Estimated tax payments
You are required to pay estimated tax if you receive income from which tax is not withheld, including income from self-employment, dividends and interest, capital gains and losses, rental income, and alimony, and your tax is expected to be $1,000 or more (after subtracting credits and withholding). Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the “required annual payment” liability throughout the year.

Higher-income taxpayers.
For higher-income taxpayers whose adjusted gross income (AGI) shown on the preceding year’s tax return exceeds $150,000 ($75,000 for married individuals filing separately), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Estimated tax payments are due quarterly. For most individuals, the due dates for the 2010 tax year are: April 15, June 15, and September 15 of 2010, and January 15, 2011. Failing to pay enough estimated tax on each installment date may result in a penalty for underpayment of estimated tax, even if you are due a refund. Therefore, properly calculating your payments is vital to avoid the penalties, including calculating adjustments needed in remaining quarters (including as soon as September 15, 2010 for the third quarter).

Third quarter payments are around the corner – September 15, 2010 – for the period June 1 through August 31. Fourth quarter payments will be due January 15, 2011 for the period September 1, 2010 through December 31, 2010. If your total estimated payments and withholding add up to less than 90 percent of what you owe, you may face an underpayment penalty.

Withholding
With the third and fourth quarter payments becoming due, ensure you are properly withholding and paying enough in estimated tax. Look at your projected year-end tax payments as compared with your expected tax liability to determine if your estimated tax payments need some tweaking. If your payments are expected to be less than 90 percent of current-year tax, you will generally need to increase your withholding or make estimated tax payments.

You may want to file a new W-4 with your employer adjusting your withholding to withhold more from your final paychecks for the year if you are currently underwithholding. This will help avoid being subject to a penalty when you file your return.

Adjusting estimated tax payments
A change in your business’s income, deductions, credits, and exemptions may also make it necessary to refigure your estimated payments for the remainder of the year. To avoid either a penalty from the IRS or overpaying the IRS interest-free, consider increasing or decreasing the amount of your remaining estimated payments.

If, during the quarter, you learn that a change in your business’s anticipated income, deductions, credits, exemptions, or other adjustments will either increase or decrease your business’s tax liability, and therefore affecting your required annual payment for the remainder of the year, you should adjust your remaining quarterly payments accordingly.

Refiguring tax payments due
To change your estimated tax payments, refigure your total estimated payments due. Next, determine the payment due for each remaining payment period. Be careful when refiguring your remaining payments. The IRS may assess a penalty against you when filing your return at the end of the year if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax. So be cautious when refiguring any tax payments.

Pre-PPACA law
Pre-PPACA law generally requires businesses to file an information return with the IRS reporting payments to non-corporate service providers that exceed $600 in a given year. Payments to providers of goods are excluded from reporting. Payments to a corporation for goods or services are excluded from reporting with some limited exceptions.

Sea change ahead
Effective for purchases made after December 31, 2011 the PPACA requires all businesses purchasing $600 or more in goods or services from another entity (including corporations but not tax-exempt corporations), to provide the vendor and the IRS with an information return. Presumably, Form 1099-MISC will be used for purposes of the new reporting rule, or the IRS will develop a new form. We will keep you posted on developments.

Example. In February 2012, your business buys computers, printers, and fax machines from an office supply company, doing business as a corporation, for $4,000. Your business also spends $1,000 at a local caterer, doing business as a partnership, for office breakfasts and lunches throughout the year. Additionally, the company spends $600 for business travel on Amtrak. Your business must provide each of these vendors with a Form 1099 for 2012, as well as the IRS.

Day-to-day transactions
Here are some more examples of purchases after 2011 that appear to fall under the PPACA’s reporting requirements:
- You make small, incremental purchases from the same vendor; for example, your business purchases more than $600 of office supplies, such as staples, toner, pens, paper, and calendars from the same vendor.
- You pay more than $600 throughout the year in mail and shipping costs to the same vendor; however each individual charge costs no more than $10 or $12.
- You purchase floral arrangements for the office throughout the year, although each purchase may be no more than $40 to $70, your cumulative purchases are more than $600
- You purchase an $800 computer for your new employee
- You hold a summer picnic for your employees and purchase more than $600 in food from a local grocery store
- Every Friday you buy breakfast pastries from the local bakery for your employees, and even though each purchase is no more than $40, you spend more than $600 in the year.

Backup withholding
The PPACA requires sellers to provide, and purchasers to collect, Taxpayer Identification Numbers (TINs). If a seller fails to furnish a correct TIN, you must impose backup withholding at the rate of 28 percent of the purchase price.

Moreover, if your business fails to issue an accurately completed Form 1099 to a vendor, the IRS can assess a penalty.

Preparing now
There are some proactive steps your business can take now to prepare for the new reporting requirement and its heavy administrative and paperwork burden. The way you collect and manage vendor information will be more important then ever. Basic information you will need to track includes every vendor’s name and TIN, the amounts spent at each vendor and the total annual amount spent at each vendor. You should also begin requesting that each of your vendors, particularly your regular vendors, complete IRS Form W-9 for your records. Form W-9 will provide you with the vendor’s legal name, address, and TIN.

Pending legislation
Opponents of the expanded information requirement are hoping that Congress will repeal it before 2012. Outright repeal is a long-shot. As written now, the PPACA reporting requirement is estimated to raise $17 billion over 10 years. Congress will need to find another source of revenue if it repeals the reporting requirement. More likely, Congress will modify the requirement.

Senate Democrats have introduced legislation to raise the reporting threshold from $600 to $5,000 and exclude some routine payments, such as office supplies, from reporting. All purchases made with a credit card would also be exempt from the reporting requirement. Additionally, small businesses employing not more than 25 employees would be completely exempt from the reporting requirement.

Congress may scale back the PPACA’s reporting requirements in the autumn of 2010. We will keep you posted on developments.

Chris Griesemer, IT Security Specialist

– — –
My alarm sounds. Time to get ready. Big day. Vegas. DEF CON. What’s DEF CON? Only the biggest hacking convention in the world held in Vegas every year.

I get up and go through the normal routine. Shower, brush my teeth; I don’t want to do too much. I mean the idea is to blend in. Not totally but I definitely don’t want to be misidentified as a FED. These conference goers tend to be a little wary of the FED. More on that later.

Should I wear all black, pierce my nose, ear and lip? Should I dye my hair lime green? Not this year. I’ll just go with the normal shorts, t-shirt and sandals.

I arrive at the Riviera around 8:15 a.m. but before I walk in, I go through my usual pre-DEF CON checklist. First, make sure I am wearing my DEF CON badge. Can’t get in without it, plus it looks cool. Second, make sure Bluetooth is turned off. And Third, make sure wifi on my iPhone is turned off. Ok, I think I am ready.

DEF CON ID Badges, photo by Dave Bullock

I walk into a sea of black t-shirt wearing geeks…I would never say that out loud. You don’t want to be on the bad side of one of these hackers. And to be honest, I don’t really look at them as geeks or nerds. Some of the smartest programmers and computer threats are walking these hallways. I show them nothing but respect.

It looks like a strong turnout this year. The cost to attend DEF CON is $140, cash. Credit cards and checks are not accepted here. Anonymity is very important to DEF CON’ers, which is why most of them use nicknames.

I decide to do some exploring and find the room with the Wall of Sheep.

The infamous Wall of Sheep, photo by Dave Bullock

In hacker terms, a “Sheep” is an individual whose online habits allow his or her information to be hacked. Five hackers sit at a long table, using sniffer programs to pull unencrypted packets out of the air and find the usernames and passwords of people logging into Gmail, yahoo or hotmail (basically any account) wirelessly. After capturing a user, they post his or her username and the first three characters of a password on a huge screen on the wall. It’s always fun looking at the names scrolling across the screen.

Next, I decide to look through the presentations over the next 3 days. Here are some that stand out:

1. Exploiting Digital Cameras
2. Hacking Facebook Privacy
3. How I Met Your Girlfriend
4. You Spent All That Money And You Still Got Owned
5. We Don’t Need No Stinkin Badges: Hacking Electronic Door Access Controllers

I decide to choose my first session. I narrow it down to: Build a Lie Detector/Beat a Lie Detector or How To Get Your FBI File. I go with the latter.

I walk into a room that seats roughly 300 people. There’s already 350 to 400 people in here. Remember when I mentioned the FED and the importance of blending in? The FED is a DEF CON’er term for an FBI agent. At the beginning of every session, a DEF CON’er can raise his hand and, point out an audience member he suspects is a FED. The presenter will ask them to come on stage and the questions begin:

DEF CON’er – Do you have a Job?
Guy – Yes
DEF CON’er – Do you ever leave the country because of your job?
Guy – No
DEF CON’er – Are you carrying a badge?
Guy – Yes
DEF CON’er – Do you carry a gun?
Guy – Yes
DEF CON’er – Are you a FED?
FED – Yes

The crowd goes crazy and the DEF CON’er and the FED both receive t-shirts. Unfortunately, there are no takers in this session.

Basically, this session is a rough overview of your right to get your FBI file and tricks that will help you accomplish this faster. Of course one of the main points this presenter explains is that when writing your request letter, be as specific as possible. Explain the time frame you are looking for and the exact information you are requesting. If not, your request might be too vague and require more time be spent on gathering your information. Plus, you don’t want the FBI looking over your file for any reason.

Something might spark their interest and they may investigate further. This is never good, according to the presenter, and the crowd agrees with a cautious chuckle.

This is the way it went for 3 days. 3 to 4 presentations every hour from 10:00 a.m. to 5:00 p.m. Friday, Saturday and Sunday.

DEF CON volunteers, photo by Dave Bullock

Unofficially, around 8,000 people attended the conference. On the first day I noticed a substantial amount of security walking the hallways. I asked if this was normal for the Riviera. To my surprise, the security lady said she was not giving any information because she knew there was some kind of contest going on. And in fact there was; a social engineering contest to see what these DEF CON’ers could find out and she wasn’t giving any information. Social engineering is a trick hackers use to manipulate others into sharing confidential information, which the hacker then uses to his or her advantage.

I saw 20 security personnel walking the hallways; not the usual amount on staff but probably a good idea. DEF CON’ers have not always been kind to the hotel housing them. One year they hacked into the air conditioning system; another, the phone system. I was talking with an employee at the Riviera and she said they hacked into the phone system again this year using the phone in the elevator.

Most presentations were very good – two were exceptional and very well attended. The first was the GSM vulnerability presentation. This was basically a presentation on GSM insecurities (or, how to listen in on cell phone calls). I knew this was going to be an interesting presentation because of the 50 or so information sheets that were posted everywhere that read:

WARNING: Cell phone calls may be intercepted or disrupted in this area between the hours of 1 p.m. and 2 p.m., Saturday 31st July.

Poster with cell phone warning, photo by Chris Griesemer

I wanted to see this presentation, but when I arrived 300 people were waiting in line and another 400 were already in the presentation hall. On a side note, waiting in line was very entertaining. If you didn’t know you were at a computer hacking convention, you definitely would by the end of any long wait. “Hey, Cyberstud, use your Jedi mind trick to get us in there.” They would all laugh. “Oh yeah, if Scotty would just beam us in there, we wouldn’t have to wait.” Again, laughter. I decided to get in on the action. “I don’t know why they just don’t follow the white rabbit.” I was a big hit.

Although I was unable to attend, I later found out that during this presentation, they captured around 20 phone calls.

The best presentation was, in my opinion, Barnaby Jack’s Jackpotting Automated Teller Machines. One of the descriptions of this presentation said the following: I’ve always liked the scene in Terminator 2 where John Connor walks up to an ATM, interfaces his Atari to the card reader and retrieves cash from the machine. I think I’ve got that kid beat.”

And he did. He basically explained how he was able to hack into a standalone ATM machine both physically and remotely. How could someone learn that much about an ATM machine unless they had one in their house? Did I mention he had one in his house? After a mishap and a call to a certified ATM technician, he was able to learn enough about the ATM that allowed him to hack it. When the presentation was completed, he had physically hacked into the machine, he had remotely hacked into the machine and finally, he had programmed a key sequence that when pressed, would display “Jackpot” on the screen and spit money out. It was truly one of the most amazing presentations I have ever seen.

What should you take from all of this? These people think differently. Most people look at a phone in an elevator and think “Don’t pick that up! It’s not an emergency.” They look at that phone and think, “It has to be connected to a regular phone system and if it is, I should be able to make long distance calls with it.” Make sure physical controls are in place. Doors to closets, data rooms and storage should be locked and controlled at all times.

Make sure social engineering training is done at least once a year. It’s more subtle than other security breaches, which is why social engineering may be one of the best ways into a business.

Finally, wireless technology is very convenient but can also be very vulnerable. Implement standards for how and where your employees may access wireless devices such as smart phones and notebooks. And for those of you who have policies, make sure you include these new standards in your policies.

What did I take from this? First, these guys are good. If they find a weakness they can exploit it. Take the time to thoroughly examine the security of your business, or hire a firm to do it for you. You can never assume your business is safe from outside threats. And secondly, if you are ever in Vegas the last part of July and are looking for something different to do, go to DEF CON. It is truly an eye opener.

By Chris Griesemer, IT Security Specialist

All photos by Dave Bullock found here: Hacker Wonderland: DefCon 18 in Photos

He received a degree in Business Administration from Central Missouri State University and is a certified public accountant in Missouri and Colorado. Most recently, he was a credit Analyst for Guaranty Bank in Springfield.

“We are glad to have Shawn join our team. While The Whitlock Company is a growing business, our hiring process is incredibly selective. We hire only employees who have something exceptional to offer our clients. Shawn’s experience working with financial institutions made him a clear choice,” said Tom Beisner, CPA, Partner and Banking Industry Service Leader.

Effective June 18, 2010, all depository financial institutions (DFIs) will be required by the NACHA Operating Rules to conduct an ACH risk assessment, and to implement risk management programs based on the results of the assessment.

Currently, the NACHA Rules requirements for ACH risk management is limited to establishing, reviewing and monitoring exposure limits for an originator’s ACH activity.

This new requirement adds additional risk management practices that are common in the industry and that will improve risk management in the ACH Network when used by DFIs. However, the NACHA Rules do not address the scope of these new requirements; instead they state that these actions must be “in accordance with the requirements of your regulator”. In general, the ACH risk assessment process should include assessing the types and levels of risks associated with ACH activity, customer due diligence, controls for originators, third-parties and direct-access connections, and systems to manage and mitigate risk.

Much of the actual investigative activity needed for a risk assessment has probably been completed as part of your existing risk assessment and ACH compliance self-audit program. Therefore, you may be able to use existing documentation to comply with this new ACH risk management requirement.

Information from BankersWeb.com. Click here to read the full article including recommended processes and controls and also Risk Management tips.

Please contact Tom Beisner or Chris Griesemer with any questions.

Lifetime Learning Credit
The Lifetime Learning credit can be claimed for qualified tuition and fees paid by an individual for his or her (or a spouse’s or dependent’s) enrollment at any college, university, vocational school, or postgraduate school. The credit is equal to 20 percent of up to $10,000 of the qualified tuition and related expenses paid by a taxpayer during the tax year. Thus, the maximum credit amount per taxpayer return is $2,000.

The Lifetime Learning credit can be claimed for all years of postsecondary school (as well as for courses to acquire or improve job skills). However, the credit phases out as your modified AGI rises, and you can not claim the credit if you are married filing separately. You cannot claim a credit if your modified AGI is $60,000 or more ($120,000 or more if you file a joint return).

American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC), which was previously the Hope scholarship credit but temporarily enhanced and renamed the AOTC for 2009 and 2010, can also be claimed for qualified tuition and fees paid by an individual for his or her (or a spouse’s or dependent’s) enrollment or attendance at any college, university, vocational school or postgraduate school.

The AOTC can be used for all four years of post-secondary school. Further, the credit can be taken for more expenses, such as text books and course materials. And, although the credit phases out as adjusted gross income (AGI) rises, the income phase out range is increased through 2010 as well. Additionally, 40 percent of the credit is refundable.

For 2010, the AOTC is available up to a maximum of $2,500 per eligible student, per year (100 percent of the first $2,000 eligible expenses plus 25 percent of the next $2,000 eligible expenses). The credit phases out at higher income levels, making the credit available to more families as well. The amount of the credit begins to phase out when an individual’s AGI falls between $80,000 to $90,000 AGI. For married joint filers the credit phases out when AGI falls between $160,000 and $180,000.

AOTC vs. Lifetime Learning credit
The AOTC and Lifetime Learning credits cannot both be taken for the same student in the same year. If you pay the qualified education expenses of more than one student in the same year, however, you can choose to take the credits on a per-student basis for that year (for example, you may claim the AOTC for your daughter and the lifetime learning credit for your son, etc). You should calculate the effect of the AOTC, Lifetime Learning Credit (and, if retroactively reinstated for the 2010 year, the higher education expense deduction) on your tax return to see which incentive achieves the greatest tax savings. Remember, also, in “doing the math” that the tax benefits are based on calendar tax years and not school academic years.

Coverdell Education Savings accounts
Individuals can contribute up to $2,000 a year to a Coverdell Education Savings account, which is established to help pay for the costs of education of an account beneficiary. A beneficiary is someone who is under age 18 or with special needs.

Although contributions to a Coverdell account are not deductible, earnings grow tax-free, and distributions are also tax free if used for qualified education expenses, including tuition and fees, required books, supplies and equipment, as well as qualified expenses for room and board. The account can help pay for the costs of attending an elementary or secondary school, whether public, private or religious, as well as a college or university.

As with the education credits, there are contribution limits based on the contributor’s modified AGI.

IRA withdrawals for education expenses
Generally, if you take a distribution from your IRA before you reach age 59 1/2 you must pay a 10 percent additional tax on the early distribution, as well as income tax on the amount distributed. This applies to any IRA you own, whether it is a traditional IRA, a Roth IRA or a SIMPLE IRA. However, you can take an IRA distribution before age 59 1/2 and avoid the 10 percent tax (but not the inclusion of the distributed amount in income for income tax purposes), if the distribution is used to pay the qualified education expenses for:

– Yourself;
– Your spouse; or
– Your or your spouse’s child, grandchild or foster child.

The amount of the withdrawal is generally limited to $10,000. Qualified education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at any college, university, vocational school or other post-secondary educational institution. In addition, if the student is at least a part-time student, room and board are generally qualified education expenses, subject to certain limitation.

Section 529 college savings plans
Qualified tuition programs, more commonly referred to as 529 plans, allow you to either prepay education expenses or contribute to an account set up for paying a student’s qualified education expenses at eligible educational institutions. A 529 plan allows you to save money, tax-free, to pay for qualified education expenses for college. Although contributions are not deductible for federal tax purposes, many states allow residents to deduct contributions on their state tax return. Moreover, withdrawals from a 529 plan are tax-free unless the amount distributed is greater than the account beneficiary’s adjusted qualified education expenses. Qualified education expenses include amounts paid for tuition, fees, books, supplies and equipment, as well as reasonable costs of room and board for individuals are at least part-time students.

Computer and technology expenses. Through 2010, parents and students can take tax-free withdrawals from their 529 plans to buy computers and computer-related equipment for college. The 2009 Recovery Act added computers, computer equipment, technology, internet access, and “related services” to the list of qualified higher education expenses that can be paid for with tax-free 529 withdrawals. However, as with the AOTC, this expanded incentive is temporary and applies only through 2010 (unless Congress extends this tax break). However, tax-free withdrawals can not be taken for computer software designed for games, sports or hobbies, unless the software is “predominantly educational in nature.”

Caution. While the tax law allows you to combine the tax benefits of a 529 plan with one of the education credits or deductions, you cannot “double dip.” That is, the expenses you use to compute the AOTC (or Lifetime Learning Credit) cannot also be included as a qualified higher education expense for purposes of determining your tax exclusion for 529 plan withdrawals. Remember, too, that states have their own rules regarding education benefits, such as withdrawals from 529 plans. These must be considered as part of your education tax savings strategy.

Student loan interest deduction
Eligible individuals can take an above-the-line deduction for up to $2,500 of interest paid on student loans used to pay for the cost of attending any college, university, vocational school, or graduate school. A student loan, for purposes of the deduction, is a loan you took out and is designated solely to pay your (or your spouse’s or dependent’s) qualified education expenses. For example, if you take out a home equity loan to pay for college tuition, the interest may be deductible as mortgage interest, but it is not considered above-the-line interest for a student loan since the lender did not specifically restrict the proceeds to education expenses.

Good news on student loan interest, however, is that qualified education expenses include not only tuition and fees, but also room and board, books, supplies and equipment, and other necessary expenses such as transportation. Interest paid on a loan that is made to you by a related person, such as parents or grandparents, or from a qualified employer plan do not qualify for the deduction.

The deduction is available regardless of whether or not you itemize. The amount of the deduction begins to phase out when an individual’s modified AGI exceeds $55,000 a year (or $115,000 for married couples filing jointly). The deduction is completely eliminated once an individual’s modified AGI reaches $70,000 (or $145,000 for joint filers). If you are claimed as a dependent on another’s tax return, you can not take the deduction, however.

Expired incentives hanging in the wings
At the end of 2009, two popular, but temporary, tax incentives expired: the higher education tuition deduction and the teachers’ classroom expense deduction of up to $250. Congress is working on legislation to extend these benefits through 2010. We will keep you posted on its progress.

Please contact us to discuss the higher education tax saving strategies that can benefit your particular situation.

Business bad debt deduction
Taxpayers may deduct any business receivable that becomes totally or partially worthless during the tax year under Tax Code Sec. 166(a). However, the business bad debt deduction is limited to the taxpayer’s adjusted basis in the receivable.

The deduction allowed for bad debts is an ordinary deduction. To claim the deduction, you must establish that the debt is genuine and that the amount cannot be recovered from the debtor. You must also make a reasonable attempt to collect the debt (however, you do not have to turn the debt over to a collection agency or file a lawsuit in an attempt to collect on the debt if doing so has little probability of success). The law requires most taxpayers to use the specific charge-off method of accounting for bad debts. Under the specific charge-off method, the taxpayer must specifically identify the accounts or notes charged off as partially or completely worthless (it is also referred to as the direct write-off method).

If you meet these conditions, you can take the deduction in the year in which the debts became worthless. This includes certain previous years since, for some debts, worthlessness may not be immediately apparent. You can deduct a bad debt before the debt is due if you can establish the partial or complete worthlessness of the debt.

Partially worthless. If you failed to claim the bad debt deduction for a receivable that became partially worthless in a prior tax year, you have until the later of (1) three years after you file the tax return (including extensions) or (2) two years from the time you paid the tax to file an amended return and deduct the bad debt.

Totally worthless. If you failed to claim a deduction for a receivable that became completely worthless in a previous tax year, you have until the later of (1) seven years after the due date of the tax return (not including extensions) or (2) two years from the time you paid the tax to file an amended return and claim a deduction for the worthless receivable.

Cash basis taxpayers
Cash basis taxpayers cannot claim a bad debt deduction for accounts receivable that are not collectible. However, notes received by a cash basis taxpayer in the ordinary course of business are treated as the equivalent of cash to the extent of the note’s fair market value (FMV) at the time received. Thus, the initial basis in such a note is its FMV. Cash basis taxpayers may claim a bad debt deduction for uncollectible notes receivable if they have included the FMV of the notes in gross income.

Accrual and hybrid taxpayers
Accrual basis taxpayers may claim a bad debt deduction for accounts receivable that become partially or completely worthless during the tax year. Accrual basis taxpayers must include the face value of a note receivable in gross income if a reasonable expectancy of collection exists at the time it is received. Taxpayers that use a hybrid method of accounting may deduct bad debts if they have included the revenue from the receivable in gross income.

Reporting
For self-employed taxpayers, the bad business debt deduction is reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), or Schedule F (Profit or Loss from Farming (for self-employed farmers)). Corporations report bad debts on Line 15 of Form 1120, U.S. Corporation Income Tax Return. S corporations report bad debts on Line 10 of Form 1120S, U.S. Income Tax Return for an S Corporation. Partnerships report bad debts on Line 12 of Form 1065, U.S. Return of Partnership Income.

Recovering bad debts
If you recover a bad debt during the year, the amount recovered is gross income to the extent that you claimed the deduction for the bad debt in a previous tax year, reducing your taxable income. This is called the tax benefit rule. The bad debt you recovered may not be offset against the bad debt deduction for the tax year of the recovery.

Do you have any questions about the tips in this article? Please contact us and we will be glad to assist your business with these strategies.

New non-health related reporting requirements imposed by the Patient Protection and Affordable Care Act of 2010 (PPACA) will go into full force in 2012. They expanded existing information reporting requirements to apply to payments made to corporations and generally to include payments of “gross proceeds” for property and services, and all “amounts [paid] in consideration for property.”

The expansion of information reporting was anticipated for corporations, but not for “property transactions” and “gross proceeds.” Many tax practitioners are already complaining loudly that businesses need guidance on what are gross proceeds and what property transactions are covered. Others predict that the new requirements will give rise to an expensive compliance burden for businesses, with as much as a tenfold increase in reporting on Form 1099-MISC.

After comments are received next month, the IRS likely will release preliminary rules on the new information requirement either at year end or by early 2011.

1. Payroll deduction IRAs
Many small employers find a payroll deduction IRA very attractive because it allows them to offer their employees a retirement savings vehicle at little cost. A business of any size, even self-employed individuals, can establish a payroll deduction IRA. Under a payroll deduction IRA, only your employees make contributions to an IRA. Your responsibility as an employer is simply to transmit the employee’s authorized deduction to the financial institution that maintains the IRA.

The IRA is set up with a financial institution, such as a bank, mutual fund or insurance company. You can limit the number of IRA providers to as few as one. The employee establishes a traditional IRA or a Roth IRA (based on the employee’s eligibility and personal choice) with the financial institution and authorizes the payroll deductions. As the employer, you withhold the payroll deduction amounts authorized by your employees and send the funds to the financial institution.

An employee’s decision to participate in a payroll deduction IRA is entirely voluntarily. If an employee decides to participate, he or she can only contribute up to a certain amount to the payroll deduction IRA every year. For 2010, the contribution limit is $5,000. An employee age 50 or older may make an additional “catch-up” contribution of $1,000 for a yearly total of $6,000. Every employee who participates is 100 percent vested in the contributions to their payroll deduction IRA.

Let’s look at an example of a payroll deduction IRA:
Aidan’s employer offers its employees the opportunity to have deductions taken from their paychecks to contribute to IRAs that the employees have set up for themselves. Aidan signs up for the program and has $100 from his $1,000 bi-weekly paycheck deposited into his IRA for a yearly total of $2,600. At the end of the year, Aidan’s employer would report the full $26,000 he earned on his Form W-2 and Aidan would add the $2,600 to any other IRA contributions he made during the year for Form 1040 deduction purposes.

The costs of a payroll deduction IRA are low. Moreover, payroll deduction IRAs are not subject to the often complex filing, documentation and administration requirements that are imposed on other employer-sponsored retirement arrangements, such as 401(k) plans.

2. SEP Plans
“SEP” stands for “Simplified Employee Pension” plan. While there are filing, administration and documentation requirements for SEP plans, the goal of an SEP plan is to keep these as simple as possible. The IRS has created, for example, model SEP language for plan documents.

An SEP plan is similar to a payroll deduction IRA. Under an SEP plan, employers make contributions to traditional IRAs set up for employees (including self-employed individuals). An SEP-IRA is funded solely by employer contributions whereas a payroll deduction IRA is funded solely by employee contributions.

As the employer, you must select the financial institution for your SEP. This decision must be made carefully because you and the financial institution will very work closely to administer the plan. After you send the SEP contributions to the financial institution, the financial institution will manage the funds. Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds, and other similar types of investments.

Federal law requires you and the trustee to keep employees informed about the administration and health of the SEP. Employees must be provided with plan documents, an annual statement that reports the fair market value of each employee’s account and a copy of an annual statement that is filed by the financial institution with the IRS. Like a payroll deduction IRA, each employee is 100 percent vested in his or her SEP-IRA.

Generally, the annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:
– 25 percent of compensation,or
– $49,000 for 2010.

Generally, contributions are not required to be made every year to an SEP. In years that contributions are made to an SEP, they must be made to the SEP-IRAs of all eligible employees. Contributions to an SEP-IRA must be made in cash; property cannot be contributed to an SEP-IRA. Special rules apply if you, as the employer, also contribute to a 401(k) or similar plan on the employee’s behalf.

All eligible employees must be allowed to participate. An eligible employee is any employee who is at least age 21 and has worked for you in at least three of the immediate past five years.

To encourage employers to establish SEPs, the government offers a tax credit. You may be eligible for a tax credit of up to $500 for each of the first three years for the cost of starting the SEP.

3. SIMPLE IRAs
A “SIMPLE IRA” is a Savings Incentive Match Plan for Employees IRA. Like an SEP plan, a SIMPLE IRA is intended to be easily created and administrated.

A SIMPLE IRA is funded both by employer and employee contributions. As the employer, you can choose either to (1) match the contributions of employees who decide to participate or (2) contribute a fixed percentage of all eligible employees’ pay. Under option (2), which is known as the nonelective contribution formula, even if an eligible employee does not contribute to his or her SIMPLE IRA, you must make a contribution to the employee’s SIMPLE IRA equal to a fixed percent of the employee’s salary. Each employee is 100 percent vested in his or her SIMPLE IRA.

While similar to a payroll deduction IRA, a SIMPLE IRA has additional requirements. One important requirement is the number of employees. Generally, your business must have 100 or fewer employees to be eligible for a SIMPLE IRA.

Let’s look at an example of a SIMPLE IRA. In this example, the employer matches the employee contributions of employees who decide to participate.

Allison’s employer has established a SIMPLE IRA plan for its employees. The employer will match its employees’ contributions dollar-for-dollar up to three percent of each employee’s salary. If an employee does not contribute to his or her SIMPLE IRA, then that employee does not receive a matching employer contribution. Allison decides to contribute five percent ($2,500) of her annual salary of $50,000 to a SIMPLE IRA. The employer’s matching is $1,500 (three percent of $50,000). Therefore, the total contribution to Allison’s SIMPLE IRA that year is $4,000.

There are contribution limits for SIMPLE IRAs. For employees, the annual contribution limit is $11,500 in 2010. Employees age 50 and older may make additional catch-up contributions of $2,500 in 2010.

The SIMPLE IRA contribution for the employer is dependent upon which contribution formula you select. If you decide to make matching contributions, only eligible employees who have elected to make contributions will receive an employer contribution. If you decide to make a nonelective contribution, each eligible employee must receive a contribution regardless of whether the employee makes contributions.

As with an SEP plan, a SIMPLE IRA creates a relationship between you and the financial institution that manages the funds. SIMPLE IRA plan contributions can be invested in individual stocks, mutual funds and similar types of investments. Each participating employee must receive an annual statement indicating the amount contributed to his or her SIMPLE IRA for the year.

As with SEP plans, you may be eligible for a tax credit to help you offset start-up costs. The tax credit can reach up to $500 per year for each of the first three years for the cost of starting a SIMPLE IRA plan.

We’ve covered a lot of material about retirement plans for small businesses. There are more detailed requirements, especially for SEP plans and SIMPLE IRAs, which we can discuss in depth. Please contact us to set up an appointment to explore these and other retirement arrangements for small businesses.

Officially known as the Senate Substitute Amendment to H.R. 5297, the Senate’s Small Business Tax bill makes significant additions to the tax title that the House passed on June 15, 2010. Most of these tax incentives are retroactive to January 1, 2010, but are only temporary; once they pass, most businesses need to act quickly to maximize their benefits.

Here’s what’s in store for businesses if the Senate bill is approved:
Bonus depreciation. Extends, through December 31, 2010, 50-percent first-year bonus depreciation that had expired at the end of 2009.

Code Sec. 179 expensing. Increases the maximum Code Sec.179 expensing deduction from $250,000 to $500,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011.

S corp built-in gain. Shortens the holding period for appreciated C corp assets after an S corp conversion to five years, if the fifth tax year in the holding period precedes the S corp’s tax year beginning in 2011.

Cell phones. Removes cell phones and similar communication devices from their current classification as listed property, thereby lifting strict substantiation requirements, depreciation limitations, and imputed income for employee use.

General business credit. Extends the carryback period for general business credits from one to five years for eligible small businesses, applied to tax years beginning after December 31, 2009; similarly extends the carryforward period.

AMT offset. Removes the limitations on which general business credits may offset AMT liability for eligible small businesses.

SECA deduction for health insurance. Allows the deduction for health insurance to be taken into account in determining earnings for self-employment tax purposes.

Qualified small business stock. Raises the exclusion for qualifying gain from 75 percent to 100 percent on Code Sec. 1202 stock acquired anytime from the date of enactment through the end of 2010.

Code Sec. 6707A penalty relief. Moderates the penalties that the IRS must apply to taxpayers failing to disclose participation in certain tax shelters. For listed transactions, a $5,000 minimum penalty would apply to individuals, $10,000 to corporations.

Start-up expense deduction. Raises the deduction limit on start-up expenses from $5,000 to $10,000, and increase the threshold to $60,000 for one year, 2010.

Roth retirement options. Authorize 401(k), 403(b) and 457 retirement plans to allow participants to roll over pre-tax account balances into a Roth account.

Revenue offsets. Many of the tax incentives in the bill must be “paid for” under Congressional budget rules with reciprocal offsets. In addition to counting on revenues from voluntary Roth conversions, the Senate bill would raise more than $4 billion through broadened information reporting rules and higher penalties for ignoring those rules.

Congress is set to return from its month-long August recess on September 14th. In addition to considering further tax breaks to jump-start business growth when it returns, Congress will be focused on whether to raise individual tax rates, revise capital gains and dividends treatment, preserve the estate tax, and shorten the growing reach of the alternative minimum tax (AMT).

We will continue to closely monitor these developments and recommend appropriate tax strategies as they evolve. If you have any questions about these changes, please contact us today.