This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
The Tax Cuts of 2010 - Good News for Businesses
Do you own a business? Are you wondering how your company is affected by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 - aka the Obama Tax Cuts?
If so, read on. We explain how your business can benefit from the new tax cuts. We also tell you about your responsibility to enact the payroll tax cut for your employees.
Paying Less Tax Under the New Legislation
The Bonus Depreciation Doubled in Size
Under the Obama Tax Cuts, the bonus depreciation amount jumped from 50% to 100%. This means businesses can write off 100% of eligible purchases (e.g., equipment and off-the-shelf computer software) bought and put in service between September 9, 2010 and December 31, 2011.
Note: In 2012, business owners can still take a bonus depreciation, but it will be back at the 50% level.
Section 179 Deductions Also Got a Boost
Section 179 deductions allow businesses to deduct the full purchase price of property from their gross income.
Section 179 deductions differ from standard depreciations because they allow you to write off your expenses in the same year you bought property, rather than spreading it out over time.
Section 179 was bolstered under the Small Business Jobs Act of 2010 (signed September 27, 2010), with the allowable deduction set at $500,000 for 2010 and 2011. Now, under the Obama Tax Cuts, the maximum deduction will fall only to $125,000 in 2012, rather than to $25,000, as it would have without the recent tax cut package.
This should inject confidence in the business owner that she can continue to invest in her business for the next few years - which is beneficial not just for her, but for the U.S. economy as a whole.
Caution: Estates and trusts cannot take a section 179 deduction.
Section 179 Vs. Bonus Depreciations - Which Is Better?
Section 179 deductions are available on all new and used equipment, whereas the bonus depreciation (set now at 100%, with no limit) is for new equipment only.
Think of the bonus depreciation as an extra deduction you can take - but you must take it in the first year only.
To figure out which type of deduction is right for your business for tax year 2010, give us a call.
Complying with the New Payroll Tax Cut
The Obama Tax Cuts instituted a one-year reduction in the Social Security tax for employees, from 6.2% to 4.2%. This means the single taxpayer making $50,000 will save $1,000 on taxes in 2011.
Note: This reduction in Social Security tax will not impact the employee's future Social Security benefits.
But it's up to business owners to adjust their employees' withholdings. They must do so as soon as possible in January 2011, but no later than January 31, 2011. Notice 136
lists the new amounts you should withhold from employees' paychecks.
Caution: If you withhold too much Social Security tax during January, you will need to make an offsetting adjustment in your employees' pay as soon as possible and no later than March 31, 2011. Ask us for more details.
Self-Employed Folks See a Reduction, Too. Those who own businesses with no other employees should also be aware of their new Social Security withholding amount, which fell from 12.4% to 10.4%. This combined with the 2.9% Medicare rate brings the total of the 2011 self-employment tax rate to 13.3%.
Confused? We're Here to Help
The Obama Tax Cuts are designed to bolster the economy by putting more money back in the pockets of business owners, thus allowing them up to hire more workers.
But to take advantage of the new rules for deductions and depreciations, you have to understand the new law.
That's where we come in. To find out more about how to improve your business with certain investments now and in 2012, give us a call.
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2010 Tax Relief Act - Personal Income Tax
On December 17, 2010, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed into law by the President. The personal income tax provisions in this law provide for an extension of the Bush-era tax cuts which were scheduled to expire at the end of 2010. The 2010 Tax Relief Act temporarily extends most of the tax cuts for 2011 and 2012 only.
Income Tax Rates
Individual income tax brackets will remain unchanged for 2011 and 2012, keeping the current structure ranging from 10-35%. The capital gains tax rates will also remain as is for the next two years.
Payroll taxes are reduced by 2 percentage points. Social Security tax rate for the employee-portion will be reduced temporarily to 4.2% for 2011 only. The employer-portion will remain at 6.2%. The Social Security wage base remains at $106,800 for 2011. Medicare tax rates unchanged. Self-employment tax rate is temporarily reduced 2 percentage points to 13.3% for 2011 only.
Extension of Tax Credits
The Act extended many personal tax credits through 2012. These credits were either scheduled to expire or reverted back to previous levels in 2011.
- Child Tax Credit
- Earned Income Credit
- Dependent and Child Care Credit
- Adoption Tax Credit
- American Opportunities Credit
The Estate Tax Credit was enhanced under the Act. The 2011 Estate Tax exempts the first $5.0 million of the estate and then imposes a 35% tax rate on the reminder. This is a significant change from the 2009 level of $3.5 million exemption and 45% tax rate. Further, without this provision, the estate exemption level would have revert back to $1.0 million.
- For higher-end taxpayers, there is a two year extension to the elimination of the itemized deduction limitation and the personal exemption phaseout. Both of the temporary repeals have been extended until the end of 2012.
- Retention of marriage relief penalty for certain tax brackets.
- Deductions for educator expenses, student loan interest, qualified tuition and state sales tax have all been extended for one or two years.
As can be seen, the 2010 Tax Relief Act provides many tax saving opportunities for individuals. Please contact us for further information regarding your personal tax situation.
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Ensuring Financial Success for Your Business
Can you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination?
Not quite. You can't let your business run on autopilot and expect good results. Any business owner knows you need to make numerous adjustments along the way - decisions about pricing, hiring, investments, and so on.
So, how do you handle the array of questions facing you?
One way is through cost accounting.
Cost Accounting Helps You Make Informed Decisions
Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions - raw materials, labor, inventory, and overhead, among others.
Note: Cost accounting differs from financial accounting because it's only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.
Cost accounting allows you to understand the following:
Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?
Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.
Budgeting. You can't create an effective budget if you don't know the real costs of the line items.
Once you understand cost behavior, you can tweak your pricing based on the current market. You can't create an effective budget if you don't know the real costs of the line items.
For example, will the costs increase or stay the same if production of your product goes up? Once you understand cost behavior, you can tweak your pricing based on the current market. You can't create an effective budget if you don't know the real costs of the line items.
Is It Hard?
To monitor your company's costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.
Fixed costs don't fluctuate with changes in production or sales. They include:
- dues and subscriptions
- equipment leases
- payments on loans
- management salaries
Variable costs DO change with variations in production and sales. Variable costs include:
- raw materials
- hourly wages and commissions
- office supplies
- packaging, mailing, and shipping costs
Tip: Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company's functioning.
We Can Help
If you'd like to better understand the ins and outs of your business and create sound guidance for internal decision making, you might consider cost accounting.
And we can help. Allow us to evaluate your business from top to bottom and determine the real cost of each component. With that as a foundation, we can help you draft budgets, adjust pricing, keep an appropriate level of inventory, and much more. Give us a call today.
How to Get Paid on Time
With the current economic conditions, the collection of accounts receivables is becoming more and more of a challenge. Strengthening your collection procedures may allow you to shorten the aging days of your accounts receivables and improve collection rates.
The following suggestions can help your business tighten up its credit and collections policies and improve its cash flow. Although some of the tips discussed here may not be suitable for every business, they can serve as general guidelines to help give your company more financial stability.
Define Your Policy. Define and stick to concrete credit guidelines. Your sales force should not sell to customers who are not credit-worthy, or who have become delinquent. You should also clearly delineate what leeway sales people have to vary from these guidelines in attempting to attract customers.
Tip: You should have a system of controls for checking out a potential customer's credit, and it should be used before an order is shipped. Further, there should be clear communication between the accounting department and the sales department as to current customers who become delinquent.
Clearly Explain Your Payment Policy. Invoices should contain clear written information about how much time customers have to pay, and what will happen if they exceed those limits.
Tip: Make sure invoices include a telephone number and website address so customers can contact you with billing questions. Also include a pre-addressed envelope.Tip: The faster invoices are sent, the faster you receive payment. For most businesses, it's best to send an invoice with a shipment, rather than afterward in a separate mailing.
Follow Through on Your Stated Terms. If your policy stipulates that late payers will go into collection after 60 days, then you must stick to that policy. A member of your staff - but not a salesperson - should call all late payers and ask for payment. Accounts of those who exceed your payment deadlines should be penalized and/or sent into collection, if that is your stated policy.
Train Staff Appropriately. The person you designate to make calls to delinquent customers must be apprised of the seriousness and professionalism required for the task. Here is a suggested routine for calls to delinquent payers:
- Become familiar with the account's history and any past and present invoices.
- Call the customer and ask to speak with whoever has the authority to make the payment.
- Demand payment in plain, non-apologetic terms.
- If the customer offers payment, ask for specific dates and terms. If no payment is offered, tell the customer what the consequences will be to him.
- Take notes on the conversation.
- Make a follow-up call if no payment is received, and refer to the notes taken as to any promised payments.
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Personal Exemptions, Standard Deductions and Tax Brackets for 2011
In 2011, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation.
These inflation adjustments relate to eight tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17. New dollar amounts affecting 2011 returns, filed by most taxpayers in early 2012, include the following:
- The value of each personal and dependent exemption, available to most taxpayers, is $3,700, up $50 from 2010.
- The new standard deduction is $11,600 for married couples filing a joint return, up $200, $5,800 for singles and married individuals filing separately, up $100, and $8,500 for heads of household, also up $100. The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
- Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000, up from $68,000 in 2010.
- The maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,751, up from $5,666 in 2010. The maximum income limit for the EITC rises to $49,078, up from $48,362 in 2010.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
- The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $102,000 for joint filers, up from $100,000, and $51,000 for singles and heads of household, up from $50,000.
Several tax benefits are unchanged in 2011. For example, the monthly limit on the value of qualified transportation benefits (parking, transit passes, etc.) provided by an employer to its employees, remains at $230.
IRS Announces 2011 Standard Mileage Rates
Beginning January 1, 2011, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) became:
- 51 cents per mile for business miles driven
- 19 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
The new rates for business, medical, and moving purposes are slightly higher than last year's. The business mileage rate was 50 cents in 2010. The medical and moving rate was 16.5 cents.
The mileage rates for 2011 reflect generally higher transportation costs compared to a year ago.
Let us know if you have questions about which driving activities you should monitor as tax year 2011 begins.
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Receive a Faster Refund with Direct Deposit
The New Year has arrived, which means . . . it's tax time!
This year, do you want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 61 million people had their tax refunds deposited directly into their bank accounts last year. It's the secure and convenient way to get money in your wallet faster.
The payment is secure - there is no check to get lost. Each year thousands of refund checks are returned by the US Post Office to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund stolen. There's no special trip to the bank to deposit a check!
Security. The payment is secure - there is no check to get lost. Each year thousands of refund checks are returned by the US Post Office to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund stolen.
- Convenience. There's no special trip to the bank to deposit a check!
You can also electronically direct your refund to multiple accounts. With the new "split refund" option, taxpayers can divide their refunds among as many as three checking or savings accounts and three different U.S. financial institutions. The split refund option, using Form 8888, is also available for paper returns.
Caution: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Also, make sure you have the correct nine-digit routing number and your account number when selecting direct deposit.
To request direct deposit, just ask us.
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Filing Requirements for Dependents
Whether a dependent has to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind.
Note: A dependent may have to file a return even if his or her income is less than the amount that would normally require a return.
Even if you are not legally required to file, you should file a federal tax return to get money back if any of the following apply:
- You had income tax withheld from your pay.
- You qualify for the earned income credit.
- You qualify for the additional child tax credit.
Contact us for further information. We'll advise you about your particular situation.
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Tax Due Dates for January 2011
Employees - who work for tips. If you received $20 or more in tips during December, report them to your employer. You can use Form 4070, Employee's Report of Tips to Employer.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2010.
Individuals - Make a payment of your estimated tax for 2010 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2010 estimated tax. However, you do not have to make this payment if you file your 2010 return (Form 1040) and pay any tax due by January 31, 2011.
Employers - Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2010.Farmers and Fishermen - Pay your estimated tax for 2010 using Form 1040-ES. You have until April 18 to file your 2010 income tax return (Form 1040). If you do not pay your estimated tax by January 18, you must file your 2010 return and pay any tax due by February 28, 2011, to avoid an estimated tax penalty.
Employers - Give your employees their copies of Form W-2 for 2010 by January 31, 2011. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting by January 31.
Businesses - Give annual information statements to recipients of 1099 payments made during 2010.
Employers - Federal unemployment tax. File Form 940 for 2010. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 10 to file the return.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2010. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2010 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
Individuals - who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 18, you may choose (but are not required) to file your income tax return (Form 1040) for 2010. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of last installment.
Payers of Gambling Winnings - If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.
Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2010. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2010 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.