DEDUCTIBLE CHARITABLE DONATION REQUIREMENTS

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Individuals and businesses making deductible contributions to charity need to be aware of the charitable deduction requirements.    To be deductible, donations of clothing and household items generally must be in good used condition or better.  A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

To deduct any donation of money, by cash, check, electronic funds transfer, credit card or payroll deduction, a taxpayer must have a written bank record, pay stub or other written communication from the charity and/or employer showing the name of the charity, the pledge amount, and the date and amount of the contribution.  The taxpayer is also required to obtain an acknowledgment from a charity for each deductible donation of $250 or more.

To help taxpayers , a recent IRS announcement offers the following additional reminders:

• Contributions are deductible in the year made. Donations charged to a credit card before the end of 2012 count for 2012.  Likewise, checks count for 2012 as long as they are mailed in 2012.
• You need to check that the organization is qualified. Only donations to qualified organizations are tax-deductible.  The IRS maintains a searchable online database listing most organizations that are qualified to receive deductible contributions. In addition, most churches, synagogues, schools and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
• For individuals, only taxpayers who itemize their deductions can claim deductions for charitable contributions.
• For all donations of property, including clothing and household items, you should get from the charity, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property.
• Your deduction for a motor vehicle, boat or airplane which you donate to charity, and which is intended to be sold by the charity, is generally limited to the gross proceeds of the sale.
• If the amount of your deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be attached to your tax return.
• It is important to keep good records and receipts.

 If you have any questions about the charitable deduction requirements, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

 AND ONE MORE THING.  The IRS has recently released a changed  Voluntary Classification Settlement Program.  Whether a worker is an independent contractor or employee is determined by whether the company he works for has the right to control and direct him regarding the job he is to do and how he is to do the job.  Multiple factors are used to determine if a worker is an employee or contractor.  Section 530 of the 1978 Revenue Act provides relief from employment tax liability for employers who misclassified workers as independent contractors. But under Section 530, this relief applies only if:

1. The taxpayer does not treat the worker in question or any similarly situated worker as an employee for any period;
2. all federal returns required to be filed by the taxpayer with respect to the worker for such period are filed on a basis  consistent with the taxpayer's treatment of the worker as a nonemployee; and
3. The taxpayer had a “reasonable basis” (such as a court case or IRS rulings, a past IRS audit, or a long-standing practice of a significant segment of the relevant industry) for not treating the worker as an employee.

The IRS had previously instituted a Program granting relief to taxpayers based on the Section 530 requirements. The IRS has now issued an Announcement granting relief to taxpayers that didn't qualify for the Program solely because they had not filed all required Forms 1099.  In addition, the IRS recently amended the Program eligibility requirements to: (1) allow a taxpayer under IRS audit (other than an employment tax audit) to be eligible to participate in the program; and (2); eliminate the requirement that a taxpayer agree to extend the statute of limitations for employment taxes in order to participate in the program.

If you are interested in learning more about the Voluntary Classification Settlement Program or have questions about how to correctly classify workers for employment tax purposes, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

Shrinking Depreciation Deductions by Guest Blogger Todd Roberts

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Todd Roberts is a regular reader of SenneySays. Todd forwarded the following article he wrote on “Shrinking Depreciation Deductions.” This article is well-written and timely. There is still time to take advantage of the generous bonus depreciation and Section 179 depreciation deductions.  Check out Todd’s article below.

SHRINKING DEPRECIATION DEDUCTIONS (abridged and reprinted with permission)

 End of year tax planning for businesses is especially difficult for 2012 because many significant provisions are scheduled to expire and it is not clear what Congress intends to do.  The lack of certainty makes year-end planning more challenging.  However, business owners’ can still act to lower their taxes by taking advantage of the generous bonus depreciation and Section 179 expense deductions available thru the end of 2012.

Bonuses Depreciation Deduction Shrinks.  For most of the past decade, Congress encouraged business owners to invest in expansion and revitalization of their businesses by purchasing new property and equipment.  Most recently, the bonus depreciation provisions were expanded in 2010.  The law allowed first-year depreciation of qualified property equal to 100 percent in years 2008 – 2011.  A deduction of 50 percent of the asset’s cost is allowed for qualified property placed in service after 2011 and before January 1, 2013.  But property placed in service in 2013 is not eligible for bonus depreciation at all.   This will significantly reduce the first-year depreciation deduction on most business assets, thereby extending the time of cost recovery.  Companies that are contemplating investing in depreciable property should consider putting this new business equipment in service before December 31, 2012.

Vehicles.  For new passenger autos and light trucks used 100 percent for business and subject to the luxury auto depreciation limitations, the bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service in 2012.  Under current law, there is no bonus depreciation or extra $8,000 auto or light truck depreciation limitation after December 31, 2012.  Taxpayers can deduct up to $25,000 of the cost of new SUV, if it is rated at more than 6,000 pounds gross vehicle weight, as a business expense in the placed-in-service year.  In addition, the remaining cost of the new SUV place-in-service in 2012 is eligible for 50 percent first-year depreciation.

Expensing (Section 179).  A similar cost recovery provision in place for many years allows businesses to deduct some or all of the costs of acquiring depreciable assets, commonly called Section 179.  Unlike bonus depreciation, which is generally available to all businesses regardless of size and without limitation on the amount of business property acquired during the year, Section 179 is subject to several limitations that generally result in Section 179 expensing only for smaller and less capital-intensive businesses.  The maximum amount a business can expense for a tax year beginning in 2012 is $139,000 of the cost of qualifying property placed in service for the tax year.  The $139,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2012 exceeds $560,000 (the investment ceiling).  For tax years beginning in 2013, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000.  The time of purchase does not affect the amount of the expensing deduction.  A business can purchase property late in the year and still get a full expensing deduction.  This means that if a business is thinking of purchasing in early 2013, they might want to accelerate the purchase to 2012.

Conclusion.  The bonus depreciation provisions and increased annual Section 179 deduction limits have reduced the after-tax costs of acquiring business property by accelerating the tax deductibility of some or all the costs of acquiring the assets over the past several years.  As a result, the provisions have proven very popular with businesses.  With favorable tax treatment still in place for 2012, businesses should contact their tax advisor to discuss the after-tax costs of acquiring depreciable business assets in 2012 versus 2013.  Call me at Jsenney@pselaw.com or 937-223-1130 if you have any ideas for an article or would like to submit one yourself.



AND ONE MORE THING.   Ohio has recently amended its corporate dissolution statute. If you are owed money by a corporation that is dissolving, you can be adversely impacted if you do not act in a timely manner.  The dissolving corporation is now required to give notice of dissolution to each known creditor and to each person that has a claim against the dissolving corporation. The notice will advise that you must file a claim for what you are owed and a deadline for filing the claim must be fixed. The deadline must be at least 60 days following the date the notice is given. The claim must be in writing and must “identify the claimant and contain sufficient information to reasonably inform the corporation of the substance of the claim.”  IF YOU DO NOT FILE A CLAIM BY THE DEADLINE THEN ANY CLAIM YOU HAVE AGAINST THE DISSOLVING CORPORATION IS BARRED.  This is not something you can set aside until you have time to deal with it. Failure to file a timely claim is fatal.  if you have a claim against a corporation and receive a Notice of Dissolution, you need legal counsel to advice on the technicalities of the new statute or you may have your claim barred.  Please contact one of our Business Attorneys at 937-223-1130 for guidance on these matters.

Avoiding the New Additional 0.9% Medicare Tax

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Under the Patient Protection and Affordable Care Act, starting in 2013, a new 0.9% Medicare surtax will be imposed on wages and self-employment (SE) income in excess of certain modified adjusted gross income thresholds. These threshold amounts are $250,000 for joint filers, $125,000 for married-filing separate filers and $200,000 for all other taxpayers.  The employer portion of the Medicare tax is not increased.

The additional 0.9% medicare tax applies to wages and self-employment income.   Partnership income allocations are considered self-employment income.  S corporation distributions are not.  For this reason, taxpayers that are setting up a new business entity should strongly consider setting up an S corporation or an LLC taxed as an S corporation.  For the same reason, taxpayers who are currently operating as a partnership or an LLC taxed as a partnership, should strongly consider converting to an LLC taxed as an S corporation.  The conversion from partnership tax format to S corporation tax format can generally be done with little or no tax consequences.

Other creative strategies that taxpayers are implementing to reduce self employment income include: renting real property to the taxpayer’s business so cash can be distributed as rent versus wages, and hiring family members in the business to distribute the income among more persons and stay under the thresholds.

If you have any questions about the additional 0.9% Medicare tax that will be imposed starting January 1, 2013, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    The IRS has also released rules for the additional investment income surtax that was passed Congress as part of the 2010 healthcare reform law.  The 3.8 percent surtax on investment income goes into effect in 2013 and applies only to capital gains and dividend income.  It is unclear how rental income will be treated under the new rules.  The surtax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.   If you have questions or comments on the new 3.8% surtax, please give us a call at 937-223-1130 or Jsenney@pselaw.com.

Additional Medicare Tax Goes into Effect in 2013

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The IRS has issued guidance on the new rules that impose an additional 0.9% Medicare tax on wages and self-employed income above a threshold amount received in tax years beginning after Dec. 31, 2012.  The guidance comes in the form of 47 pages of Regulations.  The new tax is in addition to the regular Medicare rate of 1.45% on wages received by employees with respect to employment. The tax only applies to the employee portion of the Medicare tax. The employer Medicare tax rate remains at 1.45%, and the employer and employee Social Security tax remain at 6.2%.

Employer.  For 2013, an employer pays a 7.65% FICA tax, consisting of:

    6.20% Social Security tax on the first $113,700 of an employee's wages, plus
    1.45% Medicare tax on the employee's total wages.

Employee.  For 2013, an employee pays:

    6.20% Social Security tax on the first $113,700 of wages, plus
    1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns), plus
    2.35% Medicare tax on all wages in excess of $200,000 ($250,000 for joint returns).

Self-Employed.  For 2013, the self-employment tax imposed on self-employed people consists of:

    12.40% OASDI on the first $113,700 of self-employment income, plus
    2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 for a joint return), plus
    3.80% on all self-employment income in excess of $200,000 ($250,000 for a joint return).

Withholding.  Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. The employer need not notify the employee that additional withholding has commenced. Where a payment to an employee causes him to exceed the $200,000 threshold, the additional withholding tax applies only to the portion of the payment that exceeds the threshold.   The 0.9% additional Medicare tax may be owed on the employee's income tax return where withholding is not collected for it.  For example, the employee would have to pay the additional tax with his or her income tax if the employer failed to withhold.  The employee would also have to pay the additional tax if husband and wife both have wages below $200,000, but together are in excess of $250,000.

Various Benefits Subject to the Additional Tax.  The additional Medicare tax applies to “wages” in excess of the thresholds.  But the regulations make it clear that “wages” include not just cash compensation from the employer, but also taxable noncash fringe benefits, group term life insurance in excess of $50,000, nonqualified deferred compensation, tips and other forms of employee fringe benefits.

Self-employed Persons Who also have Wages.  Calculating the additional Medicare tax for taxpayers (single or joint) who have both self-employment income and wages is a bit bore complex.  Such taxpayers calculate their liabilities for the additional Medicare tax as follows:

    Calculate the additional tax on wages over the applicable threshold for their filing status.
    Reduce the applicable threshold for their filing status by the amount of wages received.
    Calculate the additional Medicare tax on self-employment income over the reduced threshold.

If you have any questions about the additional Medicare tax that will be imposed starting January 1, 2013, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    The IRS has also released rules for the additional investment income surtax that was passed Congress as part of the 2010 healthcare reform law.  The 3.8 percent surtax on investment income goes into effect in 2013 and applies only to capital gains and dividend income.  It is unclear how rental income will be treated under the new rules.  The surtax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.   More on this in a future blog.  If you have questions or comments on the new 3.8% surtax, please give us a call at 937-223-1130 or Jsenney@pselaw.com.