Buyers of new heavy SUVs put in use in 2012 can get a substantial write-off, thanks to 50% bonus depreciation. Assume your business buys a new $60,000 SUV with loaded gross weight over 6,000 pounds and places it in service before year-end. First, the firm can expense $25,000. Half of the remaining $35,000 cost...$17,500... Qualifies for 50% bonus depreciation this year. The company can also deduct 20% of the $17,500 balance...$3,500... as a regular depreciation. Assuming that the vehicle is used 100% of the time for business, the total write-off in the first year is $46,000.

Employer-provided cell phone are tax free fringes, the Service says. As long as companies give the phones to workers primarily for business reasons, employees are not taxed on either the business or personal use of the phones. Therefore, workers do not need to keep a log of their business and personal calls.

Ditto, where employers reimburse for the business use of personal phones. The payments aren't taxed to employees if the use of the phones is reasonably related to the firm's business needs and the amounts paid are not unusual or excessive.

These same rules apply to iPads and other tablets, according to IRS officials.

IRS LOOKS CLOSELY AT E-COMMERCE

Last month, the IRS updated its Audit Techniques Guide (ATG) for cash-intensive businesses to help its agents understand the complexities of e-commerce – the selling, purchasing and/or paying for products and services, mostly online. The IRS’ interest in this area is part of its compliance efforts aimed at closing the tax gap, which is the difference between taxes owed and taxes actually paid. Small businesses are among the largest contributors to this $450 billion a year tax gap, and as they increasingly do business online, the IRS has become more interested. In 2012, the IRS will continue a nationwide Compliance Initiative Project for emerging issues related to e-commerce. The IRS will look at unreported income involving e-commerce business activity, and in particular, the following issues:

·                 Online sales and customer payments for goods and services

·                 Advertising income

·                 Internet auctions and bartering

·                 Online “tip jars” used by visitors to support websites

·                 Sale of customer lists

·                 Referral fees from list sharing

Compliance tools

Last year, Congress gave the IRS more information statements aimed at helping with e-commerce underreporting – namely, Form 1099-K, merchant card and third-party network payment reporting. These reporting requirements are aimed at businesses that conduct e-commerce through credit and debit card payments and third-party network payment providers, such as PayPal. The resulting Forms 1099-K will be a cornerstone to a future business income-matching program that does not exist today.

Last year, the IRS completed a significant update to its Internal Revenue Manual audit procedures, and many of the changes focus on unreported income in e-commerce activity. The IRS added instructions for auditors on how to examine businesses with e-commerce activities, including several techniques to question whether all income is reported on a tax return and additional guidance on audit trails to pursue. Agents are instructed to:

·                 Reconcile merchant card payments to bank deposits, books and records, and         the tax return.

·                 Investigate website traffic and volume that could be indicative of a high volume of       business.

·                 Review websites for historical activity using www.archive.org to determine                 e-commerce activity for the year under examination. Practitioners should be             prepared for IRS agents to ask these questions in their examinations:

·                 Does your client do business online?

·                 What payment methods are accepted through the website?

·                 What products, services and other items can be purchased on your client’s             website or through email marketing?

·                 What websites does your client own? How does your client account for this             income on the return?

·                 Does your client sell advertising on the Internet?

·                 Does your client sell products and services through other online providers?

·                 Does your client’s site make sales to customers in foreign countries?

·                 Does your client sell products and services from other business partners?

What’s next?

In the next several years, expect the IRS to look closer into e-commerce as a comprehensive strategy to address small business noncompliance and narrow the largest segment of the tax gap. The IRS thinks that there is substantial noncompliance in the following e-commerce areas, which it will target in compliance initiatives going forward:

·                 Unreported income on sales of goods, including sales from home-based online         businesses

·                 Unreported income on the sale of appreciable assets, such as collectibles and         antiques

·                 Offshore activity, including unreported income from foreign customers

·                 Abuse of the home office deduction

·                 Abusive home-based business tax avoidance schemes that deduct personal,           living or family expenses

·                 Internet businesses that generate losses but are actually hobbies

Prevention is always best. To proactively protect your client’s small business, prepare a complete and accurate return. During return preparation due diligence, closely review your client’s small business and reconcile your client’s income, including any Forms 1099-K received. If your client conducts business online and is selected for audit, use the issues and questions outlined above, which are all based on IRS internal guidelines for e-commerce examinations, to prepare for the audit and avoid unforeseen issues and questions.

IRS tightens the rules on the treatment of for FICA tax purposes. Service chargers are treated as wages, not tips, according to the agency. For example, a mandatory fee imposed by restaurants for tables of six or more diners equal to fixed percentage of the bill is a service charge. As a result, these charges are not eligible for the employer tip credit and cannot be used to figure the tip rate for establishment to determine whether servers are reporting enough of their tips. Although this rule is effective immediately, examiners have been told to go easy on employers. Businesses that made good faith efforts to comply with the rules will have until the end of this year to bring their payroll systems into compliance. See www.kiplinger.com/letterlinks/tips for complete details on all of the rules.

IRS reverses course on reconciling gross receipts with 1099-K forms. Businesses won't have to separately report amounts shown on 1099-Ks on a special line on Schedule C and on Forms 1065, 1120 and 1120-S after all. The revenue Service had waived separate reporting for gross receipts for 2011, but firms squawked about the added work involved to reconcile the 1099-K data with their own record-keeping systems. So IRS waived the requirement permanently. The Service had hoped to match amounts listed on 1099-Ks directly with returns, making discrepancies easier to spot. This decisions will make the 1099-Ks less useful in uncovering businesses that under-report income, and will give more ammunition to critics in Congress who want to repeal the reporting requirements altogether.

Buyers of new heavy SUVs put in use in 2012 can get a substantial write-off, thanks to 50% bonus depreciation. Assume your business buys a new $60,000 SUV with a loaded gross weight over 6,000 pounds and places it in service before year-end. First, the firm can expense $25,000. Half of the remaining $35,000 cost... $17,500... qualifies for 50% bonus deprecation this year. The company can also deduct 20% of the $17,500 balance... $3,500... as a regular depreciation. Assuming that the vehicle is used 100% of the time for business, the total write-off in the first year is $46,000.

Now that health reform has been upheld... A series of tax hikes are poised to take effect. The Supreme Court has decided that the provision in the law requiring people without health coverage to either buy insurance or pay a fine is constitutional under Congress' power to impose taxes. Republicans are vowing to repeal the entire health reform law, but they'll need to retake the White House and Senate and retain the House this November to have any shot at nixing the law.That's far from certain right now.

A Batch of reform-related tax increases are going into effect in 2013. Upper-income earners will pay more in Medicare taxes. A 0.9% surtax on singles with wages exceeding $200,00 and couples earning over $250,000 kicks in. This applies only to the employee's share. The surtax also hits the self-employed.

Unearned income will be subject to 3.8% Medicare surtax. for singles with modified adjusted gross incomes over $200,000 and marrieds over $250,000. Modified AGI plus tax free foreign earned income. The levy applies to the lesser of the filer's net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income, but no tax free interest or payouts from retirement plans.

The 7.5%-of-AGI floor for deducting medical expenses will jump to 10% for filers under age 65. This tightening won't apply to those 65 and older until 2017.

Pays to health flexible spending accounts will be capped at $2,500 a year. The federally subsized part of retiree drug plan costs will be nondeductible. And a 2.3% excise tax on medical devices takes effect. Items commonly sold at retail, such as glasses, contact lenses and hearing aids, are exempt from the tax.

Starting in 2014, individuals who remain uninsured will owe a penalty tax equal to the larger of $95 or 1% of income above the filing threshold... the income level that triggers the requirement to file. For families, the penalty will be capped at $ 285. The charge then rises sharply the next two years. In 2016, the top fine will be $2,085. Lower- and middle-incomers will get an income tax credit to help them afford coverage.

Firms with 50 or more full-timers but no health plan will owe an excise tax if even one employee gets the credit. The tax is $2,000 times the number of employees, with 30-employee offset. It's also due if an employer offers health insurance coverage that is substandard or is too costly for employees. If any employee buys coverage through exchange, the tax rate rises to $3,000. Employers cannot deduct the tax. And insurers will pay a fee... $8 billion in 2014, rising to 14.3 billion by 2018.

In 2018, insurance firms and self-insurers with " Cadillac" plans are hit with 40% tax on the cost of plans in excess of $10,200 for individual coverage and $27,500 for family plans in most cases, with a potential inflation adjustment.

The net result: IRS' role in health reform is only going to get larger.  

Get Real About Retirement Savings  

How do you want to spend your retirement? Traveling or maybe spending time with your family? Whatever your retirement dreams, you have to start planning and saving now to make your dreams come true! Here are a few retirement savings tips and reminders:  
     
1. Plan to save
First, set a realistic retirement savings goal. Take into account how many years your retirement will last,what you want to do when you retire and how much you will need for each year of your retirement.   Next, schedule your savings. Depending on what works best for you, commit to saving a certain amount every year, every month or even every week for your retirement. Stick to your schedule. Lastly, regularly review your savings goal and schedule to make sure you’re still on track.

2. Start saving now 
It’s easy to put off saving for retirement to another day. The earlier you start the more likely you will save enough for retirement. By starting sooner rather than later, you will also benefit more from compounding – earnings on previous earnings.

3. Participate in your employer’s plan 
Start participating in your employer’s retirement plan as soon as you can. If the plan allows you to contribute to the plan from your wages, contribute as much as you can up to the plan limits, which for 2012 are:

• $17,000 to 401(k) or 403(b) plans  
• $11,500 to SIMPLE plans   

If you are 50 or older by the end of the year, your plan most likely will allow you to make additional  (catch-up) contributions of $5,500 to 401(k) or 403(b) plans, and $2,500 to SIMPLE plans. If your employer doesn’t have a retirement plan, ask if one can be started.

4.  Contribute to IRAsContributing to Individual Retirement Arrangements (IRAs) is a simple way to save for your retirement. For 2012, you may be able to contribute to a traditional or Roth IRA the smaller of:

• $5,000 ($6,000 if you are age 50 or older), or 
• your taxable compensation for the year. 

Some factors may limit or eliminate your ability to make IRA contributions while others may limit you  from deducting your traditional IRA contributions.

5. Avoid early withdrawals Your retirement savings are for when you retire. To maximize the amount available when you actually retire, avoid taking money out early from retirement plans and IRAs. Remember that you usually have to pay an additional 10% tax on the amount of money you take out of your plans or IRAs before you reach age 59½, unless you qualify for an exception.

8 SMALL BUSINESS IRS AUDIT AREAS TO WATCH IN 2013

IRS audit areas to watch through 2013

The IRS continually analyzes compliance levels for entities, issues and industries by conducting hundreds of compliance projects and initiatives each year. Leading up to the start of the government’s fiscal year on Oct. 1, the IRS has announced emerging or significant areas that it will prioritize for the coming year. When it comes to compliance, the IRS has increasingly focused on small business underreporting, which is responsible for 84% of the $450 billion tax gap. At national and regional tax forums held this summer, the IRS projected 8 small business areas where it will focus through 2013.

Highlights:

1. Fringe benefits, especially personal use of company cars. The IRS is completing its third and final year of a National Research Project on employment tax compliance. Early findings from these audits indicate that employers are not reporting employees’ personal use of company vehicles on Forms 1099 or W-2. Look for the IRS to investigate the use of all company cars, especially luxury autos, in its audits.
2. High income/high wealth taxpayers. The IRS defines high income/high wealth taxpayers as those who bring in a total positive income of more than $200,000 a year. Total positive income includes all gross receipts and sources of income before expenses and deductions. Through 2013, the IRS will focus on taxpayers with a total positive income of more than $1 million who file a Schedule C business return. Last year, the IRS audited 12.5% of all individuals with incomes of more than $1 million – a significant increase from 2010, when the IRS audited 8.4% of these taxpayers.
3. Form 1099-K matching. The IRS announced that it will start Form 1099-K matching in late 2013. The IRS provided a reprieve from merchant card reporting on business returns for 2011 Schedule C and Forms 1065, 1120S and 1120; however, the IRS plans to change its approach after 2012 returns are filed. The IRS has indicated that it plans to pilot a business-matching program that can address a large amount of small business noncompliance.
4. Credit for small business employee health insurance, under Section 45R. This credit, first available on 2010 returns, is now coming under IRS scrutiny. The IRS will examine small business employers and tax exempts for compliance with Section 45R eligibility requirements.
5. Abusive transactions, especially international transactions. The IRS will continue to focus on the international tax gap. The IRS’ third voluntary initiative for foreign bank account reporting is under way, and the IRS will be looking to aggressively pursue taxpayers who hide assets overseas. The IRS will also focus on offshore transactions for large and small businesses.
6. Partnership returns for abusive transactions and unreported income. This is a new area of emphasis for the IRS. Expect the IRS to target large loss partnerships and specific abuses that emerge from early findings in this project.
7. S corporations, with an emphasis on losses in excess of basis and reasonable compensation paid to officers. The IRS is interested in S corporation audits in which losses are taken in excess of basis on shareholder returns. The IRS will review basis computations in these audits to determine whether tax preparers are properly completing due diligence requirements before deducting losses on Form 1040. The IRS is also interested in the use of S corporation distributions to avoid payment of Social Security taxes. The IRS will focus on S corporations with income, distributions and little or no salary paid to officers.
8. Proper worker reclassification. Almost all business audits also include employment tax issues. In particular, the IRS is interested in worker status. The IRS understands that businesses have an economic incentive to misclassify workers as independent contractors rather than employees. It costs about 30% less for a business to employ an independent contractor than an employee. The IRS thinks there is significant noncompliance in worker classification and will continue to focus its field examination resources in this area.