The employee portion of the Social Security tax was reduced from 6.2% of the first $106,800 of wages to 4.2% for 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The employer portion remained at 6.2%.

Under TTCA, the 4.2% rate is extended through February 29, 2012.

The act provides special rules for 2012 so that taxpayers with self-employment income and income from employment in excess of $18,350 (one-sixth of the 2012 Social Security wage base of $110,100) do not receive an extra benefit. If a full-year extension of the payroll tax cut is not enacted, taxpayers with income from employment for January and February that exceeds $18,350 will be required to recapture the excess benefit they receive. The recapture provision was included instead of a cap on the amount of employment income because of the compliance difficulties that would cause employers.

Because the extension affects withholding and was enacted only a little over a week before the higher payroll tax was scheduled to go into effect, it is not clear how well employers and payroll companies will be able to handle that change. The IRS notified employers that they should implement the lower payroll tax rate as soon as possible in 2012, but no later than January 31. The IRS also said that if an employer overwithholds during January, it should make an offsetting adjustment in workers’ pay as soon as possible, but no later than March 31. The IRS will be issuing additional guidance on implementing the provisions of the two-month extension, including revised employment tax forms and information for employees who may be subject to the recapture provision.

A conference committee of representatives and senators will be appointed to discuss extending the reduced rate for the remainder of 2012.

The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will decrease by .5¢ from the July 1, 2011 mid-year adjustment to 23¢ per mile. The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that’s not adjusted for inflation.

In addition to the opportunity to meet businesses face-to-face under one roof, the event will feature two silent auctions of items like $30,000 in advertising; live entertainment; tasting booths hosted by area restaurants; spectacular prizes; lunch for purchase on-site; and much more. It’s a win-win event for everyone!

Click here to view our gallery of former chess set winners.

• When filing for Social Security benefits, does timing matter?
• If married, which of the various filing strategies is best for you and your spouse?
• Should you continue to work while collecting Social Security?
• Should you file early at 62, or wait until full retirement age?

Thursday, 8.25.11
McCauley Nicolas Centre Community Room (Lower Level)
702 North Shore Drive, Jeffersonville, IN
Registration 5pm; Presentation 5:30-6:30pm
Refreshments to follow

RSVP by 8.19.11 to (812) 288-2881 or Jay_Conner@camadvisors.com

Employers who pay the state unemployment tax on a timely basis receive an offset credit of up to 5.4%, which results in an effective FUTA rate of 0.8% (6.2% less 5.4%). With the expiration of the surtax, the effective rate will become 0.6% (6.0% less 5.4%) beginning July 1, 2011.

So what does this mean for employers?

As the IRS noted on June 2, employers should separately track FUTA taxable wages paid before July 1, and FUTA taxable wages paid after June 30, since the FUTA rates are different during those two periods. Employers whose FUTA tax is more than $500 for the calendar year are required to make quarterly FUTA deposits. The next quarterly payment is due on July 31 and is based on taxable wages earned through June 30, so it will be computed using the 6.2% (0.8% effective) FUTA rate. The payment after that is due on October 31, 2011, and it will be computed using the 6.0% (0.6% effective) FUTA rate, assuming legislation is not enacted to retroactively reinstate the FUTA surtax beginning July 1, 2011.

The IRS will have some mechanism in place under which an employer will not be assessed deposit penalties if it computes its third and fourth quarter unemployment tax deposits at a 6.0% (0.6% effective) rate, and legislation is enacted to retroactively reinstate the surtax.

The IRS is developing a new Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2011 that will allow employers to designate two different FUTA rates for the year. That return must be filed in January 2012.

Credit Reduction States

A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is a “credit reduction state”. In 2010, there were three states subject to a reduction of the 5.4% state unemployment tax credit. Indiana and South Carolina had a 0.3% reduction, creating an effective FUTA rate of 1.1% (0.8% + 0.3% credit reduction). Michigan was in its second year as a credit reduction state, so the credit was reduced by 0.6%, resulting in a 1.4% effective FUTA rate.

The unemployment credit reduction states for 2011 will not be announced until November 2011, with payment due January 2012. The credit reduction will apply for the entire year, and will be part of the employer’s fourth quarter FUTA tax liability.

As a heads up, the states that are on the POTENTIAL credit reduction list are:

Michigan – 0.9% credit reduction (third year)

Indiana and South Carolina – 0.6% credit reduction (second year) – potentially making the effective rate 1.4% for January-June 2011 (0.8% plus 0.6%) and 1.2% for July-December 2011 (0.6% plus 0.6%).

Other states that may be subject to a 0.3% credit reduction, resulting in an effective rate of 1.1% for January-June 2011 and 0.9% for July-December 2011, are: Alabama, Arkansas, California, Connecticut, Florida, Georgia, Idaho, Illinois, Kentucky, Minnesota, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Pennsylvania, Rhode Island, Virginia, Virgin Islands and Wisconsin.

For more information, contact Diane Kilner, CPA, Manager of Small Business Services, at (812) 288-6621.

- 55.5 cents per mile for business miles driven
- 23.5 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations (no change)

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On Friday, December 3, 2010, the IRS published their standard mileage rates for 2011. These rates are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. The 2011 rates are:
– 51 cents per mile for business miles driven
– 19 cents per mile driven for medical or moving purposes
– 14 cents per mile driven in service of charitable organizations

The business mileage rate is up 1 cent from 2010, the medical and moving rate is up 2.5 cents, and the charitable mileage rate has stayed the same.

1. pay administrative costs of federal and state workforce agencies,
2. pay the federal share of Extended Benefits (under the Federal-State Extended Unemployment Compensation Act of 1970) during periods of high unemployment, and
3. provide loans to states with insolvent unemployment Trust Funds.

Employers pay FUTA on the first $7,000 of each employee’s annual wages. The FUTA tax is a flat rate of 6.2%, but employers who pay their state unemployment tax timely and in full receive a 5.4% credit. Therefore, the FUTA rate is normally 0.8%.

Federal law provides for a reduction in the FUTA tax credit when a state has outstanding federal loans for two years. The reduction in the FUTA tax credit is 0.3% for the first year, and an additional 0.3% for each succeeding year until the loan is repaid. Currently, Indiana, Michigan and South Carolina have outstanding debt related to their unemployment funds and are “credit reduction states.” The FUTA credit reduction results in a net increase in FUTA taxes and applies to all Indiana contributing employers (except to Indian Tribes, nonprofit organizations, and governmental entities). Since this is the first year for Indiana, the FUTA tax rate for 2010 will be 1.1%.

The designation of a “credit reduction state” is not decided until November of each year, but is made effective as of January 1st of that year. The FUTA credit reduction for Indiana became effective January 01, 2010 and the tax is due on federal IRS Form 940 by January 31, 2011.

Form 940, Part 1, Line 2 is where you indicate that wages were paid in a state that is subject to CREDIT REDUCTION. Schedule A (Form 940), part 2 is the actual calculation for the credit reduction, which is carried back to page 1, line 11 of the Form 940.

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business, paid for with various revenue raisers. Here’s a brief overview of the tax changes in the new law.

Tax breaks and incentives

Enhanced small business expensing (Section 179 expensing)
In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.

The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

100% exclusion of gain from the sale of small business stock for qualifying stock acquired after date of enactment and before Jan. 1, 2011.
Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don’t exceed $50 million, and the corporation must meet active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after date of enactment and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.

General business credits of eligible small businesses for 2010 allowed to be carried back five years.
Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses in 2010 aren’t subject to AMT.
Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.

S corporation holding period.
Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

Extension of 50% bonus first-year depreciation.
Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).

Special rule for long-term contract accounting.
The new law provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Boosted deduction for start-up expenditures.
The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

Limitation on penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.
The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively). These changes are retroactively effective to penalties assessed after Dec. 31, 2006.

Deductibility of health insurance for the purpose of calculating self-employment tax.
The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones removed from listed property category.
This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Offsets (revenue raisers)

Information reporting required for rental property expense payments.
For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).

Increased information return penalties
(effective for information returns required to be filed after Dec. 31, 2010).

Application of continuous levy to tax liabilities of certain federal contractors.
For levies issued after date of enactment, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).

Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions.
For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.

Allow rollovers from elective deferral plans to designated Roth accounts.
The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of date of enactment.

Crude tall oil (a waste by-product of the paper manufacturing process) is excluded from eligibility for the cellulosic biofuel producer credit.
The new law limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., with an acid number of 25 or less), effective for fuels sold or used after Dec. 31, 2009.

Nonqualified annuity contracts.
The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.

Guarantee fees.
Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after date of enactment are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.

Please keep in mind that we have described only the highlights of the most important changes in the new law. If you would like more details about any aspect of the new legislation, please do not hesitate to call us for more information at 812-288-6621, or email Misty Schraer or Diane Kilner.

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act of 2010 to help businesses hire and retain new employees. The Act features a $13 billion tax credit to encourage businesses to hire workers who have been unemployed for at least 60 days, an extension of Build America Bonds used by state and local governments to cut financing costs for infrastructure projects, and an extension of increased expensing limits for small businesses. Here is a quick summary of the Act. For full details of the new law and how it will affect you, please call us.

Payroll Tax Forgiveness for Hiring Unemployed Workers
► Provides payroll tax forgiveness for employers hiring individuals who have been unemployed for at least 60 days, beginning Feb. 3, 2010, and ending Dec. 31, 2010.

Business Credit for Retention of Certain Newly Hired Individuals in 2010
► Gives an additional income tax credit up to $1,000 for employers, equal to 6.2 percent of paid wages for every new employee retained for 52 weeks.

Increase in Expensing of Certain Depreciable Business Assets
► Extends higher limits for Section 179 small business expensing through 2010, allowing small businesses to deduct up to $250,000 from taxable income, but the value is decreased by the amount by which the cost of qualifying property placed in service exceeds $800,000.

Refundable Credit for Certain Qualified Tax Credit Bonds
► Expands the Build America Bonds program to allow issuers of other qualified tax credit bonds used for construction of schools and energy-related projects to receive refundable credits. The bonds provide a direct subsidy of 65 percent of the interest payment to the bond issuer instead of the bond holder.

Foreign Account Tax Compliance
► Imposes a 30 percent withholding penalty on foreign financial institutions that do not agree to disclose their U.S. account holders to the Internal Revenue Service; requires taxpayers to disclose their foreign accounts on their U.S. tax returns; increases the statute of limitations to six years for failure to report certain offshore transactions and income; clarifies when a foreign trust is considered to have a U.S. beneficiary; treats substitute dividend and dividend equivalent payments to foreign persons as dividends for purposes of U.S. withholding; delays implementation of a law that would allow for simpler accounting of worldwide interest allocation until 2021.

Increase in Payment of Corporate Estimated Taxes
► Increases corporate estimated tax payments for corporations with at least $1 billion in assets for the third quarters of 2014, 2015, and 2019.

Please contact us for more information.
Ron Barnes, CPA, PFS
Ken Coyle, CPA
Ken Nicolas, CPA