Sec. 25D tax credit are similar to the Code Sec. 25C tax credit but there are some differences. For example, the Code Sec. 25D credit has no lifetime limit. If you are considering making one of these improvements, please contact our office for more details about this tax credit.

Form 5695
Taxpayers claim the Code Sec. 25C tax credit on Form 5695, Residential Energy Credits. The IRS has identified some abuses of the Code Sec. 25C tax credit and it intends to make revisions to Form 5695 to curb fraudulent claims and verify eligibility for the credit. These changes are expected to appear on the Form 5695 that taxpayers will file in 2012.

If you have any questions about the Code Sec. 25C tax credit, please contact our office.

• For the IRS to collect the tax 10 years after assessment
• For taxpayers to request a credit or refund of tax – the later of three years after the return was filed or two years after the tax was paid.

While the statute imposed a two-year statute of limitations requirement for taxpayers to request innocent spouse relief under Code Sec. 6015(b) or (c), the statute had no statute of limitations period for requesting equitable relief under Code Sec. 6015(f). The IRS by regulation imposed a two-year statute, from the time of the first collection activity.

The Tax Court struck down the regulation as an improper denial of equitable relief; but U.S. Courts of Appeal reversed the Tax Court and upheld the regulation. In May 2011, more than 50 Congressmen wrote to the IRS that the regulation was contrary to Congressional intent. IRS Commissioner Douglas Shulman promised to review the regulation.

The IRS announced transition rules for taxpayers seeking equitable innocent spouse relief, while it modifies the regulations. Subject to the applicable statutes of limitation on collections and refunds, the IRS will do the following:

• Future requests – Taxpayers may request equitable innocent spouse relief after July 25, 2011, the date of the IRS announcement, without regard to the first collection activity.
• Pending requests – The IRS will consider a pending request without regard to the first collection activity.
• Denied requests – Taxpayers should reapply for relief. The IRS will accept the application if the initial request was timely for requesting a refund.
• Requests in litigation – The IRS will take appropriate action where it previously denied a request as untimely.
• Completed litigation – The IRS will generally take no further collection action.

On August 2nd, President Obama quickly signed the Budget Control Act after passed by the Senate 74 to 26. The House had passed the Budget Control Act on August 1st by a vote of 269 to 161. The new law raises the debt limit to avoid a projected August 2nd default and creates a bipartisan joint select committee on deficit reduction.

At press time, it is unclear what changes to the Tax Code may be addressed by the joint select committee on deficit reduction. The joint committee’s mandate under the new law requires it to draft additional deficit reduction legislation in time to be voted on by Congress before year end.

In recent months, tax proposals from both side of the aisle raised as part of the debate leading up to the passage of the new law have included bold, sweeping tax proposals, as well as more limited loop-hole-closing recommendations. All these proposals remain on the table for consideration by the joint committee as it begins work shortly.

The attached report will also discuss the following highlights:

• Tax reform linked to deficit reduction
• Fate of Bush-era tax cuts unclear
• AMT proposed to be abolished
• Corporate tax preferences under fire
• Lower corporate tax rate possible

 Click here to read the Budget Control Act of 2011, Special Report.

Complexity and its consequences
Every year, Olson reports to Congress on some of the problems taxpayers of all types are facing. This year, Olson said that the most serious problem facing taxpayers – and the IRS – is the complexity of the Tax Code.

According to Olson, individuals and businesses spend about 6.1 billion hours a year complying with the filing requirements of the Tax Code. Over the past 10 years, there have been more than 4,000 changes to the Tax Code, including an estimated 579 changes in 2010 alone. Olson also noted that IRS regulations, if printed out, stand about a foot tall.

“The complexity of the Tax Code leads to perverse results,” Olson cautioned. “On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.”

Recommendations
Olson gave Congress a broad outline of tax reform, deferring to lawmakers to provide specifics. To start, Olson recommended that Congress look at every tax incentive and compare the benefits of the incentive against complexity of the incentive.

Olson also recommended six core principles for reform:
1. The tax system should not “entrap” taxpayers.

2. The tax laws should be simple enough so that most taxpayers can prepare their own returns without professional help, simple enough so that taxpayers can compute their tax liabilities on a single form, and simple enough so that IRS telephone assistors can fully and accurately answer taxpayers’ questions.

3. The tax laws should anticipate the largest areas of noncompliance and minimize the opportunities for such noncompliance.

4. The tax laws should provide some choices, but not too many.

5. Where the tax laws provide for refundable credits, they should be designed in a way that the IRS can effectively administer the refundable credits.

6. The tax system should incorporate a periodic review of the Tax Code.

Congressional reaction
Lawmakers from both parties at the Ways and Means committee hearing supported simplification of the Tax Code but were far apart on which incentives to keep and which to jettison. The individual income tax deduction for home mortgage interest is one incentive that repeatedly comes up for repeal but never moves beyond discussion stage. Other popular tax incentives, especially in the education and energy areas, enjoy broad support in Congress.

Tax reform is likely to remain on Congress’s agenda in 2011. It is unclear at this time how far along Congress will get in drafting and enacting tax reform legislation. Our office will keep you posted of developments.

As an independent member of PKF North America, The Whitlock Company has strong relationships with leading accounting firms around the country. The addition of Daxin adds depth and expertise to the worldwide network.

“ Being a part of this extraordinary network is a great benefit to us and to our clients because we are able to access the expertise of our peers no matter how distant they are,” said managing partner David Myers. He added, “It allows us to combine the depth of knowledge of a national firm with local insights. That’s an important aspect of our company.”

About PKF North America: PKF North America is an association of 88 separate and legally independent accounting and consulting firms located in the U.S., Canada and Mexico. For more than forty years, member firms have benefited from access to educational materials and their peers’ expertise. The organization’ s most recent additions bring the net revenue of PKF North American member firms to approximately $1 billion.

Specifically, when the “lame-duck” Congress returns this month, it must decide whether to “patch” the alternative minimum tax (AMT) for 2010 (increase exemption amounts, and allow personal credits to offset the AMT), as it has done in past years. It also must decide whether to retroactively extend a number of tax provisions that expired at the end of 2009. These include, for example, the research credit for businesses, the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes, and the additional standard deduction for State and local real property taxes.

In addition, Congress must decide whether to extend the Bush tax cuts for some or all taxpayers. They and other Bush-era tax rules expire at the end of this year. Without Congressional action, individuals will face higher tax rates on their income, including capital gains. Also, unless Congress changes the rules, the estate tax, which isn’t in effect this year, will return next year with a 55% top rate.

In short, year-end planning—which always involves some educated guesswork—is a bigger challenge this year than in past years.

That said, we have compiled a checklist of actions that can help you save tax dollars if you act before year-end. These moves may benefit you regardless of what the lame-duck Congress does on the major tax questions of the day. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.

Year end move for individuals

• Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget that you cannot set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids (2010 is the last year that FSAs can be used for nonprescription drugs).

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

• Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2010 if your are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2010. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2010, but the withheld tax will be applied pro rata over the full 2010 tax year to reduce previous underpayments of estimated tax.

• Make energy saving improvements to your main home, such as putting in extra insulation or installing energy saving windows or buying and installing an energy efficient furnace, and qualify for a 30% tax credit. The total (aggregate) credit for energy efficient improvements to the home in 2009 and 2010 is $1,500. Unless Congress acts, this tax break won’t be around after this year. Additionally, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home (this break stays on the books through 2016).

• Convert your traditional IRA into a Roth IRA if doing so is expected to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free but the conversion will increase your adjusted gross income for 2010. However, you will have the choice of when to pay the tax on the conversion. You can either (1) pay the tax on the conversion when you file your 2010 return in 2011, or (2) pay half the tax on the conversion when you file your 2011 return in 2012, and the other half when you file your 2012 return in 2013.

• Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2011, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. We can fill you in on the details.

Take required minimum distributions (RMD) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. A temporary tax law change waived the RMD requirement for 2009 only, but the usual withdrawal rules apply full force for 2010. So individuals age 70 1/2 or older generally must take the required distribution amount out of their retirement account before the end of 2010 to avoid the penalty. If you turned age 70 1/2 in 2010, you can delay the required distribution to 2011, but if you do, you will have to take a double distribution in 2011—the amount required for 2010 plus the amount required for 2011. Think twice before delaying 2010 distributions to 2011—bunching income into 2011 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels.

• Make annual exclusion gifts before year end to save gift tax (and estate tax if it is reinstated). You can give $13,000 in 2010 or 2011 to an unlimited number of individuals free of gift tax. However, you can’t carry over unused exclusions from one year to the next. The transfers also may same family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year end moves for business owners

• Hire a worker who has been unemployed for at least 60 days before year end if you are thinking of adding to payroll soon. Your business will be exempt from paying the employer’s 6.2% share of the Social Security payroll tax on the formerly unemployed new-hire for the remainder of 2010. Plus, if you keep that formerly unemployed new-hire on the payroll for a continuous 52 weeks, your business will be eligible for a nonrefundable tax credit of up-to-$1,000 after the 52-week threshold is reached. This credit will be taken on the business’s 2011 tax return. In order to be eligible, the formerly unemployed new-hire’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Put new business equipment and machinery in service before year-end to qualify for 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance won’t be available for property placed in service after 2010.

Make expenses qualifying for the $500,000 business property expensing option. The maximum amount you can expense for a tax year beginning in 2010 is $500,000 of the cost of qualifying property placed in service for that tax year. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2010 exceeds $2 million. Also, within the overall $500,000 expensing limit, you can expense up to $250,000 of qualified real property (certain qualifying leasehold improvements, restaurant property, and retail improvements). Note that at tax return time, you can choose not to use expensing (or bonus depreciation) for 2010 assets. This is something to consider if tax rates go up for 2011 and future years, and you’d rather have more deductions after 2010 than for 2010.

• Set up a self-employed retirement plan if you are self-employed and haven’t done so yet.

• Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner’s share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro-rata share of an S corporation’s losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.

• Consider whether to defer cancellation of debt (COD) income from the reacquisition of an applicable debt instrument in 2010. The business can elect to elect to have the cancelled COD income included in gross income ratably over five tax years beginning with the fourth tax year following the tax year in which the repurchase occurs (i.e., beginning with 2014).

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

We will host an open house and ribbon cutting ceremony at the new office (3929 East 7th Street, Joplin, MO, 64801) on Friday, November 5, 2010 from 3-6 p.m.

“We are very excited about the move,” said Managing Partner David Myers. He added, “Our client base in the tri-state area is constantly growing and changing. Our new Joplin office is more accessible to a greater number of our clients and allows us more visibility in the area.” The tri-state office serves clients in southwest Missouri, Kansas and Oklahoma.

Many organizations will appoint a CPA to their board of directors and rely upon that person for the accounting and internal control issues. But, it is important that all members of a not-for-profit’s board of directors should have at least a basic understanding of not-for-profit accounting and internal controls. Not-for-profit entities have unique accounting requirements that if not understood can result potential cash flow issues for some entities.

Not-for-profit entities are required to account for its income based on whether or not a donor has placed restrictions on the donation. If a donor indicates a specific purpose for their donation, the donation must be accounted for as either a temporarily restricted or permanently restricted asset depending on the nature of the donation.

If a director did not understand these basic accounting rules and the nature of their entities donor restricted assets, the director could believe that the entity is in good financial position when in reality it is not. For instance, if an entity has received significant contributions for a new building, the entity could show an impressive bottom line but not have adequate cash available for the basic operations of the entity.

It is also important for directors to have a basic understanding of internal controls. Many not-for-profits attempt to keep their administrative expenses at a minimum so that more of their resources can be directed to the entity’s programs. Doing so, however, often leads to a significant lack of internal controls. It is important for directors to understand their entity’s internal control structure, policies and procedures in order to determine to what extent board should be involved in the day-to-day operations of the entity.

While it is important for most entities to have a variety of talents on its board of directors, it is also important that they all understand basic accounting and internal control. One way to achieve this basic knowledge is to ask a CPA with expertise working with not-for-profits to provide a basic training session for the board of directors.

By Joe Page, CPA, CFE, The Whitlock Company

Passage of the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) Reconciliation Act) by Congress, followed by its signing by President Obama on March 30, 2010, completes a massive overhaul of the nation’s health insurance and health delivery systems. The Reconciliation Act amends the Patient Protection and Affordable Care Act of 2010 (P.L. 111-148), which President Obama signed on March 23. Combined, the two
new laws include more than $400 billion in revenue raisers and new taxes on employers
and individuals.

Immediate Changes
Many of the key provisions in the health care package take effect in 2010:

To read more from this CCH Special Report, please click here to view the PDF file.