FAQ: Does sick pay get any special tax treatment?

Doeren Mayhew

FAQ: Does sick pay get any special tax treatment?

The term "sick pay" can refer to a variety of payments. Some of these payments are nontaxable, while others are treated as taxable income. Some of the taxable payments are treated as compensation, subject to income tax withholding and employment taxes; others are exempt from some employment taxes.

Amounts received for personal injury or sickness through an accident or health plan are taxable income if the employer paid for the plan. If the coverage is provided through a cafeteria plan, the employer, not the employee, is considered to have paid the premiums; thus, the benefits are included in income. If, on the other hand, the employee paid the entire cost of the premiums (or included the premiums in income), then any amounts paid under the plan for personal injury or sickness are not included in income.

An employee who is injured on the job may receive workers' compensation under a workers' compensation act. These amounts are fully exempt from income and employment taxes. However, the exemption does not apply to retirement plan benefits that are based on age, length of service, or prior contributions, even if retirement was triggered by occupational sickness or injury. The exemption also does not apply to amounts that exceed the amount provided in the worker's compensation act. There is no exemption under these plans for amounts received as compensation for a nonoccupational injury or sickness.

Compensatory damages paid for physical injury or physical sickness are not taxable, whether paid in a lump sum or as periodic payments. This applies to amounts received through prosecution of a legal suit or action or through a settlement agreement in lieu of prosecution. Other nontaxable benefits include disability benefits paid for loss of income or earning capacity as a result of injuries under a no-fault automobile insurance policy.

Payments for permanent injury or loss of a bodily function under an employer-financed accident or health plan are excludible. The payments must be based on the nature of the injury rather than on the length of time the employee is absent from work.

Disability income plans are employer plans that provide full or partial income replacement for employees who become disabled. Employer-provided disability income benefits generally are taxable to employees. Similarly, sick pay that is a continuation of some or all of an employee's compensation is subject to income tax withholding if paid by the employer. The first six months of payments for sickness or disability, when the employee is off work, are subject to employment taxes, but payments made after the expiration of six months are not subject to FICA (Social Security) and FUTA (unemployment) taxes.

Reimbursements from an employer's plan for medical expenses are not includible in income and are not subject to income tax withholding. If the employer has no plan or system and pays medical expenses for sickness or disability, the payments are subject to FICA and FUTA for the first six months. Of course, reimbursements of amounts deducted in a prior year must be included in income. Medical reimbursements provided under a self-insured employer plan are not subject to income tax withholding, even if the amounts are included in income.

Payments for sick leave or accumulated sick leave are taxable compensation.

Contact Doeren Mayhew for more information.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Tax measures large and small await Congressional action

Tax measures large and small await Congressional action

Congress has returned to work after its August recess under a tight deadline to reduce the federal budget deficit and also, possibly, extend some expiring tax incentives. Between now and the end of the year, Congress could enact significant tax reform in a deficit reduction package; or it may take a piecemeal approach. All this Congressional activity contributes to uncertainty in tax planning.

Joint committee's task

On August 2, 2011, President Obama signed the Budget Control Act of 2011 (P.L. 112-25). Along with cutting approximately $1 trillion in federal spending and raising the federal debt ceiling, the Budget Control Act creates a special a bipartisan joint select committee of Congress to propose more deficit reduction measures. The Budget Control Act charges the Joint Select Committee on Deficit Reduction with reducing the federal government budget deficit by at least $1.5 trillion over fiscal years 2012 to 2021. If the joint committee cannot agree on deficit reduction measures, or if Congress rejects the committee's proposals, the Budget Control Act provides for automatic cuts over the coming decade.

The12-member joint committee is composed of an equal number of members from both parties: six Democrats and six Republicans. The joint committee must make its proposals, in legislative language, not later than November 23, 2011 (if a majority of the committee agrees on the proposals). Congress must vote on the proposals not later than December 23, 2011.

Flood of proposals expected

The joint committee is expected to be flooded with proposals to reduce the federal deficit. President Obama has urged the joint committee to take a "balanced approach" to deficit reduction. The president has called for reducing the federal deficit through a combination of spending cuts and revenue raisers. Some of the tax provisions mentioned by President Obama for repeal or reform include tax incentives for oil and gas producers and the last-in, first-out (LIFO) method of accounting. President Obama also wants Congress to extend the two percent payroll tax cut, which is scheduled to expire after 2011.

One of the most contentious proposals the joint committee may address is the fate of the Bush-era tax cuts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (2010 Tax Relief Act) extended the Bush-era tax cuts through the end of 2012. President Obama wants to extend the Bush-era tax cuts for lower and middle income taxpayers but not for higher income taxpayers (which the White House defines as individuals with incomes over $200,000 and families with incomes over $250,000). It is unclear at this time if the joint committee will take up the Bush-era tax cuts.

The joint committee may look to some recent tax reform proposals for guidance. In 2010, the President's National Commission on Fiscal Responsibility and Reform developed a six-part plan to reduce the federal deficit. The commission recommended reducing or eliminating many tax incentives for individuals in exchange for lower individual income tax rates. The commission also endorsed lowering the corporate tax rate to 26 percent. In July 2011, a bipartisan group of senators, known as the "gang of six," introduced a plan for deficit reduction. The senators' plan would, among other provisions, replace the current individual income tax rate schedule with three new tax brackets along with abolishing the alternative minimum tax (AMT).

Expiring tax provisions

A number of popular but temporary tax incentives (known as "tax extenders) are scheduled to expire after 2011. In past years, Congress has routinely extended many of them. This year may be different. The joint committee could include the tax extenders in its work, extending some but allowing others to expire. Alternatively, the joint committee could decide not to touch the tax extenders. In that case, some or all of them could be extended in separate legislation.

Some of the extenders scheduled to expire after 2011 are (not an exhaustive list):

Research tax credit
15-year recovery for qualified leasehold improvements, restaurant property and retail improvements
Work Opportunity Tax Credit
Employer wage credit for activity military reservists
Indian employment credit and accelerated depreciation for business property on Indian reservations
Special expensing rules for film and production costs
Basis adjustment to stock of an S corporation making charitable contributions
Enhanced deduction for charitable contributions of food inventory, corporate charitable contributions of book inventory and corporate charitable contributions of computers
Expensing of environmental remediation costs
Grants for investment in certain energy property in lieu of tax credits
Income tax credit for alcohol fuels
Refined coal production facilities credit
Tax treatment of payments to controlling exempt organizations
Subpart F exceptions for active financing income
Additionally, one hundred percent bonus depreciation is scheduled to expire after 2011 (except for property with a longer production period). Enhanced Code Sec. 179 expensing ($500,000 maximum amount/$2 million investment ceiling) also is scheduled to expire after 2011.

At this time, September 2011, it is not too early to contemplate how tax reform could impact your planning. Please contact Doeren Mayhew and we can schedule a time to review your tax strategy.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

August 2011 tax compliance calendar

August 2011 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2011.

August 1

Employers. Employers file Form 941 for the second quarter of 2011.

Employers. Certain small employers deposit any undeposited tax if your tax liability is $2,500 or more for 2011 but less than $2,500 for the second quarter.

August 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 27-29.

August 5

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 30-August 2.

August 10

Employees who work for tips. Employees who received $20 or more in tips during July must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 3-5.

August 12

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 6-9.

August 15

Monthly depositors. Monthly depositors must deposit employment taxes for payments in July.

August 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 10-12.

August 19

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 13-16.

August 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 17-19.

August 26

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 20-23.

August 31

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 24-26.

Please contact the offices of Doeren Mayhew for more information.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

FAQ: Are summer camp costs deductible?

With school out for the summer, parents are looking for activities for their children. The possibilities include sending a child to day camp or overnight camp. Parents may wonder whether these costs are deductible. At least two possible tax breaks come to mind: the dependent care credit, and the deduction for medical expenses. The most likely tax benefit is the child (or dependent) care credit.

Dependent care credit. To qualify for the dependent care credit, expenses must be employment-related. They must enable the parent to work or to look for employment. The IRS has indicated that the costs of sending a child to overnight camp are not employment-related. However, the costs of sending a child to day camp are treated like day-care costs and will qualify as employment-related expenses (even if the camp features educational activities). At the same time, the costs of sending a child to summer school or to a tutor are not employment-related and cannot be deducted.

In some situations, the IRS requires that expenses be allocated between child care and other, nonqualified services. However, the full cost of day camp generally qualifies for the dependent care credit, without an allocation being required. If the parent works part-time, camp costs may only be claimed for the days worked. However, if the camp requires that the child be enrolled for the entire week, then the full cost is qualified.

Example. Tom works Monday through Wednesday and sends his child to day camp for the entire week. The camp charges $50 per day and children do not have to enroll for an entire week. Tom can only claim $150 in expenses. However, if the camp requires that the child be enrolled for the entire week, Tom can claim $250 in expenses.

Dependent care costs also may be reimbursed by a flexible spending account (FSAs) under an employer-sponsored arrangement. FSAs allow pre-tax dollars to fund the account up to specified maximum. Each FSA may limit what it covers so check with your employer before assuming the day camp or similar child care is on its list of reimbursable expenses.

Medical expenses. The cost of camp generally is not deductible as a medical expense. The cost of providing general care to a healthy child is a nondeductible personal expense.

Example. The child's mother works; the child's father is ill and cannot take care of the child. The cost of sending the child to summer camp is not deductible as a medical expense; however, the costs may still qualify for the dependent care credit.

However, camps specifically run for handicapped children and operated to assist the child may come under the umbrella of medical expenses. The degree of assistance is usually determinative in these situations.

Dependency exemption. In any case, the cost of sending a child to camp can be treated as support, for claiming a dependency exemption. For a parent to claim a dependency exemption, the child cannot provide more than half of its own support. The parent must provide some support but does not necessarily have to provide over half of the child's support. If the child is treated as a qualifying relative (because he or she is too old to be a qualifying child), the parent must still provide over half of the child's support.

The rules on the deductibility of camp costs are somewhat complicated, especially in borderline situations. Please check with Doeren Mayhew if you have any questions.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

July 2011 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of July 2011.

July 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 25-28.

July 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 29-30, July 1.

July 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 2-5.

July 11

Employees who work for tips. Employees who received $20 or more in tips during June must report them to their employer using Form 4070.

July 13

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 6-8.

July 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 9-12.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in June.

July 20

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 13-15.

July 22

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 16-19.

July 27

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 20-22.

July 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 23-25.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Please contact Doeren Mayhew for more information.

IRS streamlined offer-in-compromise program aims to cut red tape

The IRS's streamlined offer-in-compromise (OIC) program is intended to speed up the processing of OICs for qualified taxpayers. Having started in 2010, the streamlined OIC program is relatively new. The IRS recently issued instructions to its examiners, urging them to process streamlined OICs as expeditiously as possible. One recent survey estimates that one in 15 taxpayers is now in arrears on tax payments to the IRS to at least some degree. Because of continuing fallout from the economic downturn, however, the IRS has tried to speed up its compromise process to the advantage of both hard-pressed taxpayers and its collection numbers.

OIC program

The IRS OIC program on its face can appear very attractive to taxpayers with unpaid liabilities. An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liabilities for less than the full amount owed. Keep in mind that taxpayers do not automatically qualify for an OIC. The IRS has cautioned that, absent special circumstances, if you have the ability to fully pay your tax liability in a lump sum or via an installment agreement, an OIC will not be accepted.

The IRS may accept an offer in compromise based on three grounds:

Doubt as to collectibility
Doubt as to liability
Effective tax administration
The decision whether to accept or reject an OIC is entirely within the discretion of the IRS. Sometimes, but very rarely, an OIC will be deemed accepted because the IRS failed to reject it within 24 months of receiving the offer.

Streamlined OICs

The low acceptance rate of OICs has some lawmakers in Congress and taxpayer groups upset. One of the most vocal critics has been National Taxpayer Advocate Nina Olson who has urged the IRS to bring more taxpayers into the OIC program. Partly in response to this criticism, the IRS launched the streamlined OIC in 2010. The streamlined OIC program is intended to cut through much of the red tape that surrounds OICs. The IRS promised, among other things, to process streamlined OICs more quickly.

In February 2011, the IRS announced some changes to streamlined OICs. Streamlined OICs may be offered to taxpayers with total household incomes of $100,000 or less and who have a total tax liability of less than $50,000. Taxpayers who do not meet these requirements may apply for a traditional OIC.

Procedures

The streamlined procedures do not necessarily mean that the IRS will accept more OICs; merely that it will process the offers it receives more quickly. Since the streamlined OIC program is relatively new, the IRS has not yet reported how many streamlined offers it has accepted.

Before accepting or rejecting a streamlined OIC, IRS examiners must verify that the information provided by the taxpayer is correct. The IRS instructed examiners reviewing streamlined OICs to verify taxpayer information through internal research. Examiners will verify ownership of items such as real estate, motor vehicles and other property.

Examiners also will be able to communicate directly with taxpayers or their representatives. The IRS instructed examiners to contact taxpayers or their representatives by telephone whenever possible; rather than sending written notices. Three phone attempts should be made over two business days to contact the taxpayer or his/her representative. If the examiner reaches the taxpayer's voicemail, the examiners should request a call-back within two business days.

The streamlined OIC program is not for everyone. Indeed, the acceptance rate for all OICs (just about 13,000 in fiscal year (FY) 2010) means that relatively few taxpayers will make an offer that the IRS will accept. Nonetheless, the OIC program is one tool that may be used by taxpayers with unpaid liabilities. If you have any questions about the IRS's streamlined OIC or traditional OIC, please contact our office.

MI - Department of Treasury kicks off public awareness effort for tax amnesty

The Michigan Department of Treasury has kicked off the public awareness effort for the state's tax amnesty program under the theme "All Excuses Welcome." The amnesty period runs from May 15, 2011, through June 30, 2011. Regardless of the reason a taxpayer has fallen behind, any individual or business that has a state tax debt or that has not filed a tax return for a qualifying tax year can avoid penalties and prosecution through the tax amnesty program. Press Release, Michigan Department of Treasury, April 26, 2011


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

How Do I? Write Off Bad Business Debts

A business with a significant amount of receivables should evaluate whether some of them may be written off as business bad debts. A business taxpayer may deduct business bad debts if the receivable becomes partially or completely worthless during the tax year.

In general, most business taxpayers must use the specific charge-off method to account for bad debts. The deduction in any case is limited to the taxpayer's adjusted basis in the receivable.

The deduction allowed for bad debts is an ordinary deduction, which can serve to offset regular business income dollar for dollar. If the taxpayer holds a security, which is a capital asset, and the security becomes worthless during the tax year, the tax law only allows a deduction for a capital loss. However, notes receivable obtained in the ordinary course of business are not capital assets. Therefore, if such notes become partially or completely worthless during the tax year, the taxpayer may claim an ordinary deduction for bad debts.

For a taxpayer to sustain a bad debt deduction, the debt must be bona fide. The IRS looks carefully at a bad debt of a family member.

To be entitled to a business debt write off, the taxpayer must also make a reasonable attempt to collect the debt. However, in a nod to reality, the IRS does not request the taxpayer to turn the debt over to a collection agency or file a lawsuit in an attempt to collect the debt if doing so has little probability of success.

Deadlines for claiming a write off for any past business bad debt must be watched. Taxpayers have until the later of (1) seven years from the date they timely filed their tax return or (2) two years from the time they paid the tax, to claim a refund for a deduction for a wholly worthless debt not deducted on the original return.

If you have questions, please contact your local office: Doeren Mayhew

IRS issues 2011 vehicle depreciation dollar limits

The IRS has issued the limitations on depreciation deductions for owners of passenger automobiles, trucks and vans first "placed in service" (i.e. used) during the 2011 calendar year. The IRS also provided revised tables of depreciation limits for vehicles first placed in service (or first leased by a taxpayer) during 2010 and to which bonus depreciation applies.

Note. Bonus depreciation may not be applicable because, among other reasons, you purchased the vehicle used. You may elect out of bonus depreciation or elect to increase the alternative minimum tax (AMT) credit limit under Code Sec. 53 instead of claiming bonus depreciation.

Bonus depreciation backdrop

The Small Business Jobs Act of 2010 extended 50 percent bonus depreciation through the end of 2010. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended bonus depreciation for two years (through the end of 2012) and increased the bonus depreciation allowance rate from 50 percent to 100 percent for qualified property acquired after September 8, 2010 and before January 1, 2012, and placed in service before January 1, 2012.

Nevertheless, the additional first-year bonus depreciation amount applicable to vehicles is limited to $8,000, whether other assets in the same depreciation class are entitled to 50 percent or 100 percent bonus depreciation. Sport Utility Vehicles (SUVs) and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps (under Code Sec. 280F).

Passenger automobiles

The maximum depreciation limits under Code Sec. 280F for passenger automobiles first placed into service during the 2011 calendar year are:


- $11,060 for the first tax year ($3,060 if bonus depreciation is not taken);
- $4,900 for the second tax year;
- $2,950 for the third tax year; and
- $1,775 for each tax year thereafter.

Trucks and vans


The maximum depreciation limits under Code Sec. 280F for trucks and vans first placed into service during the 2011 calendar year are:

- $11,260 for the first tax year ($3,260 if bonus depreciation is not taken);
- $5,200 for the second tax year;
- $3,150 for the third tax year; and
- $1,875 for each tax year thereafter.

Leases

Lease payments for vehicles used for business or investment purposes are deductible in proportion to the vehicle's business use. Lessees, however, must include a certain amount in income during the year the vehicle is leased to partially offset the amount by which lease payments exceed the luxury auto limits.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

FAQ: What are my chances of being audited?

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

What your return says is key

If it's not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession--not when you file--are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you're self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.

Further, you may pique the IRS's interest and trigger an audit if:

You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
You have questionable business deductions;
You are a higher-income taxpayer;
You claim tax shelter investment losses;
Information on your return doesn't match up with information on your 1099 or W-2 forms received from your employer or investment house;
You have a history of being audited;
You are a partner or shareholder of a corporation that is being audited;
You are self-employed or you are a business or profession currently on the IRS's "hit list" for being targeted for audit, such as Schedule C (Form 1040) filers);
You are primarily a cash-income earner (i.e. you work in a profession that is traditionally a cash-income business)
You claim the earned income tax credit;
You report rental property losses; or
An informant has contacted the IRS asserting you haven't complied with the tax laws.
DIF score

Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.

E-filed returns. There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.

Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.

Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, weigh the risk carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

April 2011 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of April 2011.

April 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 26-29.

April 6

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 30-April 1.

April 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 2-5.

April 11

Employees who work for tips. Employees who received $20 or more in tips during March must report them to their employer using Form 4070.

April 18

Individuals. File a 2010 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in March.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 9-12.

April 20

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 13-15.

April 22

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 16-19.

April 27

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 20-22.

April 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 23-26.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

Doeren Mayhew: Retirement and Benefit Plan Changes

Doeren Mayhew: Retirement and Benefit Plan Changes

See original PDF at Doeren Mayhew

Court upholds strict certification for Work Opportunity Tax Credit

A federal appeals court has found an employer cannot claim the Work Opportunity Credit (WOTC) for employees who were eventually denied certification by a state employment agency.  Merely applying for certification was insufficient to claim the credit. Certification required an affirmative act by the state employment agency.

WOTC

The WOTC is a federal tax credit that rewards private-sector businesses for hiring individuals from target groups, such as certain individuals receiving government assistance, veterans and others. Participating employers can reduce their federal income tax liability. A tax credit of up to 40 percent of the first $6,000, or up to $2,400, in wages paid during the first 12 months for each new hire. Employers must submit a special IRS form to their state employment agencies, which, in turn, certify that an individual is a member of a target group.

Certification

In this case, the taxpayer hired individuals who were members of target groups under the WOTC. A state agency certified many of the individuals as members of a targeted group. However, the same state agency also denied many applications for target group status. Undeterred, the taxpayer claimed the WOTC for all of the employees. The taxpayer argued that its applications for certification were sufficient to claim the tax credit. The Court of Appeals for the Federal Circuit disagreed.

Court’s decision

The court found that merely applying for certification was insufficient. Congress intended certification -- not merely application for certification -- to be an integral, rather than optional, part of the statute. Further, the court found that the taxpayer could not challenge the denial of a state certification in a federal tax proceeding.


Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Doeren Mayhew FAQ: What are the rules for claiming dependents?

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

Dependency deduction

You are allowed one dependency exemption deduction for each person you claim as a qualifying dependent on your federal income tax return. The deduction amount for the 2010 tax year is $3,650. If someone else may claim you as a dependent on their return, however, then you cannot claim a personal exemption (also $3,650) for yourself on your return. Additionally, your standard deduction will be limited.

Only one taxpayer may claim the dependency exemption per qualifying dependent in a tax year. Therefore, you and your spouse (or former spouse in a divorce situation) cannot both claim an exemption for the same dependent, such as your son or daughter, when you are filing separate returns.

Who qualifies as a dependent?

The term "dependent" includes a qualifying child or a qualifying relative. There are a number of tests to determine who qualifies as a dependent child or relative, and who may claim the deduction. These include age, relationship, residency, return filing status, and financial support tests.

The rules regarding who is a qualifying child (not a qualifying relative, which is discussed below), and for whom you may claim a dependency deduction on your 2010 return, generally are as follows:

-- The child is a U.S. citizen, or national, or a resident of the U.S., Canada, or Mexico;

-- The child is your child (including adopted or step-children), grandchildren, great-grandchildren, parents, brother, sister (including step-parents, -brothers, and -sisters), half-siblings, in-laws, and if related by blood, uncles, aunts, nieces, and nephews;

 -- The child has lived with you a majority of nights during the year, whether or not he or she is related to you;

 -- The child receives less than $3,650 of gross income (unless the dependent is your child and either (1) is under age 19, (2) is a full-time student under age 24 before the end of the year), or (3) any age if permanently and totally disabled;

 -- The child receives more than one-half of his or her support from you; and

 -- The child does not file a joint tax return (unless solely to obtain a tax refund).

Qualifying relatives

The rules for claiming a qualifying relative as a dependent on your income tax return are slightly different from the rules for claiming a dependent child. Certain tests must also be met, including a gross income and support test, and a relationship test, among others. Generally, to claim a "qualifying relative" as your dependent:

-- The individual cannot be your qualifying child or the qualifying child of any other taxpayer; 

-- The individual's gross income for the year is less than $3,650; 

-- You provide more than one-half of the individual's total support for the year; 

-- The individual either (1) lives with you all year as a member of your household or (2) does not live with you but is your brother or sister (include step and half-siblings), mother or father, grandparent or other direct ancestor, stepparent, niece, nephew, aunt, or uncle, or inlaws. Foster parents are excluded.

Although age is a factor when claiming a qualifying child, a qualifying relative can be any age.

Special rules for divorced and separated parents

Certain rules apply when parents are divorced or separated and want to claim the dependency exemption. Under these rules, generally the "custodial" parent may claim the dependency deduction. The custodial parent is generally the parent with whom the child resides for the greater number of nights during the year.

However, if certain conditions are met, the noncustodial parent may claim the dependency exemption. The noncustodial parent can generally claim the deduction if:

-- The custodial parent gives up the tax deduction by signing a written release (on Form 8332 or a similar statement) that he or she will not claim the child as a dependent on his or her tax return. The noncustodial parent must attach the statement to his or her tax return; or

-- There is a multiple support agreement (Form 2120, Multiple Support Declaration) in effect signed by the other parent agreeing not to claim the dependency deduction for the year.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

November 2010 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of November 2010.
November 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 27-29.
November 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 30-November 2.
November 10
Employees who work for tips. Employees who received $20 or more in tips during October must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 3-5.
November 15
Monthly depositors. Monthly depositors must deposit employment taxes for payments in October.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 6-9.
November 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 10-12.
November 19
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 13-16.
November 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 17-19.
November 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 20-23. 

This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice. Please contact Doeren Mayhew with any questions. 

Doeren Mayhew: The production deduction

After a series of adverse rulings by the World Trade Organization (WTO), Congress curtailed its efforts to benefit exporters and instead provided a tax deduction for all manufacturers — whether they export or not.

The American Jobs Creation Act of 2004 (AJCA) repealed the extraterritorial income (ETI) exclusion and established the manufacturers’ deduction — also commonly referred to as the Section 199 or domestic production activities deduction. And the deduction isn’t just for traditional manufacturers. It’s also available to eligible construction contractors, engineers, architects, software developers, film producers, energy producers, farmers and agricultural processors. After a five-year phase-in period, the deduction reaches its maximum amount in 2010.

How the deduction works

The manufacturers’ deduction permits eligible taxpayers to deduct a specified percentage of the lesser of: 1) their income from “qualified production activities,” or 2) their taxable income for the year. The deduction may not exceed 50% of the W-2 wages a taxpayer pays during the year. Wages not allocable to domestic production gross receipts are excluded from W-2 wages for the purposes of the deduction.

The specified percentage phased in from 2005 through 2009 and reaches its maximum amount in 2010,  going up from 6% in 2009 to 9% in 2010 and thereafter. As a result, in 2010 the deduction will lower the maximum effective marginal tax rate on qualifying income from 35% to 31.85%.

Qualified income is calculated by taking gross receipts from domestic production and subtracting the cost of goods sold and other allocable costs, deductions, expenses and losses. Domestic production gross receipts are those derived from any lease, rental, license, sale, exchange or other disposition of:

• Qualifying production property (including tangible personal property, computer software and certain sound recordings) manufactured, produced, grown or extracted by the taxpayer in whole or in significant part in the United States,

• Qualified films produced by the taxpayer, or

• Electricity, natural gas or potable water produced by the taxpayer in the United States.

Domestic production gross receipts also include receipts from construction and engineering or architectural services performed in the United States.

Two significant exceptions are receipts from the sale of food and beverages prepared by taxpayers at retail establishments and the transmission or distribution of electricity, natural gas and potable water.

Additionally, the deduction isn’t allowed in determining net earnings from self-employment and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax (AMT).

Looking more closely

The manufacturers’ deduction provides many companies with a potentially significant tax break. But the rules are complex, so be sure to take a closer look at whether you might qualify and what you need to do to maximize your tax savings.

Should the reader have any questions regarding any of the content contained within this article, it is recommended that a Doeren Mayhew representative be contacted.

Doeren Mayhew: Still sitting on the fence?

Picking the best retirement plan for your business

It’s common business knowledge that the key to getting, and keeping, good employees is to offer a benefit package they’ll appreciate. But you also want to make sure that you — as the owner — get all the tax breaks you’re entitled to.

A retirement plan is a good place to start. Whether yours is a new business just starting out or an existing business now ready to set up a plan, many of the considerations are the same.

Not one-size-fits-all

Retirement plans aren’t a one-size-fits-all proposition. Most small to midsize businesses implement 401(k) plans, Savings Incentive Match Plans for Employees (SIMPLEs), and Simplified Employee Pension (SEP) IRAs for their employees. Regardless of the plan, employer contributions are deductible, employee contributions are pretax and plan funds grow tax-deferred.

To determine which plan is best for your business, you’ll need to consider a variety of factors. Tax treatment and contribution limits are obvious concerns. But other factors also matter: company size and employee limits, employee age and turnover, employee compensation and company profits, flexibility of contribution amounts, treatment for owners and other highly compensated employees, reporting requirements, and administrative costs.

401(k) plans top the list

401(k)s are by far the most popular form of retirement plan. They are contributory plans — meaning the employee makes contributions through redirected salary. You can choose to match the employee’s contribution, up to certain limits.

401(k)s have a higher employee contribution limit than either SIMPLEs or SEP-IRAs — for 2010, contribution limits are $16,500, plus $5,500 for the age 50 and over catch-up amount.

Although the 401(k) has the advantage of higher employee contribution limits, it also has the most reporting requirements, making it more costly to create and maintain. Because annual requirements include filing a tax return (Form 5500) and compliance testing, most businesses turn over plan administration to an outside professional.

Employees are always 100% vested in their contributions to their account. Although amounts redirected to a 401(k) aren’t currently subject to income tax, the earnings are subject to FICA and Medicare tax.

You have some flexibility in determining whether to match your employees’ contributions. Employer contributions can vest over time, based on plan schedules. If the plan is top-heavy (favoring highly compensated employees), employer contribution matching and vesting become subject to IRS requirements. To maximize your own contributions — as the owner — you’ll need to monitor and encourage employee contributions, perhaps by providing an employer match.

Roths may be the way to go

If your plan is set up to accommodate a Roth 401(k), participants in a 401(k) or 403(b) plan may designate some, or all, of their elective contributions as a Roth contribution. Roth contributions will be taxed (not tax-deferred as in a traditional 401(k)), but all qualified withdrawals will be tax free, which means participants may never have to pay tax on growth in the plans. Plus, there are no required distributions.

To have a qualifying Roth contribution program, your retirement plan must establish a separate designated Roth account for each employee and maintain separate recordkeeping for each account.

SIMPLEs not just a runner-up

There are two types of SIMPLEs: a SIMPLE IRA and a SIMPLE 401(k). Both are contributory plans allowing employee contributions for 2010 of up to $11,500, indexed for inflation, and an additional $2,500 for employees age 50 and older.

With a SIMPLE, you’re required to match employee contributions up to 3% of pay, or you can choose to contribute 2% of pay for each employee. This matching is mandatory, unlike with the traditional 401(k). All contributions vest immediately.

SIMPLEs have a major advantage over 401(k)s in that they are, in fact, simple. With no annual tax return filing, and minimal documentation requirements, SIMPLEs are easier to handle, and you may avoid administration fees altogether. However, due to their lower contribution limit, SIMPLE plans may not be a good choice for owners who are seeking to maximize their retirement plan contributions.

SEP-IRAs funded entirely by employer

Unlike the SIMPLE and 401(k) plans, the SEP-IRA is a noncontributory plan — meaning no employee contributions are allowed. The SEP-IRA is entirely funded by employer contributions. Contributions are discretionary, but can’t exceed a specified limit — 25% of an eligible employee’s compensation up to a maximum of $49,000 in 2010. Participants are immediately vested.

SEP-IRAs are easy and inexpensive to set up and administer. No annual tax return is required, and you have until the due date of the company tax return (including extensions) to make your contribution. The company must include all eligible employees, but, because employer contributions are optional, contributions can be lower (or skipped) in a year in which your company is strapped for cash.

A business owner who’s self-employed, or employs primarily family members, may find that a SEP-IRA provides significant retirement funding benefits. When there are other employees who must be covered, the employer contribution may be viewed as too expensive.

You may get a credit for plan startup

If you’re ready to take the plunge and implement a retirement plan, Uncle Sam may help with some of the costs. Small employers — those with 100 or fewer employees — may be eligible for a credit of up to 50% of the first $1,000 spent on retirement plan administration and education for employees. This credit is available for the first three years of the plan — amounting to a maximum of $500 credit for each year.

We’ve covered only a few retirement plans. Other possibilities include defined benefit plans and other profit sharing or defined contribution plans. The greatest benefits may result from a mix-and-match approach. Combining plans could increase the allowable contributions for owners. You may also want to evaluate nonqualified deferred compensation arrangements to meet your retirement funding goals.

 Should the reader have any questions regarding any of the content contained within this article, it is recommended that a Doeren Mayhew representative be contacted.

Doeren Mayhew Featured On Freep.com

Doeren Mayhew featured on Freep.com:

Michigan's ailing economy has forced many companies to find new ways to grow. One longtime local business, Doeren Mayhew, shows how it can be done.

The 79-year-old accounting and tax consulting firm in Troy is making acquisitions and expanding its services, both in Michigan and outside the state.

Last year, it formed a new venture called Doeren Mayhew Financial Advisors and opened a two-person office in Houston that now serves five large credit unions.

For more information, view the article on Freep.com or visit Doeren Mayhew.

Doeren Mayhew: The Worker, Homeownership, and Business Assistance Act of 2009 Signed Into Law

Enacted in November 2009, the Worker, Homeownership, and Business Assistance Act of 2009 contains many tax provisions that affect individual and business taxpayers. For individuals, the Act provides an expansion of the firsttime homebuyer tax credit by including existing homeowners who are "long-time residents." A number of other key measures contain changes for businesses, including an important new net operating loss provision.

Homebuyer Tax Credit Under Prior Law Prior to the new law's enactment, a refundable federal tax credit of up to $8,000 ($4,000 for a married taxpayer filing separately) was allowed for qualifying first- time homebuyers who purchased a home between April 8, 2008, and December 1, 2009. In order to qualify for the credit, a taxpayer must have had no ownership interest in a qualifying principal residence in the U.S. during the three-year period before the purchase of the home. Under prior law, the allowable credit was phased out for individual taxpayers whose modified adjusted gross income was between $75,000 and $95,000 (between $150,000 and $170,000 for married taxpayers filing jointly).

Homebuyer Tax Credit Under New Law The Worker, Homeownership, and Business Assistance Act generally extends the first-time homebuyer credit for contracts to purchase entered before May 1, 2010, and closed before July 1, 2010. The new law also liberalizes the credit by making it available to higher income taxpayers, as well as to those individuals who are not first-time homebuyers.

Generally, existing homeowners who are qualifying "long-time residents" may qualify for the tax credit if they contract to purchase another principal residence before May 1, 2010, and close before July 1, 2010. The Act provides that any individual who has maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the date of the purchase of a subsequent residence be treated as a "first-time homebuyer."

However, the maximum credit for long-time residents who qualify under the Act is the lesser of $6,500 ($3,250 for married individuals who file separate returns) or 10% of the purchase price of the principal residence. The credit now phases out for individual taxpayers whose modified adjusted gross income is between $125,000 and $145,000 ($225,000 and $245,000 for married taxpayers filing joint returns) for the year of purchase. For purchases after November 6, 2009, the first-time homebuyer tax credit cannot be claimed for the purchase of a principal residence if its purchase price exceeds $800,000.

Extension of Five-Year NOL Carryback The Act liberalizes rules relating to business net operating losses (NOLs) by extending the prior law's temporary fiveyear carryback of NOLs to apply to 2009 NOLs. The Act also provides an expansion of the five-year carryback's availability to include generally all businesses, not just eligible small businesses.

Under prior law, for NOLs arising in tax years ending after December 31, 2007, an eligible small business could temporarily elect to increase the NOL carryback period for an applicable 2008 loss from a previous limit of two years to up to five years. (This carryback allows a business to use the loss to offset net income realized in an earlier year, thus qualifying for a refund for that prior year.) Generally, an eligible small business is a trade or business whose average three-year annual gross receipts are $15 million or less, ending with the tax year in which the loss arises.

The Worker, Homeownership, and Business Assistance Act of 2009 liberalizes the previous NOL provision by extending the five-year election to most businesses, as opposed to limiting it to only eligible small businesses.

Subject to the "only one election" rule, an applicable NOL arising from a business's 2008 or 2009 calendar year, or that of a fiscal year beginning in 2007, 2008, or 2009, can be carried back to the third, fourth, or fifth preceding tax year. The NOL carryforward period of 20 years is not modified under the Act.

Limitation on NOL Amount The Act generally limits the amount of an NOL that can be carried back to the fifth tax year prior to the loss to 50% of the taxpayer's taxable income for that fifth preceding tax year.

Doeren Mayhew Can Help The Worker, Homeownership, and Business Assistance Act of 2009 contains other important tax provisions, including modifications to failure-to-file penalties for pass-through entities (such as partnerships), and an extension of the FUTA surtax. Our professionals can help you understand how the new law's provisions apply to you or your business. Please call Doeren Mayhew today at (248) 244-3000 for more information.

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