Employment Post-Deployment: Give a Vet a Job, Get a Break from Uncle Sam

Looking to fill a position at your business or nonprofit? Hiring a veteran could be a win-win situation.

7.7 percent of all vets (and a dismal twelve percent of vets returning from Iraq and Afghanistan) are currently unemployed—nearly 900,000 people. The VOW to Hire Heroes Act of 2011, passed late last year, helps put former servicemembers to work by providing for-profit companies and not-for-profit organizations tax incentives for hiring them.

Under the new legislation, employers who hire veterans who (a) are certified qualified veterans and (b) begin work before January 1, 2013 can claim the Work Opportunity Tax Credit (WOTC) as a credit against its share of social-security tax. This credit may be as high as $9,600 for for-profit employers and $6,240 for qualified tax-exempt employers (depending on how long the vet was unemployed before being hired, how many hours they work and how much they earn in their first year of work).

To claim the WOTC under the VOW act, employers must first get confirmation that the hiree is indeed a qualified veteran, then follow a process (different for for-profit and nonprofit employers) for filing a claim. For more information, visit this IRS webpage or contact your tax professional.

Coming Year Looks Turbulent for High-Net-Wealth Individuals

A political climate heating up over tax policy, combined with an election cycle, means the year ahead looks to be an uncertain time for taxpayers—particularly high-net-worth individuals. The New York Times‘ Paul Sullivan recently surveyed tax advisers on how the wealthy should respond to this lack of certainty, and came away with this advice: Batten down the hatches.

“For high-net-worth individuals, chances are the next year or so is going to be a challenging time,” Sullivan was told by Chris Johnson, head of United States wealth advisory at Barclays Wealth. “There is going to be a lot of attention focused on ways to extract additional tax dollars.”

The changes brewing for 2012 include:

• Expiration of about 70 tax breaks, maybe. Congress used to regularly renew these “patches” for a year or two, drawing little attention. But, under unprecedentedly intense scrutiny on tax measures this year, it’s not clear they’ll do so again. The tax breaks are varied, ranging from a patch that allows teachers to deduct $250 for classroom expenses to one that lets people choose between deducting state income or sales tax from their federal tax.

• Expiration of two big tax breaks, definitely. The first allowed people whose marginal tax bracket is under 15 percent to not pay capital gains tax when they sold securities they had held for over a year. The second is a 2010 Tax Relief Act provision that let 100 percent of an investment in a private company be free of capital gains taxes. Both will lapse this year regardless of what Congress does.

• Expansion of the alternative minimum tax. The AMT was designed to apply to the wealthy, but because it wasn’t keyed to inflation, Congress has had to adjust it every so often to prevent it from affecting middle-income taxpayers. Again, intensified scrutiny this year might lead to Congress not making an adjustment, meaning the tax would expand to include about 20 million more people.

• Enactment of broker reporting requirements. Irrespective of Congress’ actions, brokers this year are required to report the purchase price of mutual funds and exchange-traded funds to the IRS for capital gains purposes.

For more information on how tax changes this year could affect you, and for help preparing for those impacts, contact your tax professional.

A Couple Housekeeping Items…

…before we sally forth into 2012:

2012 standard mileage rates

First, the IRS has announced the 2012 standard mileage rates. Standard mileage rates are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes (in lieu of calculating the actual costs). The new rates are:

• 55.5 cents per mile driven for business purposes
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of a charitable organization

The IRS bases standard mileage rates on an annual independent study of the costs of operating an automobile. The agency adjusts the rates often, most recently last July. This latest adjustment left the business and and charitable rates unchanged, but reduced the medical and moving rate by .5 cents.

Updated Publication 557

The IRS has released an updated version of Publication 557, which contains the rules and procedures concerning tax-exempt status. For nonprofit organizations, knowing what’s new is a must. Some of the top-line changes:

• If a tax-exempt organization fails to file a Form 990, 990-EZ, 990-PF or 990-N annually for three consecutive years, it will lose its tax-exempt status automatically.
• Form 990 has been redesigned—Schedule H (Hospitals) most drastically, due to the passage of the Patient Protection and Affordable Care Act.
• The advance ruling process for section 501(c)(3) organizations has been eliminated. Now, a new 501(c)(3) will be classified as a publicly supported organization (not a private foundation) if, when it applies for tax-exempt status, it can demonstrate that it can reasonably be expected to be publicly supported. 501(c)(3) organizations also will no longer have to file a Form 8734 after their first five tax years.
• Tax-exempt organizations are now supposed to report significant new program services, significant changes in how it conducts program services and significant changes to its organizational documents on their Form 990, instead of in a letter to the IRS Exempt Organizations Determinations.

For more information about these and other tax-related changes concerning nonprofits, contact your tax professional.

Tags: standard mileage rates

Employee Classification and 1099 Forms

The misclassification of employees as independent contractors is a common small-business tax issue that governments have recently been looking at more closely. Last year, the IRS introduced an initiative called the Voluntary Classification Settlement Program that allowed employers who had misclassified their employees as independent contractors to get those classifications in order and merely pay a discounted employment tax.

Now, the state is getting involved. On January 1, a new California law known as SB 459 went into effect, significantly increasing the penalties for intentional employee misclassification. Under the new law, if an employer is found to have violated SB 459, they must “display prominently” on their website a notice that they have “committed a serious violation of law by engaging in willful misclassification of employees.” Fines (depending on whether there is a pattern of misclassification) can range up to $25,000 per violation.

If you work with independent contractors, you should consult an attorney experienced in employment law about whether your relationship with the contractors is appropriately classified.

If you determine that you have indeed properly classified the independent contractors with whom you work, remember: You are required to file a 1099-MISC form each year to show that you paid the contractors for services rendered.

Any time you make an agreement with a sole proprietor or other self-employed person (i.e., not a corporation) for them to perform a service for your business, you should ask them to fill out a W-9 form, including their Taxpayer Identification Number (either a federal Employer Identification Number or a Social Security Number), before they begin work. If you pay an independent contractor more than $600 in a year, you must send them a 1099-MISC form by January 31 of the following year and send the IRS a copy by February 28.

It’s not uncommon for small businesses to fail to file 1099-MISC forms, but if they continually do so,  the penalties can be steep. While fines for unintentionally late or incorrect forms are no higher than $50, they’re no lower than $100 for “intentional disregard” of IRS 1099 rules. And if the IRS audits you and finds just 10 instances where you should have filed 1099s but intentionally didn’t, the penalties can reach into the thousands.

 

In Proposals to Tax Nonprofits, Desires for Balanced Budgets and More Jobs Conflict

As the 2012 presidential campaign ramps up, the American electorate appears primarily concerned with two issues: Balancing budgets and creating jobs.

In the interest of the former (put simply, to raise revenue), state and local governments nationwide have been proposing the imposition of new taxes and fees on nonprofit organizations. But in the interest of job creation, they should probably think twice, a new report from the Johns Hopkins Center for Civil Society Studies suggests.

What many state and local government officials proposing tax hikes on not-for-profits might not realize is, these organizations are job creators. In fact, with almost 10.7 million paid workers, the nonprofit sector has the third-largest workforce among U.S. industries (behind only retail trade and manufacturing).

Moreover, the nonprofit sector has proven more resilient in this recession than for-profit industries: Nonprofit employment increased nearly 5 percent from 2007 to 2010, while for-profit employment decreased by more than 8 percent.

Still, the proposals are circulating. If you’re with a nonprofit, it’s important to stay abreast of NPO tax issues. But, of course, you can rely on your tax professional to keep you up to speed on any new tax requirements.

After The Countdown to Midnight, A New Countdown Begins

Welcome to the New Year: You’ve got 90 days ’til taxes are due.

Maybe that seems like a lot of days, but what author Gretchen Rubin says is true: The days are long, but the years are short. In our case, it’s the next three months that will feel short, so do yourself and your tax professional a favor: A good long while before April 17 (the filing deadline this year, because April 15 falls on a Sunday and April 16 falls on Emancipation Day, a holiday celebrated in Washington, D.C.), get together your taxes-related documents. Here’s what you’ll need:

• Your Social Security number (and those of your dependents, if you’re claiming any).
• W-2 forms from your employers.
• 1099-MISC forms for self-employment income.
• 1099-INT forms for interest.
• 1099-DIV forms for dividends.
• 1099-B forms showing brokerage trades in stocks or bonds.
• K-1 forms for income from a partnership, small business or trust.
• 1099-SSA forms showing Social Security benefits payments received.
• Written documents, such as spreadsheets and bank statements, for income not reported on your W-2 or 1099 forms, like rental income and alimony.
• Cancelled checks, receipts or spreadsheets for tax-related expenses such as IRA contributions, moving expenses, college expenses, medical and dental expenses, real estate taxes, gifts to charities and churches, and daycare and childcare costs.
• 1098 forms, on which your mortgage interest is reported to you.
• 1098-E forms, on which your student-loan interest is reported to you.
• A summary of estimated federal and state taxes paid (if you paid them) and canceled checks.

If you can’t find a W-2 form, you can request a replacement from the appropriate employer—they’re required by law to keep one on file for four years. If you’re missing a 1099 form related to a financial account (e.g., a 1099-DIV), try asking for another one from the appropriate financial institution.

If any of the above information continues to elude you, worry not—your tax professional can help you track it down. Hope to see you soon!

Keep Your Hands Clean of 2011’s “Dirty Dozen”

The beginning of the year is a time to look forward at what we’d like to accomplish, but we can’t know where we’re going unless we know where we’ve been.  It’s always wise to look back and recap the annum’s most noteworthy news, records, films, books and—tax scams? Well, for accountants, anyway. Each year, the IRS releases its list of the “Dirty Dozen” tax scams—the 12 cheats agency commissioner Doug Shulman calls “the worst of the worst.”

“Don’t fall prey to these tax scams,” Shulman said in the announcement of the 2011 list’s release. “They may look tempting, but these fraudulent deals end up hurting people who participate in them.”

Here, for your edification, is 2011’s Dirty Dozen, which will bring to light what pitfalls to avoid in the coming year.

1. Hiding income offshore – Evading U.S. income tax by hiding income in offshore banks or brokerage accounts; employing nominee entities; or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.
2. Identity theft and phishing – Using an unsuspecting person’s personal information to file a fraudulent tax return and collect a refund, typically by using false e-mail addresses and websites and posing as an institution like the IRS.
3. Return-preparer fraud – Return-preparers making basic errors, engaging in fraud and other illegal activities, stealing some of their clients’ refunds, charging inflated fees or attracting clients by making false promises.
4. Filing false or misleading forms – Filing returns in order to claim refunds to which one is not entitled. One example of this is fabricating an information return and falsely claiming the corresponding amount as withholding.
5. Frivolous arguments – Making unreasonable, outlandish and already legally-rejected claims to avoid paying the taxes one owes.
6. Nontaxable social-security benefits with exaggerated withholding credit – Just what it sounds like, this tactic results in zero income being reported to the IRS, but the withholding amount and the reported income are often both incorrect.
7. Abuse of charitable organizations and deductions –Improperly shielding income or assets from taxation, donors attempting to maintain control over donated assets or income from donated property, and organizations claiming the full value for both the receipt and the distribution of the same non-cash donation.
8. Abusive retirement plans – Avoiding IRA contribution limits, improperly reporting early distributions, and employing limited-liability companies to engage in prohibited activity.
9. Disguised corporate ownership – Improperly using a third party to request an employer identification number in order to disguise financial activity or the ownership of a business and thus facilitate underreporting of income, fictitious deductions, non-filing of tax returns, etc.
10. Zero wages – Reducing the amount of taxes owed by filing a phony wage- or income-related informational return to replace a legitimate one.
11. Misuse of trusts – Improperly utilizing trusts to avoid income-tax liability and hide assets from creditors, including the IRS.
12. Fuel tax credit scams – Claiming the fuel tax credit for nontaxable uses of fuel when one’s occupation or income level makes the claim unreasonable.

For more information about these top tax scams and how to avoid them, contact your trusted tax professional.

Online Sales Tax Could Go Federal, Impacting Small Businesses Nationwide

Did you know 99 percent of online retailers (including retailers who sell both at a brick-and-mortar location and over the internet) sell less than $150,000 per year? Do you figure into that statistic?

If so, you might want to be paying attention to the rising issue of online sales tax. A number of states in dire fiscal straits have recently enacted laws requiring online retailers to collect and remit sales tax from their customers. The outcry from these retailers—notably heavy-hitters like Amazon, eBay and Overstock.com—has prompted Congress to consider establishing a more uniform, federal system for online sales tax collection.

At a House Judiciary Committee hearing on November 30, Ted Cohen, vice president of global government relations and deputy general counsel for eBay, testified against any such system that does not include an exemption for small businesses. After explaining that eBay and small business’ fates are intertwined because hundreds of thousands of small businesses use eBay as a sales platform, Cohen pointed out that “small businesses retailers face many competitive disadvantages when compared to larger retailers. They have proportionally higher costs of doing business.”

“A real Small Business Exemption,” he said, “would protect small retailers who are already falling behind…Permanently protecting small business retailers from national remote sales tax collection burdens will promote new retail competition.”

But even as small-business-reliant eBay is making those arguments, other retail giants such as Amazon are backing two online-sales-tax bills introduced in Congress this year—neither of which has a small-business exemption.

For more information about your state’s online-sales-tax regulations and the potential impact of federal action, contact your tax professional.

Rubber-Stamp No More: Five Meaningful Budget Questions Board Members Can Ask

If you are a member of a nonprofit organization’s board of directors, you know how the board’s approval of the organization’s annual budget usually goes.

The nonprofit’s staff drafts the budget and presents it to the board. The board, under time constraints and not as familiar as necessary with the organization’s day-to-day operations, gives it a rubber stamp. The members of the board feel that they have not contributed meaningfully to overseeing the nonprofit’s finances (or, by extension, setting its priorities).

It doesn’t have to be this way! Below, courtesy of Blue Avocado editor Jan Masaoka, are five questions board members can ask in order to play a greater role in the budgeting process.

1. Are there specific financial goals we should set for this year? Build a reserve of working capital, for example, by including a certain amount of surplus in the budget each year for the next few years.
2.  Would we like any new programs, program expansions or compensation changes? For instance, a board member might request that staff prepare a cost estimate for adding a 401(k) retirement plan with a 1 percent employer contribution to the organization’s employee-benefits package.
3. Are there large expenses for which we should be saving? Say, a new phone system for which we should be putting away a certain amount per year?
4. Should we spend our unrestricted funds differently? Which programs are being subsidized by unrestricted funds rather than breaking even or making a surplus? Does the management team have any suggestions for how this could be changed?
5.  Does our allocation of funds generally align with our priorities? For example, let’s say a performing-arts nonprofit was founded as an actual performing group, but is increasingly allocating its funds for classes. Should it perhaps begin re-allocating its funds toward performances?

Little-Used Employee Benefit Lets Households “Flex” Tax Muscle

If you’re a high-net-worth individual and your employer offers flexible spending accounts, now might be a good time to jump through the hoops and take advantage of that employee benefit. As The New York Times’ Ron Lieber points out, if President Obama succeeds in his effort to raise taxes in 2013 on high-income households, flexible spending accounts could substantially offset those increases.

Flexible spending accounts enable employees to use pre-tax income for costs related to healthcare, dependent care, public transportation and parking. In other words, employees can spend some of their income on certain expenses before their employer takes out income taxes.

This is, obviously, a big leg-up. It allows households to use up to $5,000 a year on dependent care (for, say, summer day camp) and $230 a month for public transportation. It also lets them spend pre-tax income on healthcare costs, through health care flexible spending accounts and health savings accounts. The result can be tax savings in the thousands—in many cases, savings greater than the proposed tax increases.

Of course, not all employers offer flexible spending accounts. Big companies tend to have them, but small ones sometimes don’t. Even at workplaces that do have the accounts, many employees don’t sign up for them (The plans often require lots of paperwork). Mercer’s 2010 survey of employer-sponsored health plans found that at workplaces that have more than 500 employees and offer health care flexible spending accounts, just 23 percent of employees were signed up. Finally, like tax rates themselves, the rules for flexible spending accounts may change. Already, the contribution limit on the accounts has been set at $2,500 for 2013, lower than it previously has been. So, time may be of the essence.

Those caveats made, flexible spending accounts could be a valuable tax-minimization tool for you. To learn more, contact your tax professional.