The Bonus Depreciation.

The 2010 Tax Relief Act benefits businesses by increasing 50 percent bonus depreciation to 100 percent for qualified investments made after September 8, 2010 and before January 1, 2012 (before January 1, 2013 for certain longer-lived and transportation property).

This provision is especially beneficial for businesses because bonus depreciation, unlike Code Sec. 179 expensing, is not limited to smaller companies, or capped at a certain dollar level. However, only new property qualifies for the 100 percent bonus depreciation (unlike Code Sec. 179 expensing, which can be claimed for both new and used property).

How does this help the health care industry?

In January 2011, XYZ medical practice, a calendar year business, buys $1 million of qualifying property eligible for the 100 percent bonus depreciation deduction. Under the 2010 Tax Relief Act's enhanced 100 percent bonus depreciation provision, XYZ medical practice will be able to claim a $1 million depreciation deduction for the property on its 2011 Federal tax return. This provision can also apply to the nonstructural components of construction of a new facility, remodeling of an existing facility, or an addition. Most of the states did not couple with this legislation including Iowa.

Additional Assistance.

Although enhanced 100 percent bonus depreciation is not extended into 2012, the new law does provide 50 percent bonus depreciation for qualified property placed in service after December 31, 2011 and before January 1, 2013.

Code Section 179 Expensing.

Over the years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the 2010 Small Business Jobs Act increased the Code Sec. 179 dollar and investment limits to $500,000 and $2 million, respectively. For tax years beginning in 2012, the new law provides for a $125,000 dollar limit and a $500,000 investment limit (both indexed for inflation). Without this provision, the dollar and investment limits would have reverted to $25,000 and $200,000, respectively, for tax years beginning after 2011. Amounts that are not eligible for expensing due to excess investments cannot be carried forward and expensed in a later year; they may only be recovered through depreciation.

Iowa recently passed legislation to couple with this legislation and allow the correction to be made on the 2011 tax return in lieu of amending 2010. This change will allow you to “double-up” your Sec. 179 claim on your 2011 Iowa return.

IRS Grants Filing Extension to Trucking Companies for Form 2290 Tax Returns

The Internal Revenue Service recently advised trucking companies and other business owners of heavy highway vehicles that their next federal highway use tax return, usually due August 31, will instead be due on November 30, 2011.

Because the highway use tax is currently scheduled to expire on September 30, 2011, this extension is designed to alleviate any confusion and possible multiple filings that could result if Congress reinstates or modifies the tax after that date.

Under temporary and proposed regulations, the November 30 filing deadline for Form 2290 -- Heavy Highway Vehicle Use Tax Return -- for the tax period that begins on July 1, 2011, applies to vehicles used during July, as well as those first used during August or September. Returns should not be filed and payments should not be made prior to November 1.

To aid trucking companies applying for state vehicle registration on or before November 30, the new regulations require states to accept as proof of payment the stamped Schedule 1 of the Form 2290 issued by the IRS for the prior tax year ending on June 30, 2011.

This is an adjustment as normally, after a taxpayer files the return and pays the tax, the Schedule 1 is stamped by the IRS and returned to filers for this purpose. A state ordinarily may accept a prior year's stamped Schedule 1 as a substitute proof of payment only through September 30.

For those acquiring and registering a new or used vehicle during the July-to-November period, the new regulations require a state to register the vehicle without proof that the highway use tax was paid if the person registering the vehicle presents a copy of the bill of sale or similar document showing that the owner purchased the vehicle within the previous 150 days.

Five Reasons Why Mandatory Firm Rotation Will Not Lead to Higher Audit Quality

From the American Institute of CPAs (AICPA)

The importance of audits of state and local government entities and nonprofit organizations is important to the success of our communities. It is always in our best interest to review new initiatives to increase effectiveness and quality of audits for these organizations, but mandatory firm rotation may lead to unintended and undesirable consequences.

1. Increase in audit failures. Studies found that audit failures are three times more likely in the first two years of an audit (Public Oversight Board, Commission on Auditor’s Responsibilities, and the National Commission on Fraudulent Financial Reporting). In addition, the Committee of Sponsoring Organizations of the Treadway Commission found that 26% of the organizations that released fraudulent financial statements changed auditors between the last clean financial statements and the last fraudulent financial statements, whereas only 12% of no-fraud organizations switched auditors during that time.

2. Increased start-up costs. Changing auditors results in more frequent start-up costs, both for the auditor and the organization.

3. Increased difficulties in timely reporting. Timely reporting becomes more difficult because audit firms need to meet a very short “learning curve” to perform a rigorous audit.

4. Loss of “institutional knowledge.” Over successive audits, firms increase institutional knowledge, including, for example, their knowledge of the client’s accounting and internal control systems. This benefit would be greatly diminished by mandatory rotation.

5. Reduced incentives to improve efficiency and audit quality. Mandatory rotations fail to fully reward firms that achieve greater efficiency and audit quality because rotation reduces potential demand. Auditors providing less efficient and quality services are likely to survive because there will constantly be organizations looking for new auditors. Conversely, quality firms no longer have the incentive to increase market share and profits since they lose clients after the maximum allowed duration.

Employee and Independent Contractor Classifications Defined

As your company grows, the size of your staff will, too.  Depending on the roles the people on your team will fulfill, they can either be classified as independent contractors or employees.  This distinction can be a complicated process and revolves around the working relationship between the individual and the company.

 If a company has the right to control what is to be done, how it is done, which tools are provided and if expenses are reimbursed, a person is probably an employee.  Conversely, an individual is probably an independent contractor if the company directs only the result of the work.  Independent contractors generally have invested into their services and may provide these services to others outside of your company. 

Other factors taken into consideration for worker classification include:

1.  Can the employer and worker part ways without penalty?  The right to discharge or terminate a relationship is present in an employer/employee relationship; however, discharge or termination in an independent contractor situation may constitute a breach of contract.

2. Is the worker paid fixed wages calculated on hourly or weekly basis?  If yes, the worker is more likely an employee.  Independent contractors typically perform a specific job at a fixed price.

3. Does the worker have the right to employ assistants?  The exclusive right of the worker to hire, supervise and completely delegate the work of assistants is an indication of an independent contractor.

An employer misclassifying an employee as an independent contractor fails to pay mandatory employee withholding taxes, FICA taxes, unemployment taxes and workers’ compensation premiums.  Not only does this jeopardize a fair and competitive marketplace by underbidding honest law-abiding businesses, this can also result in devastating penalties and fines, interest on back taxes and criminal charges to the employer under various laws.  In addition, the employer may be responsible for the incorrectly classified employee’s unpaid income taxes.

The IRS has provided a video workshop that outlines and demonstrates the differences between independent contractors and employees.  Click here and when the video loads, select Lesson 6.  

Taking the time on the front end to determine the correct classification for your team members will save time, money and your sanity in the long run.

Iowa Modifies Renewable Fuel Incentives and Creates Biodiesel Refund and E-15 Credit

The following summaries tell of upcoming changes to the various Iowa renewable fuel tax credits.

Ethanol Promotion Tax Credit
The ethanol promotion tax credit has been increased from 6.5 cents per gallon to a maximum credit of 8 cents per gallon.  In addition, retail fuel dealers may now claim the credit on a company-wide basis along with the location-by-location basis allowed previously.  The amendments are applicable retroactively to January 1, 2011.

E-85 Gasoline Promotion Tax Credit
The phase-down of the current E-85 credit has been eliminated and replaced with a 16-cent per-gallon credit, effective January 1, 2012, through December 31, 2017.

Biodiesel Blended Fuel Tax Credit
The December 31, 2011 expiration date for the biodiesel blended fuel tax credit has been extended until December 31, 2017. In addition, retailer’s diesel gallon sales no longer are required to meet a threshold of at least 50% biodiesel to qualify for the credit.

The legislation also establishes new per-gallon tax credit rates. In calendar year 2012, biodiesel blended fuel classified as B-2 or higher, but less than B-5, is at the designated rate of 2 cents while fuel classified as B-5 or higher, is at 4.5 cents.

Beginning in calendar year 2013, biodiesel blended fuel must be classified as B-5 or higher to qualify for a credit of 4.5 cents.

E-15 Plus Gasoline Tax Credit

A new credit has been created for ethanol blends between E-15 and E-69 equaling 3 cents per gallon for calendar years 2012 through 2014 and 2 cents per gallon for calendar years 2015 through 2017.

Biodiesel Production Refund
The legislation creates a per-gallon production refund on no more than 25 million gallons of biodiesel per facility produced in Iowa by a qualified manufacturer. Specifically, a qualifying producer may apply for a refund of the amount of the sales tax imposed and paid upon purchases made by the producer. The refund is made on a quarterly basis, according to the following per-gallon rates; 3 cents for calendar year 2012; 2.5 cents for calendar year 2013; and 2 cents for calendar year 2014.

For corporate and personal income tax purposes, a subtraction adjustment is allowed for the amount of any biodiesel production refund, to the extent included in federal taxable income or adjusted gross income.

The refund provision is repealed on January 1, 2015.

Elimination of the LIFO Method?

One of the biggest revenue-raisers proposed by President Obama, as talks continue regarding the nation’s debt ceiling, is what he describes as an arcane change in the tax treatment of business inventories — things like steel, groceries and oil. The elimination of this method would dramatically affect the manufacturing and distribution industries.

The proposal would prohibit the use of an accounting technique known as last in, first out, or LIFO. The technique is used to determine the cost of goods sold, and therefore the income earned, by a company. 

The repeal of LIFO would have a tremendous impact on closely held businesses using LIFO. The LIFO reserve would be brought back into income and taxed accordingly. Many closely held businesses have significant LIFO reserves that have built-up over time and the taxation of these reserves will result in a major tax hit to the company. In some cases, the tax effect may be significant enough to force a company out of business given the current economic challenges that exist. We will continue to monitor the developments relating to LIFO and assist our clients as necessary.

Final Regulations on 3% Withholding Released

We have been carefully monitoring a new law passed on May 6, 2011 that says federal, state and other units of government with annual payments for goods and services – including contractors – of $100 million or more must withhold income tax of 3% of the total payment for goods and services. The final regulations for the provisions taking effect January 1, 2013 are summarized below.  

The following are subject to the new requirement:

1. The entire U.S. government, including all federal agencies, the executive branch, the legislative branch and the judicial branch.
2. All states including the District of Columbia (but not including Indian tribal governments).
3. All political subdivisions of a state government or every instrumentality of such subdivisions unless the instrumentality makes annual payments for property or services of less than $100 million.

Exception for Small Entities
Subdivisions of a state, or instrumentalities of a subdivision of a state, are exempt from the withholding requirement if its total annual payments for property and services (not including wages) are less than $100 million. The proposed regulations provide a simple rule for determining whether an entity makes annual payments less than $100 million. In general the entity looks to its accounting year ending with or within the second preceding calendar year For example, if total payments for the entity’s 2011 accounting year exceed $100 million, the withholding requirement will apply in 2013.

Under an optional rule, an entity may average payments made during any four of the previous five accounting years ending with the accounting year ending with or within the second preceding calendar year.

Payments Subject to Section 3402(t) Withholding
Generally, withholding is required on all payments to all persons providing property or services to the government, including individuals, trusts, estates, partnerships, associations, and corporations. Withholding is required at the time of payment. If the government entity fails to withhold the tax required under section 3402(t), it becomes liable for the payment of the tax.

Payment Threshold
The proposed regulations create a payment threshold of $10,000 and provide that payments below the threshold are not subject to withholding. The regulations also include an anti-abuse rule that payments of $10,000 or more may not be divided into payments of less than $10,000 solely for the purpose of avoiding the withholding requirements.

Exceptions
The regulations provide the following exceptions from the withholding requirements:

1. Payments otherwise subject to withholding, such as wages. Payments for retirement benefits, unemployment compensation, or social security.
2. Payments subject to backup withholding, if the required backup withholding is actually performed.
3. Payments for real property, including land or completed buildings.
4. Payment of interest.
5. Payments to other government entities, foreign governments, tax exempt organizations, or Indian tribes.
6. Payments made under confidential or classified contracts, as described in IRC 6050M(e)(3).
7. Payments made by a political subdivision of a state, or instrumentalities of a political subdivision of a state that make annual payments for property of services of less than $100 milllion.
8. Public assistance payments made on the basis of need or income. However, assistance programs based solely on age, such as Medicare, are subject to the requirements.
9. Payments made under a government grant principally for a public purpose.
10. Payments to employees in connection with service, such as retirement plan contributions, fringe benefits, and expense reimbursements under an accountable plan.
11. Payments received by certain nonresident aliens and foreign corporations.
12. Payments in emergency or disaster situations.
13. Certain payment card transactions reportable under section 6050W.

We will continue to monitor this important change so check back regularly for updates!