How do I? Compute bonus depreciation?

The 2010 Small Business Jobs Act retroactively extended 50-percent additional first-year bonus depreciation for the 2010 tax year. Under the Small Business Jobs Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2010, from computer software to plants and equipment. Moreover, the 50-percent bonus depreciation allowance can be taken together with any Code Sec. 179 expensing, which was also extended (and enhanced) through 2011.

Note. The Small Business Jobs Act increased the maximum deduction for Code Sec. 179 expensing to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011.

Bonus basics
The 2010 Small Business Jobs Act allows all businesses to take a bonus first-year depreciation deduction of 50-percent of the adjusted basis of qualified property purchased and placed in service for use in your trade or business after December 31, 2009, and generally before January 1, 2011. Bonus depreciation is allowed only for: (1) tangible property to which MACRS applies that has an applicable recovery period of 20 years or less, (2) water utility property, (3) certain computer software, and (4) qualified leasehold improvement property. It is not allowed for intangible property, with the exception of certain computer software.

Bonus depreciation can be claimed for both regular and alternative minimum tax (AMT) liability. It is also important to note that, since bonus depreciation is treated as a depreciation deduction, it is subject to recapture as ordinary income under certain provisions of the Internal Revenue Code. And if you have a tax year that is less than 12 months, the amount of the bonus depreciation allowance is not affected by a short tax year.

Computing your bonus depreciation
To figure your allowable 50-percent bonus depreciation deduction, you must multiply the unadjusted depreciable basis of the property by 50-percent. This is the amount of additional first-year depreciation you can deduct in 2010. For example, you purchase qualifying property for your business in 2010 that costs $150,000. You are allowed an additional first-year depreciation deduction of $75,000.

Note. The "unadjusted depreciable basis" is the property's cost (including amounts you paid in cash, debt obligations, or other property or services, plus any amounts you paid for items such as sales tax, freight charges, installation, or testing fees).

Regular depreciation
After you have computed the 50-percent bonus depreciation allowance for the property, you can use the remaining cost to compute your regular MACRS depreciation for 2010 and subsequent years. Under MACRS, the cost or other basis of an asset is generally recovered over a specific recovery period. In this case, the property must have a recovery period of 20 years or less.

Example. Assume that in 2010 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5 year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5 year property. Thus, 20 percent, or $100, is apportioned to 2010, which computes to an additional $50 regular depreciation deduction in 2010 under the half-year convention. Accordingly, the total depreciation deduction with respect to the property for 2010 is $550. The remaining $450 cost of the property is recovered under otherwise applicable rules for computing depreciation in subsequent years.

Code Sec. 179 expensing
The 50-percent bonus depreciation allowance is taken after any Code Sec. 179 expense deduction and before you compute regular depreciation under MACRS rules. Therefore, the cost (basis) of the property must be reduced by the amount of any Code Sec. 179 expense allowance claimed on the property before computing the 50-percent bonus depreciation allowance (multiplying the property's basis by 50-percent). Regular depreciation under MACRS is then computed after you have reduced the basis by any Code Sec. 179 expensing allowance and the 50-percent bonus depreciation allowance.
Example. On April 14, 2010, Tom bought and placed in service in his business qualified tangible property that cost $1 million. He did not elect to claim the Code Sec. 179 expensing deduction and he claims no other credits or deductions related to the property. He may deduct 50-percent of the cost ($500,000) for purposes of 2010 bonus depreciation. He will use the remaining $500,000 of the property's cost to figure his regular MACRS depreciation deduction for 2010 and the years thereafter.

Example. The facts are the same as above, except Tom uses the Code Sec. 179 expensing deduction. On April 14, 2010, Tom bought and placed in service in his business qualified tangible property that cost $750,000. He elects to deduct $250,000 of the property's cost as a Code Sec. 179 deduction. Tom will apply the 50-percent bonus depreciation allowance to $500,000 ($750,000 - $250,000), which is the cost of the property after subtracting the section 179 expensing deduction. Tom will then deduct 50-percent of the cost after section 179 expensing ($250,000) for purposes of 2010 bonus depreciation. He will use the remaining $250,000 of the property's cost to figure his regular MACRS depreciation deduction for 2010 and the years thereafter.

Computing bonus depreciation can be a complicated process, as many variables may come into play. Our tax professionals can help determine the best way for your business to utilize the new bonus depreciation allowance together with other tax incentives to achieve significant tax savings. 


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.

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: 2010 year-end tax planning for businesses

2010 year-end tax planning involves consideration of tax laws going into effect in 2011 as much it involves tax provisions effective this year. Some tax incentives that expired for businesses at the end of 2009 have been resurrected for 2010 (and 2011 in some cases), including bonus depreciation and small business expensing. However, with higher tax rates set for 2011, traditional planning techniques, such acceleration and deferral, may require more thought this year especially. This article explores some planning opportunities, challenges, and issues presented by year-end tax planning for 2010.

Accelerating income/deferring deductions
Every year, businesses can take advantage of a traditional planning technique that involves (or alternatively deferring income and accelerating deductions). However, business taxpayers such as passthrough entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2011 (and perhaps beyond) in light of the scheduled 2011 tax rate increases (the top two income tax brackets are set to rise from 33 and 35 percent to 36 and 39.6 percent respectively). Since pass-through entities generally pay tax at the individual income tax rate level, and those levels are expected to rise, this may be a significant factor affecting this year's planning.

For example, limited liability companies, partnerships, and S corporations can avoid or minimize the impact of the scheduled 2011 rate increases by accelerating certain business transactions and thus income into 2010 (and deferring deductions until next year). For instance, if your business is planning to sell certain property, you may want to close the sale in 2010 to avoid the higher 2011 rates. Not only are the ordinary income tax rates scheduled to rise, but too are the capital gains rates. Thus, this strategy can generally help regardless of the type of income generated since rates in both categories are going to rise next year. 

The strategy of accelerating income and deferring deductions may apply to a number of transactions affecting your business, including leasing, inventory, compensation and bonus practices, depreciation and expensing. Pass-through entities need to be particularly sensitive to the scheduled 2011 income tax rate increases and therefore plan accordingly.

Cash basis businesses that expect to be in the same or a higher tax bracket in 2011 should consider moves to shift income into 2010 by accelerating cash collections this year, and deferring deductions until next year. Thus, delay payment of certain expenses until next year, where possible, since deductions are allowed when the expenses are actually paid. If you have outstanding accounts receivable, collect on those payments due to your business in 2010.

Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate the shipment of products or provision of services into 2010 so that your business's right to the income arises this year.

Take advantage of increased small business expensing
For 2010 and 2011, businesses can benefit from enhanced Code Sec. 179 small business expensing. Congress increased the amount of qualifying property that business that immediately expense to $500,000 (up from $250,000) for tax years beginning in 2010 and 2011. This amount is reduced dollar for dollar to the extent the cost of the qualifying property placed in service during the year exceeds $2 million (increased from $800,000). The increase in the expensing cap from $800,000 to $2 million for 2010 (and 2011) effectively opens up the availability of Code Sec. 179 expensing to many more businesses. If you have bought qualifying property - even computer software qualifies - or plan to buy property, consider doing so now to take advantage of the immediate tax benefit. You can also do so again in 2011, when tax rates are expected to be higher. 

Also included in the definition of qualified Code Sec. 179 property (only temporarily though) is qualified real property, which is defined as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to expensing of up to $250,000 of the total cost of these properties. The dollar cap applies to the aggregate cost of qualified real property.

Bonus deprecation
Bonus depreciation is not limited by the size of the business, unlike practical access to Code Sec. 179 "small business" expensing. Bonus depreciation allows taxpayers to immediately deduct 50-percent of the cost of qualifying property purchased and placed in service in 2010. Unlike Sec. 179 expensing, bonus depreciation is only available for 2010. Qualifying property must be purchased and placed into service on or before December 31, 2010.

Increased start-up expense deduction
New businesses can take advantage of the increased deduction for start-up expenditures. For 2010, the start-up expense deduction limit has been raised from $5,000 to $10,000. The phaseout threshold is also increased to $60,000 (up from $50,000). Thus, if you have incurred during 2010 costs relating to the creation of an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may be able to benefit from this increased deduction. Entrepreneurs can recover more small business tart-up expenses up-front, thereby increasing cash flow and providing other benefits.

Additional planning techniques
There are a number of other year-end tax planning strategies you may want to consider utilizing for 2010. These include potentially changing your accounting method to advance income or defer expenses (however, accounting method changes can have a binding elect on taxpayers for future years); accelerating installment sale proceeds or electing out of the installment method; electing slower depreciation methods, deferring payments of accrued bonuses; and determine if you can write-off any bad debts. 

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.

Congress faces historic tax law decisions in fall session

Congress returns to work in mid-September to a full agenda of tax legislation, dominated by the fast-approaching expiration of the 2001 individual marginal income tax rate reductions. Predicting when Congress will act on the rate cuts or any legislation is nearly impossible. House Democrats, who have already passed a number of tax bills, appear to be allowing the Senate to take the lead in the weeks preceding the November elections. The uncertainty over the fate of many tax provisions makes year-end tax planning more important than ever.




Individual tax rates



For many taxpayers, the greatest uncertainty is over the fate of the 2001 individual income tax rate reductions. After December 31, 2010, the individual marginal income tax rates for all taxpayers will rise when the reduced rates expire. President Obama has asked Congress to extend all of the 2001 individual marginal income tax reductions except for the top two rates.



Change is coming regardless of whether Congress approves the president's proposal or allows the reduced rates to expire entirely. The likely prospect of higher income tax rates significantly impacts tax planning for individuals and business owners.



Individuals may benefit from many traditional planning techniques. Individuals expecting to be in a higher tax rate in a future year because of higher income levels may want take into account the timing of income or deductible expenses in one tax year or another. An individual may find that accelerating income into 2010, so it is taxed at a lower rate, may be advantageous. You may be able to accelerate payments due to you. Another strategy may be to take withdrawals from retirement savings, either as part of a Roth IRA conversion plan or otherwise, to accelerate income into 2010. Similarly, deferring deductions into 2011 may help offset income that is expected to be taxed at a higher rate. You may consider holding off on a charitable contribution until 2011. Our office can help you design a strategy that works best for you.



Individuals in the highest tax brackets also should consider the likely reinstatement of the limitation on itemized deductions. For 2010 - and 2010 only - the limitation on itemized deductions for higher income taxpayers is completely repealed. The provision limits the total amount of otherwise allowable itemized deductions for higher income taxpayers. President Obama has asked Congress to allow the limitation on itemized deductions to return but to modify it for 2011 and beyond.



Capital gains/dividends



Also expiring after December 31, 2010 are reduced capital gains and dividends tax rates. For 2010, the maximum capital gains and dividends tax rate is 15 percent (zero percent for taxpayers in the 10 and 15 percent brackets). President Obama has asked Congress to impose a 20 percent capital gains and dividends tax rate on higher-income individuals for 2011 and beyond. All other taxpayers would pay capital gains and dividends taxes of 15 percent unless they qualify for the zero percent tax rate. Generally, the 20 percent tax rate would apply to individuals with incomes over $200,000 and married couples filing a joint return with incomes over $250,000.



Small business



The House and Senate have tried several times this year to send a small business tax relief bill to the White House but have failed. House-passed bills stalled in the Senate. The stalemate in the Senate may break this fall because lawmakers are eager to show voters they support "jobs" bills.



Some of the small business tax relief measures that enjoy bipartisan support are:



--Expansion of the small business stock exclusion to 100 percent; --Reform of the Code Sec. 6707A penalties for reportable transactions; --An increase in the deduction for qualified start-up expenses; --Enhanced Code Sec. 179 expensing; and --Bonus depreciation.



Homebuyers



The popular first-time homebuyer tax credit (and the reduced credit for long-time residents) has expired. The credit was popular because Congress made it fully refundable and certain lenders allowed purchasers to monetize the credit toward a down payment. Recent reports about sales of new homes reaching record lows may encourage Congress to consider extending the incentive. However, Congress must find a way to pay for the credit if it decides to extend it.



Estate tax



Nine years ago, Congress repealed the federal estate tax. Because of budget concerns, Congress delayed full repeal until 2010. For individuals dying in 2010, the traditional stepped-up basis rules are replaced with a modified carryover basis regime. Again, because of budget concerns, full repeal expires after December 31, 2010. If Congress takes no action on the estate tax before year-end, the exemption level will be $1 million in 2011 and the maximum estate tax rate will be 55 percent.



The House has approved legislation to make permanent the estate tax rules as they were in 2009. The House bill has languished in the Senate over not only its cost but also concerns over whether to make it retroactive to January 1, 2010. Some states have already passed bills to protect older wills based on formula dispositions, which may not have anticipated repeal of the estate tax in 2010.



Extenders



A package of tax extenders has stalled in the Senate and is unlikely to pass as a single bill because of its price tag. Instead, Democratic leaders in the Senate have indicated that they may enact some of the extenders in other bills, especially the extenders that have support from both parties. House Democrats would prefer the Senate keep the extenders in one bill but will likely acquiesce in enacting some of the extenders rather than none.



Among the extenders that enjoy bipartisan support are:



--Research tax credit; --State and local sales tax deduction; --Teachers' classroom expense deduction; --Higher education tuition deduction; and --Energy incentives for consumers.



Offsets



Congress must find offsets to pay for any tax cuts and its options are dwindling. Two House-approved revenue raisers, a change in the tax treatment of carried interest and the imposition of self-employment taxes on service S corps, died in the Senate and are unlikely to be revived. Less controversial are reforms to grantor retained annuity trusts (GRATs) and the cellulosic biofuel credit. Congress could also abolish the Code Sec. 199 production activities deduction and raise taxes on oil and gas producers.



Lawmakers have a short window in which to try to pass critical tax bills before year-end. Our office will keep you posted of developments. Please contact our office if you have any questions.
 

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

Don’t make a tax mess when paying household employees

Millions of American families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ domestic workers, be sure you understand the tax rules — it can pay off for you and your employees.




Household employee qualifications



Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.



Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.



Let’s say, for example, you hire a nanny to care for your child and do light housework 30 hours a week. She performs her duties according to your instructions and uses your supplies. The nanny is considered a household employee.



On the other hand, suppose you hire a gardener to mow your lawn and provide other landscaping services twice a month. Because he furnishes his own equipment and supplies, pays other workers as needed, sets his own schedule and offers his services to others, the gardener is classified as an independent contractor.



Social Security and Medicare taxes



If a household worker’s cash wages exceed the domestic employee coverage threshold of $1,700 in 2010, you must pay Social Security and Medicare taxes —15.3% of cash wages, which you can pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.)



But don’t count wages you pay to:



• Your spouse,



• Your children under age 21,



• Your parents (with some exceptions), and



• Household workers under age 18 (unless working for you is their principal occupation).



The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($106,800 for 2010, adjusted annually for inflation).



Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.



Unemployment and federal income taxes



If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.



The tax is 6.2% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.



You don’t have to withhold federal income tax — or, usually, state income tax — unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).



Tax payment



You can pay federal employment taxes, including amounts withheld from employees’ wages, by filing Schedule H, Household Employment Taxes, with your Form 1040. You may also submit payroll tax forms for your workers (Form 941).



Although you’re not required to make quarterly deposits, you may face penalties unless you cover these amounts. You can do so by making estimated tax payments or increasing withholding from your own paychecks.



If you own a sole proprietorship, you can piggyback household employment taxes onto the deposits or payments you make for your business employees.



Other obligations



As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 and I-9, which document that they’re eligible to work in the United States.



After year end, you must also file Form W-2 for each household employee to whom you paid more than $1,700 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements.



In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.



A time saver



Running a household is a lot like running a business. Many companies outsource their tax and other administrative functions so they can concentrate on their core business activities. Similarly, if you have household employees, getting help with your tax responsibilities frees up your time to focus on the things that really matter, such as your loved ones and your work.



Sidebar: A spoonful of compliance …



With many tax and administrative headaches, it’s not surprising that people often pay their household employees “under the table.” But compliance isn’t just the right thing to do; it also offers a number of advantages for both employers and workers.



For starters, you avoid huge penalties and interest — not to mention potential negative publicity. Plus, you may qualify for tax breaks such as flexible spending account reimbursements for child care and the Child and Dependent Care credits. In some cases, these tax savings outweigh the additional tax liability of employment taxes.



Meanwhile, your workers are building an employment history, which helps them qualify for car loans, mortgages and other types of credit. They also benefit from unemployment insurance coverage, Social Security and Medicare benefits, and the Earned Income Tax credit (if eligible).



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.

How do I...Set up a retirement plan for employees of my small business?

Many small employers want to offer their employees the opportunity to save for retirement but are unsure of how to go about setting up a retirement plan. In this article, we'll explore three options that are widely used by small businesses: payroll deduction IRAs, SEP plans, and SIMPLE IRAs.

Payroll deduction IRAs
Many small employers find a payroll deduction IRA very attractive because it allows them to offer their employees a retirement savings vehicle at little cost. A business of any size, even self-employed individuals, can establish a payroll deduction IRA. Under a payroll deduction IRA, only your employees make contributions to an IRA. Your responsibility as an employer is simply to transmit the employee's authorized deduction to the financial institution that maintains the IRA.

The IRA is set up with a financial institution, such as a bank, mutual fund or insurance company. You can limit the number of IRA providers to as few as one. The employee establishes a traditional IRA or a Roth IRA (based on the employee's eligibility and personal choice) with the financial institution and authorizes the payroll deductions. As the employer, you withhold the payroll deduction amounts authorized by your employees and send the funds to the financial institution.

An employee's decision to participate in a payroll deduction IRA is entirely voluntarily. If an employee decides to participate, he or she can only contribute up to a certain amount to the payroll deduction IRA every year. For 2010, the contribution limit is $5,000. An employee age 50 or older may make an additional "catch-up" contribution of $1,000 for a yearly total of $6,000. Every employee who participates is 100 percent vested in the contributions to their payroll deduction IRA.

Let's look at an example of a payroll deduction IRA:
Aidan's employer offers its employees the opportunity to have deductions taken from their paychecks to contribute to IRAs that the employees have set up for themselves. Aidan signs up for the program and has $100 from his $1,000 bi-weekly paycheck deposited into his IRA for a yearly total of $2,600. At the end of the year, Aidan's employer would report the full $26,000 he earned on his Form W-2 and Aidan would add the $2,600 to any other IRA contributions he made during the year for Form 1040 deduction purposes.
The costs of a payroll deduction IRA are low. Moreover, payroll deduction IRAs are not subject to the often complex filing, documentation and administration requirements that are imposed on other employer-sponsored retirement arrangements, such as 401(k) plans.

SEP plans
"SEP" stands for "Simplified Employee Pension" plan. While there are filing, administration and documentation requirements for SEP plans, the goal of an SEP plan is to keep these as simple as possible. The IRS has created, for example, model SEP language for plan documents.

An SEP plan is similar to a payroll deduction IRA. Under an SEP plan, employers make contributions to traditional IRAs set up for employees (including self-employed individuals). An SEP-IRA is funded solely by employer contributions whereas a payroll deduction IRA is funded solely by employee contributions.

As the employer, you must select the financial institution for your SEP. This decision must be made carefully because you and the financial institution will very work closely to administer the plan. After you send the SEP contributions to the financial institution, the financial institution will manage the funds. Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds, and other similar types of investments.

Federal law requires you and the trustee to keep employees informed about the administration and health of the SEP. Employees must be provided with plan documents, an annual statement that reports the fair market value of each employee's account and a copy of an annual statement that is filed by the financial institution with the IRS. Like a payroll deduction IRA, each employee is 100 percent vested in his or her SEP-IRA.
Generally, the annual contributions an employer makes to an employee's SEP-IRA cannot exceed the lesser of:

-- 25 percent of compensation,or
-- $49,000 for 2010.

Generally, contributions are not required to be made every year to an SEP. In years that contributions are made to an SEP, they must be made to the SEP-IRAs of all eligible employees. Contributions to an SEP-IRA must be made in cash; property cannot be contributed to an SEP-IRA. Special rules apply if you, as the employer, also contribute to a 401(k) or similar plan on the employee's behalf.

All eligible employees must be allowed to participate. An eligible employee is any employee who is at least age 21 and has worked for you in at least three of the immediate past five years.

To encourage employers to establish SEPs, the government offers a tax credit. You may be eligible for a tax credit of up to $500 for each of the first three years for the cost of starting the SEP.

SIMPLE IRAs
A "SIMPLE IRA" is a Savings Incentive Match Plan for Employees IRA. Like an SEP plan, a SIMPLE IRA is intended to be easily created and administrated.

A SIMPLE IRA is funded both by employer and employee contributions. As the employer, you can choose either to (1) match the contributions of employees who decide to participate or (2) contribute a fixed percentage of all eligible employees' pay. Under option (2), which is known as the nonelective contribution formula, even if an eligible employee does not contribute to his or her SIMPLE IRA, you must make a contribution to the employee's SIMPLE IRA equal to a fixed percent of the employee's salary. Each employee is 100 percent vested in his or her SIMPLE IRA.

While similar to a payroll deduction IRA, a SIMPLE IRA has additional requirements. One important requirement is the number of employees. Generally, your business must have 100 or fewer employees to be eligible for a SIMPLE IRA.

Let's look at an example of a SIMPLE IRA. In this example, the employer matches the employee contributions of employees who decide to participate.

Allison's employer has established a SIMPLE IRA plan for its employees. The employer will match its employees' contributions dollar-for-dollar up to three percent of each employee's salary. If an employee does not contribute to his or her SIMPLE IRA, then that employee does not receive a matching employer contribution. Allison decides to contribute five percent ($2,500) of her annual salary of $50,000 to a SIMPLE IRA. The employer's matching is $1,500 (three percent of $50,000). Therefore, the total contribution to Allison's SIMPLE IRA that year is $4,000.

There are contribution limits for SIMPLE IRAs. For employees, the annual contribution limit is $11,500 in 2010. Employees age 50 and older may make additional catch-up contributions of $2,500 in 2010.
The SIMPLE IRA contribution for the employer is dependent upon which contribution formula you select. If you decide to make matching contributions, only eligible employees who have elected to make contributions will receive an employer contribution. If you decide to make a nonelective contribution, each eligible employee must receive a contribution regardless of whether the employee makes contributions.

As with an SEP plan, a SIMPLE IRA creates a relationship between you and the financial institution that manages the funds. SIMPLE IRA plan contributions can be invested in individual stocks, mutual funds and similar types of investments. Each participating employee must receive an annual statement indicating the amount contributed to his or her SIMPLE IRA for the year.

As with SEP plans, you may be eligible for a tax credit to help you offset start-up costs. The tax credit can reach up to $500 per year for each of the first three years for the cost of starting a SIMPLE IRA plan.
We've covered a lot of material about retirement plans for small businesses. There are more detailed requirements, especially for SEP plans and SIMPLE IRAs, which we can discuss in depth. Please contact our office to set up an appointment to explore these and other retirement arrangements for small businesses.

Doeren Mayhew

Doeren Mayhew: Deducting receivables as bad business debts

While the economy continues to slowly recover, many businesses continue to face customers struggling to pay outstanding bills for services or goods. The Tax Code provides relief to businesses faced with the inability to collect on accounts receivable. Businesses that are unable to get customers to pay the bill can claim a deduction for the "bad debt."

Business bad debt deduction

Taxpayers may deduct any business receivable that becomes totally or partially worthless during the tax year under Tax Code Sec. 166(a). However, the business bad debt deduction is limited to the taxpayer's adjusted basis in the receivable.

The deduction allowed for bad debts is an ordinary deduction. To claim the deduction, you must establish that the debt is genuine and that the amount cannot be recovered from the debtor. You must also make a reasonable attempt to collect the debt (however, you do not have to turn the debt over to a collection agency or file a lawsuit in an attempt to collect on the debt if doing so has little probability of success). The law requires most taxpayers to use the specific charge-off method of accounting for bad debts. Under the specific charge-off method, the taxpayer must specifically identify the accounts or notes charged off as partially or completely worthless (it is also referred to as the direct write-off method).

If you meet these conditions, you can take the deduction in the year in which the debts became worthless. This includes certain previous years since, for some debts, worthlessness may not be immediately apparent. You can deduct a bad debt before the debt is due if you can establish the partial or complete worthlessness of the debt.

Partially worthless. If you failed to claim the bad debt deduction for a receivable that became partially worthless in a prior tax year, you have until the later of (1) three years after you file the tax return (including extensions) or (2) two years from the time you paid the tax to file an amended return and deduct the bad debt.

Totally worthless. If you failed to claim a deduction for a receivable that became completely worthless in a previous tax year, you have until the later of (1) seven years after the due date of the tax return (not including extensions) or (2) two years from the time you paid the tax to file an amended return and claim a deduction for the worthless receivable.

Cash basis taxpayers
Cash basis taxpayers cannot claim a bad debt deduction for accounts receivable that are not collectible. However, notes received by a cash basis taxpayer in the ordinary course of business are treated as the equivalent of cash to the extent of the note's fair market value (FMV) at the time received. Thus, the initial basis in such a note is its FMV. Cash basis taxpayers may claim a bad debt deduction for uncollectible notes receivable if they have included the FMV of the notes in gross income.

Accrual and hybrid taxpayers
Accrual basis taxpayers may claim a bad debt deduction for accounts receivable that become partially or completely worthless during the tax year. Accrual basis taxpayers must include the face value of a note receivable in gross income if a reasonable expectancy of collection exists at the time it is received. Taxpayers that use a hybrid method of accounting may deduct bad debts if they have included the revenue from the receivable in gross income.

Reporting
For self-employed taxpayers, the bad business debt deduction is reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), or Schedule F (Profit or Loss from Farming (for self-employed farmers)). Corporations report bad debts on Line 15 of Form 1120, U.S. Corporation Income Tax Return. S corporations report bad debts on Line 10 of Form 1120S, U.S. Income Tax Return for an S Corporation. Partnerships report bad debts on Line 12 of Form 1065, U.S. Return of Partnership Income.

Recovering bad debts
If you recover a bad debt during the year, the amount recovered is gross income to the extent that you claimed the deduction for the bad debt in a previous tax year, reducing your taxable income. This is called the tax benefit rule. The bad debt you recovered may not be offset against the bad debt deduction for the tax year of the recovery.

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This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice or opinions on specific facts or matters, and, accordingly, assumes no liability whatsoever in connection with its use. 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.

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Preparing for the possible return of pre-EGTRRA individual tax rates

In less than six months, unless Congress acts, the individual marginal income tax rate reductions under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will expire. While the timetable for addressing the EGTRRA tax cuts is not certain, the approaching sunset of the individual rate reductions, the possibility for their extension, and the fate of the limit on itemized deductions and the personal exemption phase-out will touch all taxpayers. The potential rate change makes tax planning all the more important.

Individual income tax rates

EGTRRA set in motion a gradual reduction of the individual marginal income tax rates. EGTRRA also created a new and temporary 10 percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent.

The federal individual income tax rates for 2010 are:

Single individuals: If taxable income is not over $8,375: 10% of the taxable income; Over $8,375 but not over $34,000: $837.50 plus 15% of the excess over $8,375; Over $34,000 but not over $82,400: $4,681.25 plus 25% of the excess over $34,000; Over $82,400 but not over $171,850: $16,781.25 plus 28% of the excess over $82,400; Over $171,850 but not over $373,650: $41,827.25 plus 33% of the excess over $171,850; and Over $373,650: $108,421.25 plus 35% of the excess over $373,650.

Married couples filing a joint return: If taxable income is not over $16,750: 10% of the taxable income; Over $16,750 but not over $68,000: $1,675 plus 15% of the excess over $16,750; Over $68,000 but not over $137,300: $9,362.50 plus 25% of the excess over $68,000; Over $137,300 but not over $209,250: $26,687.50 plus 28% of the excess over $137,300; Over $209,250 but not over $373,650: $46,833.50 plus 33% of the excess over $209,250; and Over $373,650: $101,085.50 plus 35% of the excess over $373,650.

Unless extended or made permanent, the individual marginal income tax rates will all rise after December 31, 2010 when EGTRRA sunsets. The 10 percent regular income tax bracket will also disappear after December 31, 2010 and the first portion of an individual's taxable income will be taxed at 15 percent rather than at 10 percent.

According to the Joint Committee on Taxation (JCT), after EGTRRA sunsets and with no modification by Congress, the federal individual income tax rates for 2011 will be:

Single individuals: If taxable income is not over $34,850: 15% of the taxable income; Over $34,850 but not over $84,350: $5,227.50 plus 28% of the excess over $34,850; Over $84,350 but not over $176,000: $19,087.50 plus 31% of the excess over $84,350; Over $176,000 but not over $382,650: $47,499 plus 36% of the excess over $176,000; and Over $382,650: $121,893 plus 39.6% of the excess over $382,650

Married couples filing a joint return: If taxable income is not over $58,200: 15% of the taxable income; Over $58,200 but not over $140,600: $8,730 plus 28% of the excess over $58,200; Over $140,600 but not over $214,250: $31,802 plus 31% of the excess over $140,600; Over $214,250 but not over $382,650: $54,633.50 plus 36% of the excess over $214,250; and Over $382,650: $115,257.50 plus 39.6% of the excess over $382,650.

President Obama has asked Congress to permanently extend the current 10, 15, 25, and 28 percent rates. Under the president's proposal, these rates would continue for individuals without interruption after December 31, 2010. However, the president's proposal would allow the 33 percent rate bracket and the 35 percent rate brackets to become 36 percent and 39.6 percent, respectively, after December 31, 2010.

The president has also asked Congress to expand the tax rate bracket for the 28 percent rate so that individuals with less than $195,550 of taxable income in 2011 ($200,000 of AGI), assuming one personal exemption and the basic standard deduction, indexed from 2009) will not be subject to the 36 percent rate that applies after December 31, 2010. For married individuals filing joint returns and surviving spouses, the dollar threshold for the 36 percent bracket would be set so that married couples and surviving spouses with AGI below $237,300 of taxable income in 2011 ($250,000 of AGI, assuming two personal exemptions and the basic standard deduction, indexed from 2009), subject to the 33 percent rate in 2010, will not become subject to the 36 percent rate after December 31, 2010.

Capital gains/dividends

At the same time taxpayers are looking at higher individual marginal income tax rates, the capital gains and dividend tax rates will also increase after December 31, 2010. For 2010, the maximum capital gains and dividends tax rate is 15 percent (zero percent for taxpayers in the 10 and 15 percent brackets). Effective January 1, 2011, the tax rate on qualified long-term capital gains will be 20 percent and taxpayers will pay tax on dividends at the same rates that apply to ordinary income.

President Obama has asked Congress to impose a 20 percent capital gains and dividends tax rate on individuals with incomes above $200,000 (less the standard deduction and one personal exemption indexed from 2009). The 20 percent rate would also apply to married couples filing a joint return with income above $250,000 (less the standard deduction and two personal exemptions indexed from 2009). All other taxpayers would pay capital gains and dividends taxes of 15 percent unless they qualify for the zero percent tax rate.

If Congress does not act, the tax rate on dividends after December 31, 2010 will be the same as that currently for dividends failing to qualify for the current 15 percent rate; that is, the same as a taxpayer's personal income tax bracket.

Limitation on itemized deductions

Along with reducing the individual marginal income tax rates, EGTRRA also repealed the limitation on itemized deductions for 2010, but only for 2010. President Obama has asked Congress to allow the limitation on itemized deductions to return but to modify it for 2011 and beyond. Under the president's proposal, the limitation on itemized deductions would apply to an AGI threshold determined by taking a 2009 dollar amount and adjusting for subsequent inflation. The Obama administration has proposed a dollar amount of $200,000 for single individuals and $250,000 for married couples filing a joint return.

Also impacting higher-income taxpayers is repeal of the personal exemption phase-out. Under EGTRRA, the personal exemption phase-out is repealed for 2010 - but only for 2010.

What's next

Congress likely will vote on the administration's proposal to raise only the top two tax brackets this fall. Whether that vote will come in September or in a lame-duck session after the mid-term elections remains uncertain at this time, as does the outcome of that vote. In the interim, our office will continue to monitor the debate and, as Congress gets closer to a decision, prepare year-end tax strategies that respond most effectively to what Congress decides.

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This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice or opinions on specific facts or matters, and, accordingly, assumes no liability whatsoever in connection with its use. 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.

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