In 2011, the ten year Bush tax cuts will phase out. Currently there are Congressional efforts to keep the cuts, but there are also efforts to raise additional tax revenue. In the end, the cuts will probably expire. Thus in 2011, the following will probably occur:

■ Income Rates: the 36% and 39.6% tax brackets will be reinstated for married filers making more than $250k and singles making more than $200k;

■ Capital Gains: for taxpayers above the 28% income bracket, the capital gains rate will increase from 15% to 20%;

■ High Income: other credits and deductions may be phased out across higher income levels.

As pressures mount to balance the federal budget, Congress could look to reinstate higher progressive income tax schedules. Rates could hit 50% for those with the highest adjusted gross incomes.

We've blogged very irregularly for the past few months. Now that April 15th has come and gone, we'll have more time to post tax news and relevant analysis.

One of the most common issues we discussed with clients during tax season was the new health care law. Although it has now become law, we're still not sure which provisions will survive intact and which will be changed before they become effective.

CCH, part of a tax software company, produced a brief on the new law and it's tax implications. We are reposting it here for your information (PDF download).

Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law recently.

Employers' Share of Social Security Withholding: Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after the date of enactment. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

$1,000 Business Tax Credit: In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

Fine Print: 

Family members and other relatives do not qualify.

Employer must get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

For those of you thinking about not filing your taxes this year, the IRS is sending out a subtle message: "watch out."

According to the Federal Business Opportunities website, the IRS is seeking to buy 60 shotguns for its Criminal Investigation Division.

[On Fridays, we find the lighter side of tax news.]

We follow a few reputable IRS prognosticators and in-the-loop people. Here's the latest in scrutiny and audit alerts:

Appraisers: in a memo to field agents, the IRS mentioned the penalties for misstatements in appraisals that result in taxes saved. These penalties apply to the payer of the tax and may apply to the appraiser. Agents will be paying attention to both sides in any reviews or audits.

R&D Tax Credit: The IRS has found many R&D tax credit claims without proper documentation or based on bogus assumptions. Examiners have been told to slap a 20% fine on spurious claims.

S Corporations: Recent audits have found areas of noncompliance, so agents will be on the lookout for: excessive travel, meals, and entertainment expenses; expensing of tools and supplies; taking profits as dividends instead of salary to avoid payroll taxes. S Corporations can be a solid tax structure, but owners should be aware of increased scrutiny and follow the guidelines.

Payroll Tax Audits: notices of 6,000 exams over three years were going out in November, but were delayed until February of 2010.  The IRS wanted to fine-tune the selection criteria to select fewer profiles that would result in a no-change audit. Payroll audits look for employee classification issues, executive pay levels, and treatment of fringe benefits. Examiners will be closely looking at S Corps, ensuring owners aren't paid little/no salary. (The illegal strategy is to pay out profits as dividends, avoiding payroll taxes.)

As always, there's reason to fear the IRS if you've followed their regulations and kept good records. While audits can be nerve-wracking and tiresome, there are a few simple steps to prepare. If you've avoided taxes, then fearing the IRS is probably warranted.

2009 News: Maine's Pine Tree Zones Expanded

PTZ benefits are now available to businesses anywhere in Maine (previously they were confined to designated areas). Potential savings include incremental increases in employer taxes and sales taxes on new equipment purchases. Businesses need to get their plans certified by the Department of Economic and Community Development and add one net new quality job within two years to qualify for benefits.

Process

Businesses that have expansion plans should contact the Department of Economic and Community Development to begin the application process. The process includes writing a letter, receiving an official response, preparing a plan, and having that plan certified. Upon certification, businesses qualify for available benefits, subject to annual filing requirements. Businesses must create one net new "quality" job within two years of certification ("quality" means meeting a gross income test and making certain benefits available).

Benefits

• Corporate Income Tax Credit: the tax credit benefit derives from net new PTDZ payroll and property as a percentage of all Maine payroll and property;

• Insurance Premiums Tax Credit: the tax credit benefit derives from net new PTDZ payroll and property as a percentage of all Maine payroll and property; (only applies to Financial Services sector)

• Income Tax Reimbursement: the tax reimbursement benefit derives from income taxes withheld for net new jobs created;

• Sales and Use Tax: paying no tax on all new tangible property purchases that are used in its qualified business activity;

• Access to reduced electricity rates

Advice

PTDZ benefits may be a good fit with businesses already planning an expansion, however the incremental tax savings may be minimal if the expansion does not add many employees or purchase much equipment. Applying for certification may be a lengthy, time-intensive process. At Yellis & Foley, we think this certification should be part of your overall tax strategy. Thus, in order to access benefits that exceed your costs, consultation with your CPA is essential.

More information on the state's website.

Bonus Depreciation

Congress adjusted depreciation rules for 2009 to give businesses the incentives to invest in equipment and other capital purchases. Thus buying assets and putting them into use this year can result in huge write-offs. The 2009 bonus depreciation rules allow businesses to claim 50% of the asset's cost in 2009, with the rest being depreciated the regular way. This applies to assets with 20 year (or less) usable lives, and does not apply to most buildings or real estate.

Expensing Assets

Firms can also expense up to $250k of the cost of an asset instead of depreciating them at all. This provision is is phased out after a firm expenses over $800k in asset purchases, resulting in no expensing available after $1.05 million claimed.

Our Prognostication

These breaks could be extended in 2010, but they have not been officially acted on. If not extended, bonus depreciation ends and the expensing cap falls to $134k in 2010. Businesses should consider making investments over the next few weeks if they have taxable income to reduce and the purchases fit into normal operations.

Note for Maine Businesses

The Maine State Government has not followed these federal asset rules. So Maine-based companies should be aware that they will not be able to claim the bonus depreciation or asset expensing against income for Maine taxation purposes.

Special Case: Large SUV Write-off

Buying a new heavy SUV for business-only use may provide the best writeoff of all: expense up to $25k, claim half the remaining cost as bonus depreciation, and take 20% of the remaining cost as regular depreciation. This applies to new SUVs with a loaded weight over 6k pounds used exclusively for business. On an SUV costing $50k, a business could take expense $25k, claim $12.5k as bonus depreciation, and $2.5k as first year depreciation, for a total writeoff of $40k--80% of the purchase price!

Past Year-End Planning Entries

Self Employment & Estimated Taxes

Individual Tax Planning

This week, we're posting advice for year end tax planning. If you think one of the topics could help your tax situation, do additional research or contact your tax professional. We're standing by to answer any questions you've got. --Y&F

New Car Sales Tax Deduction

Individual taxpayers can deduct sales tax they paid on a new vehicle purchased in 2009. The deduction is available to those who itemize and those that do not (as an addition to the standard deduction). Taxpayers can claim the deduction for multiple vehicles, but the vehicle price is capped at $49,500. Income limits apply: marrieds making over $250k and singles making over $125k do not qualify.

Selling Stock

Year end be the time to sell some securities. Stocks that have lost value and stocks that have gained value can be sold for favorable tax treatment, depending on your situation. Capital losses from last year can be used to offset this year's capital gains. If you have losses from this year, they can offset up to $3,000 of other income (the remainder of the loss is carried over to 2010). Talk to your investment advisors and tax professional before selling stock.

Retirement Savings

Your taxable income can be lowered by contributing money to your individual retirement account (IRA). IRA contributions are tax-deferred, meaning that you don't pay taxes now, but do pay taxes when you withdraw from your IRA. You can contribute up to $5,000 per year; if you are over age 50, the limit rises to $6,000 per year. IRA contributions lower your taxable income dollar for dollar, meaning your tax savings is the contribution * your marginal tax rate. Depending on your income level, you may also qualify for the savers credit, which directly lowers your tax bill.

College Deductions

For taxpayers in college themselves or with dependents in college, paying tuition or buying required supplies can result in tax benefits. Paying tuition now for bills due in January will make the expense claimable for 2009 tax purposes. Buying a computer for a student, if the college requires it (most do), can result in a 20% tax credit (using the Lifetime Learning or Hope credit). 

The GAO, a federal inspection agency, recently found that IRS audits of sole proprietors yields less revenue per hour than IRS audits of other entities. This is because sole proprietors generally have lower gross receipts than other entities, such as corporations. So despite significant noncompliance, these types of audits turn up less additional taxes and penalties. 

But despite finding more money elsewhere, the IRS will not let Schedule C filers off the hook because of the high levels of noncompliance. The IRS will not send any signal that its ok to fudge on your taxes.