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  Client Advisor
Fall 2011 Issue
     
 
The end of first-year depreciation incentives
In this issue:
 

As we all know, the recession caused Congress to drama­tically increase tax incentives for businesses that expend amounts for capital equipment and certain building improvements. Congress expanded the long-standing Section 179 deduction to the point that it is currently at $500,000 per year. Similarly, Congress added an incentive in the form of 100% bonus depreciation for many new (rather than used) asset additions.

Congress extended these provisions into 2012, but did so at reduced amounts. With the economy gradually recovering and the budget pressures greater than ever, our expectation is that these 2012 limits signal the end of the large first-year deductions.

Overview of Bonus Depreciation
From 2008 through most of 2010, the bonus depreciation deduction was 50% of the cost of new assets. For assets acquired and placed in service from 9/9/10 through 12/31/11, the deduction moves up to 100%. Congress has also extended the deduction into 2012, but at a lower 50% rate. Presently, the tax law does not extend bonus depreciation after 12/31/12, and it appears that any extension is unlikely.

To qualify for either 100% or 50% bonus depreciation, the asset must have its original use commence with the taxpayer (i.e., it is new rather than used property), and must have a depreciable life of 20 years or less. Virtually all tangible personal property (such as autos, trucks, machinery, and equipment) has a depreciable recovery period of 20 years or less and, accordingly, all are eligible.

Overview of Section 179 Deduction
For most of the past decade, the Section 179 deduction was maximized at just over $100,000. When the recession hit, Congress bumped the limit to $250,000, but later increased the amount to $500,000 for tax years beginning in 2010 and 2011. More recently, Congress indicated that for tax years beginning in 2012, the Section 179 deduction would drop back to $125,000 (although inflation indexing is applied, and the actual number should be $130,000-$135,000).

Not only will the Section 179 deduction shrink beginning in 2012, but fewer small businesses will have access to this write-off. During 2011, the deduction phases out only if a taxpayer’s eligible Section 179 asset purchases exceed $2 million. Starting in 2012, the phase-out threshold is $500,000 of asset additions. The Section 179 deduction applies to both new and used asset additions. It applies to machinery and equipment, software and, for 2011 only, up to $250,000 of qualified real property improvements. Qualified real prop­­erty im­provements include improvements to restaurant buildings and interiors of retail and leased nonresi­dential buildings. Farmers can also claim the Section 179 deduction on special use or single purpose agriculture buildings such as bins, drying systems, and livestock barns. However, it is not available for general purpose agriculture buildings such as machine sheds and shops, nor is it generally available to landlords who purchase or construct assets that are used by a tenant.

Quick Reference Chart
The following chart is a summary of the first-year depreciation incentives that are in the law through 2012, as well as the amounts that we expect to be applicable for 2013 and after. The latest legislation from Congress for 2012 seems to signal that these incentives are ending and that the new norm for the Section 179 deduction would be $125,000, although adjusted upward for annual inflation indexing.

Here is the summary chart:
First-Year Depreciation Incentives

If you have any questions regarding details on either the bonus depreciation deduction or Section 179, please contact us. If you are planning on taking advantage of major purchases or improvements while these large allowances are still in the tax law, we recommend that you have a detailed depreciation projection prepared. These depreciation incentives can shelter a significant amout of income, but the eligibility rules can be tricky and it’s important to have an accurate expectation of the deductions that will be coming your way.

1 Fiscal year taxpayers apply the Section 179 limit for the tax year beginning in 2011, 2012, or 2013.
2 The 2012 (and estimated 2013) Section 179 limits are inflation-indexed by reference to 2006.
3 Both new and used asset additions qualify.
4 The asset must have its original use commence with the taxpayer (i.e., only new assets qualify).
5 All taxpayers, regardless of whether reporting on a calendar or fiscal tax year, apply the bonus depreciation % based on which calendar year the asset was acquired and placed in service.


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 End of 1st-year incentives
 ERP software & IT needs
 Inside news
 Foil ID theft
 Fed tax decrease
 IRS extends delay
 Which records to retain
 Estate planning
 Our Archives
 
 
 

Shannon & Associates
1851 Central Place S
Suite 225
Kent, WA 98030-7507
Phone: 253.852.8500
Fax: 253.852.0512
info@shannon-cpas.com
www.shannon-cpas.com

 

 

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Inside news    
 


United way day of caring


We are pleased to announce that for the fifth year in a row Shannon employees participated in the United Way Day of Caring. This event was held all over King County. United Way reports that this was their biggest yet with some astounding figures: 11,000 volunteers, 122 companies, 416 projects completed, and $1.12 MILLION in donated labor. We were fortunate enough to be able to select a local nonprofit, Camp Berachah. We gathered about 15 of our firm members and headed to Camp Berachah the morning of September 16. Our task was to paint their main lodge … keep in mind … accountants we are … painters we are not!  Fortunately, we had several staff members who were very comfortable on ladders, one staff member that even worked his way through college working for a painting organization, and many of us have painted our own homes. So with all those years of expertise, together we finished the lodge in one day, and the transformation was amazing. We had a great time working together for a great organization. A little about Camp Berachah: For over 35 years, they have been providing events and camps for thousands of youth, adults, families, and churches throughout the Pacific Northwest. Their unique retreat and conference center is host to over 300 groups and 20,000 people every year. Aside from their popular summer camps, their wide variety of programs and facilities are available for Christian churches, non-profit organizations, and families.  They are conveniently located in Auburn, Washington – just 40 minutes south of Seattle and Bellevue and 40 minutes north of Tacoma. In 1985, Camp Berachah asked people to "Catch the Vision" that was Camp Berachah, which began a period of new development and expansion. Today, they are carrying on that vision and have begun a new five-year plan to "Capture the Future" by adding facilities and programs that will meet the Christian camping and conference needs of future generations. For more information on Camp Berachah, you can find them on the web at www.campberachah.org

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Freeze your credit to foil identity theft    
 

Each year, millions of Americans fall victim to fraudulent schemes stemming from identity theft. Someone might use your personal information to charge goods and services on a bogus credit card; in another scenario, a thief might obtain a loan using your name and make no effort to repay the money. In some cases, the identity theft can be cleared up fairly easily, with little or no financial loss. Other victims, however, spend months or even years attempting to recover financial losses and repair their credit ratings.

To minimize your risk in this area, it makes sense to take some basic precautions. Don’t reveal personal information unnecessarily, use passwords to protect online accounts, and shred financial documents you don’t need to retain. In addition, you can monitor your credit reports regularly to spot suspicious activity.

There are three major credit bureaus that gather information on how consumers use credit, then sell the data to parties that have a legitimate reason for asking, such as mortgage lenders. Those credit bureaus are Equifax, Experian, and TransUnion. At www.annualcreditreport.com, you can get one free credit report from each bureau every 12 months. With careful planning you can access your credit report every four months, at no cost. For example, you might request your credit report from Equifax in September 2011, from Experian in January 2012, and from TransUnion in May 2012. Then you can start the cycle all over in September 2012.

Once you have your free credit report, you can verify the information and file a complaint with that credit bureau if you find errors. The credit bureau must investigate and correct any misinformation it confirms. Although each credit bureau is responsible for notifying the other two credit bureaus if an error is corrected, you may want to follow up to make sure all of your credit reports are updated.

In addition to getting your free credit reports regularly, you also may want to sign up for a credit monitoring service. These services, offered by a wide variety of companies, will notify you of any new or unusual activity on your credit accounts. Fees might be $10–$15 a month.

Cold Comfort
Relying on free credit reports and credit monitoring services may help you discover identity thefts but won’t prevent them from happening. There may be a considerable time lag between the fraud’s occurrence and your learning that you have been victimized.

For prevention, you can initiate a security freeze, also known as a credit freeze. For a complete freeze, you must notify all three credit bureaus. At www.equifax.com, www.experian.com, and www.transunion.com, you can learn the required procedures. Generally, you must provide certain personal information and pay a modest fee. Depending on your state of residence and whether or not you’ve been a victim of identity theft, those fees range from zero to $20. Thus, you can freeze access to your credit report at all three credit bureaus for $60 or less.

Once you freeze your credit in this way, new creditors won’t have access to your credit report. Thus, thieves are unlikely to get new credit cards, auto loans, cell phone contracts, etc., in your name. As long as you are not applying for credit, you won’t miss this access. You can still use your existing credit cards, for instance. Also, at any time you can temporarily lift this freeze for up to 30 days if you need credit. The fee for a temporary lift is comparable to what you’d pay to establish the freeze in the first place.

Security freezes won’t provide absolute prevention of identity theft, but they can deliver a valuable extra layer of protection. They are especially worthwhile if you don’t anticipate the need for a credit check in the foreseeable future.

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Federal Unemployment tax rate to decrease from 6.2%
to 6.0%
   
  Starting July 1, 2011, the federal unemployment tax rate (FUTA) dropped from 6.2% to 6% of applicable wages. The tax applies to the first $7,000 paid to each employee as wages during the year. Generally, an employer can take a credit against the FUTA tax for amounts the employer pays into state unemployment funds. This credit can be as much as 5.4% of FUTA taxable wages. The net FUTA tax rate after the credit, therefore, went from 0.80% to 0.60% on July 1, 2011.

The employer is entitled to the maximum credit if they paid in their state unemployment taxes in full, on time, and are not in a state that has been determined to be subject to credit reduction.

A credit reduction state is a state that has not repaid the money it borrowed from the federal government in order to pay its unemployment benefits. For 2011, the Department of Labor determined that these states are Indiana, Michigan and South Carolina. Employers will need to track and separate any wages paid in the second half of the year and calculate the FUTA tax at the lower rate. So check your payroll calculations and reset your rates.

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IRS extends delay of health care reporting requirements for small businesses    
 

Last year’s health care reform legislation, the Patient Protection and Affordable Care Act (the “Act”), requires certain information reporting by employers relating to employer-sponsored health care insurance coverage for tax years beginning on or after January 1, 2011. The Act generally requires that the aggregate cost of the applicable employer-sponsored health care insurance coverage must be reported to employees on Form W-2.

Previous guidance issued last October made the new reporting requirement optional for all employers for the 2011 Form W-2 (which will typically be provided to employees in January 2012). The IRS has now issued interim guidance further extending the Act’s optional health care insurance coverage information reporting requirements for small employers through at least 2012 (or until further guidance is issued by the IRS, if later). It should come as welcomed relief, as small employers won’t be required to report the cost of health insurance coverage on any forms required to be provided to employees until January 2014 — at the earliest.

Under the Act, a small employer is considered one who files fewer than 250 Forms W-2. The complete guidance for larger employers who are subject to the information reporting requirements for the 2012 Form W-2 (and to those who choose to voluntarily comply with the reporting requirements in either 2011 or 2012) can be found in IRS Notice 2011-28 (which can be accessed at www.IRS.gov).

Let us know if we can be of further assistance relating to the Act’s information reporting requirements.


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Which tax records to retain    
 

Which tax records to retain and for how long?

Once you have gathered 2010’s tax-related records and filed the required returns, you may be inclined to dispose of certain current and past year tax information. However, you should be aware of the rules for retaining relevant tax records in the event that the IRS — or another taxing authority — wants you to produce those records as part of an audit.

Individual Taxpayers
Keep at Least Three Years — The following records are commonly used to substantiate a taxpayer’s income and expense items:

  • Form(s) W-2
  • Form(s) 1099
  • Form(s) K-1
  • Bank and brokerage statements
  • Canceled checks or other proof of payment of deductible expenses
At a minimum, the above tax records should be kept for a three-year period following the date that you file your return (or its due date, if later).

Six Years May Be Necessary — However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, yet no fraud was discovered, is six years. Therefore, retain the above documents for at least six years to better protect yourself in the event of an audit.

Investment Records — Similarly, you’ll want to keep investment sales records after you liquidate an investment. Documentation that substantiates the gain or loss on an investment should be kept for the period that you retain other tax documents supporting the return on which you report the sale.

Prior Years’ Tax Returns — It is a good idea to maintain one or more permanent files with important legal and personal documents, including those relating to taxes. Specifically, as a general rule, you should retain copies of your federal and state income-tax returns (and any tax payments) indefinitely.

For instance, the IRS (or another taxing authority) could claim that you never filed a particular year’s return. If that occurs, the IRS could assess tax and penalties relating to the return in question. You will need a copy of your return to bolster your position that you actually filed the return.

Business Taxpayers
It is an employer’s responsibility to keep accurate, up-to-date business records. Similar to the concern of an individual taxpayer, businesses — especially small businesses — need to be prepared for the possibility of an audit.

Employment Tax Records — Employment tax records must be maintained for at least four years after the later of the due date of the tax return for the period to which the records relate or the date the tax is paid. The penalties for noncompliance can be harsh. These records should include the following information:
  • Employer identification number (EIN);
  • Amounts and dates of all wage, annuity, and pension payments;
  • Amounts of tips reported;
  • The fair market value of in-kind wages paid;
  • Names, addresses, Social Security numbers, and occupations of employees and recipients;
  • Employee copies of Forms W-2 that were returned as undeliverable;
  • Dates of employment;
  • Periods for which employees and recipients were paid while absent due to sickness or injury, and the amount and weekly rate of payments made to them by the employer or third-party payers;
  • Copies of employees’ and reci­pients’ income-tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V);
  • Dates and amounts of tax de­posits;
  • Copies of returns filed;
  • Documentation for allocated tips; and
  • Documentation for fringe benefits provided, including appropriate substantiation.
Pass-through Business Entities —
If you are an owner in a subchapter S corporation, LLC, LLP, or a limited partnership, you should retain a copy of the annual Form K-1 for as long as you own an interest in the entity plus four additional years. Also, keep any paperwork related to the sale or other disposition of your interest for at least four years after the disposition.

Corporate Income Tax Returns —
It is highly advisable that you retain copies of all corporate tax returns indefinitely.

Other Business Records —
In addition, you should keep the following business records indefinitely in case of a tax audit:
  • Board minutes
  • Bylaws
  • Business licenses
  • Contracts, leases and mortgages
  • Patents/trademarks
  • Shareholder records
  • Stock registers/transactions
  • Employee benefit plans, including pension/profit sharing plans
  • Real estate purchases
  • Construction records
  • Leasehold improvements
  • Annual financial statements
  • Fixed asset purchases
  • Depreciation schedules
The following business records should be retained for at least seven years:
  • Accounts payable/receivable
  • Inventory records
  • Loan payment schedules
  • Expense records
  • Sales records
  • Purchase orders
  • Bank statements
  • Cancelled checks
  • Loan records
  • Electronic payment records
  • Payroll records
We Can Help
Filing your tax returns on time is just one part of properly handling your taxes. Make sure you can defend yourself in event of an audit by properly retaining your tax records. Please let us know if we can be of assistance in any way.

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Don't take a vacation from estate planning    
  According to the National Association of Realtors’ 2011 Investment and Vacation Home Buyers Survey, there are 7.9 million vacation homes in the United States. Many people like the idea of going to their own place for weekends and longer stays. Owners may dream of seeing children and grandchildren get together for wonderful family experiences at a treasured vacation home.

These experiences may happen during the owner’s lifetime, but reality can be quite different after the owner’s death. If a vacation home owner leaves the house to more than one heir, serious disputes can arise. The new owners may not agree on capital expenses or who should pay them.

Example: Jim and Karen Warner bought a New Jersey beach house decades ago. Over the years, their children and then grandchildren spent time there. Jim died and left the beach house to Karen who left it equally to their three children at her death.

The oldest child, Chris, now works for a software company in California and never uses the New Jersey beach house. Sarah, a prosperous real estate attorney in New York, uses the house often with her husband and her three children. Emily, the youngest, is an aspiring but as yet unsuccessful actress and novelist who uses the house infrequently. After a severe winter, Sarah wants to hire a roofer for extensive and expensive repairs, but Emily doesn’t think they’re necessary. Chris doesn’t bother to respond to calls or emails about the roof contract; he doesn’t intend to pay one-third of the cost if a roofer is hired.

Avoiding Acrimony
Such an outcome may be the norm rather than the exception if a vacation home is simply left to more than one individual. Therefore, if you own a vacation home, it should be integrated into your estate plan. Be realistic about the prospects of the new owners handling the bequest without disputes.

One solution is to sell the vacation house while you are alive, perhaps when family use has declined. Any profit probably will be taxed as a long-term capital gain, which now qualifies for a favorable tax rate. The sales proceeds can be given or bequeathed to your heirs who can buy their own vacation home or use the money for other purposes. If you do not sell your vacation home while you are alive, your designated heir or heirs could inherit during a weak real estate market and therefore be stuck with ongoing expenses as well as a property that’s difficult to sell.

Another approach is to leave the house to just one child while equalizing inheritances. In the Warner family example, Karen might leave the house to Sarah, the attorney, who is most likely to use the house, and bequeath other assets of comparable value to Chris and Emily. Without the beach house to promote discord, Sarah might invite her siblings for occasional visits.

Alternatively, the owner of a desirable vacation home might place the property in trust or in a limited liability company (LLC). Some funding could be provided to cover the operating expenses, and the trust or LLC documents could describe a procedure for the buyout of a beneficiary who would rather have cash than the right to use the home.

If this arrangement appeals to you, our office can help you determine the necessary funding to keep your vacation home a family retreat.

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  Call 253.852.8500 or email to find out more.