Unused Estate Tax Exclusion of Deceased Spouses
October 7, 2011 | 
Author The general collective psychosis exhibited by Congress when crafting tax law has been particularly evident in what they have done in the arena of the estate and gift taxes for the last ten years. (“Craft” is probably the wrong word since it connotes skill.)The most recent incarnation is amending the estate tax law in late 2010 to do two important things. The first is to raise the estate exclusion amount to $5,000,000 and the second is to allow “portability”, where surviving spouses may add the unused exclusion amount of their deceased spouse to their own exclusion amount. Those are two good things. Unfortunately these provisions both expire at the end of 2012 continuing the very challenging and uncertain climate of estate planning that has now persisted for over a decade.
Recently the IRS released guidance on the “portability” provision. The guidance alerts executors, of the estates of those dying after December 31, 2010, that a timely filed estate tax return, Form 706, must be filed to make the election to transfer the decedent’s unused estate and gift tax exclusion to their surviving spouse. This is very important because normally no estate tax return would be required for gross estates of less than $5 million.
Action Item for executors or surviving spouses. Estate tax returns are generally due nine months from the date of the decedent’s death. In order to take advantage of the portability provisions for decedents with a date of death after December 31, 2010, an estate tax return must be timely filed within nine months of their date of death, or the extended due date, with an election to transfer the unused exclusion amount.
Posted in Estate and Gift Taxes, tax credits, Tax Deadline, Tax Reduction Strategy, Taxation, Trust Administration, Trusts and Estates | 
Tags: Estate Tax, gift taxes, Health care tax provisions, New Legislation, tax law changes, tax planning, Tax Reduction, Taxation, Trusts and Estates | 
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W-2 Reporting of Employer Sponsored Health Coverage
The Affordable Care Act requires that employers report the cost of employer provided health coverage on each employee’s W-2. Guidance issued by the IRS last year made reporting optional for all employers in 2011. Recently the IRS issued more guidance that makes reporting in 2012 optional for “smaller” employers issuing fewer than 250 W-2’s. The requirement will remain optional for small employers in future years unless the IRS issues other guidance.
Companies that are required to report the information or smaller companies that elect to do so voluntarily can get information on how to do so in IRS Notice 2011-28. Other information is available here.
More on Independent Contractors
Earlier articles discussed the greater emphasis on the employee-independent contractor issue by government tax auditors at all levels, here, and the IRS worker classification amnesty program, here, which was rolled out within the last couple of weeks. Now the IRS and US Department of Labor have announced a joint initiative to share information and collaborate in efforts to “reduce… misclassification of employees as independent contractors, reduce abusive employement/unemployement tax schemes, and improve compliance with labor and tax law”.
Probably, taxing authorities are concerned that poor economic conditions are causing companies to misclassify employees as independent contractors in order to save a few bucks on payroll tax costs. Companies that use independent contractors definitely need to be more careful in insuring they are properly classified and that transactions with independents are well documented to substantiate the classification.
IRS Amnesty Program on Worker Classification
The Internal Revenue Service announced a program that allows employers to resolve their employee versus contractor issues, (see “Contractors vs. Employees”), by reclassifying workers that they have been erroneously treating as contractors in the past. Basically, employers must agree to treat these workers as employees in the future, pay an amount equal to just over 1% of the amount they paid the subject workers in the prior year and then agree to a special six year statute of limitations, rather than the usual three year limitation that applies to taxes.
In return, employers avoid being assessed for payroll taxes, penalties and interest for these workers for past years, and they will not be audited on payroll taxes related to these workers.
To be eligible the employer must have consistently treated workers as contractors, including filing Forms 1099 for amounts paid to them, and the employer cannot currently be under audit by the IRS, the US Department of Labor , or any state agencies that relates to worker classification.
To apply file Form 8952 at least 60 days before you begin treating workers as employees. The IRS press release on this program is here.
Posted in Corporate Taxes, Payroll, Tax audits, Taxation | Tags: Business taxes, Internal Revenue Service, IRS, Payroll, Tax audits, Taxation | 2 Comments »
Proposed American Jobs Act of 2011
The Obama administration submitted the President’s promised “American Jobs Act of 2011” to Congress on September 12. Here are some of the key business “stimulus” provisions.
- It would extend the 100% bonus depreciation deduction, scheduled to expire this year, to the end of 2012.
- It would cut the employer portion of the Social Security tax to 3.1% from the present 6.2% on the first $5 million of payroll.
- It provides a credit for the full amount of employer social security taxes on the amount of wages and salaries that exceed the total amount of wages and salaries paid in the corresponding period of the prior year. This is supposed to provide an incentive for additional hiring and pay increases and it applies to the last quarter of 2011 and all of 2012.
- It proposes an increase in the credit for hiring disabled vets who have been unemployed for six months or more from $4,800 to $9,600. It also creates two new credits for hiring veterans.
- It would create a tax credit of $4,000 for hiring workers unemployed for six months or more.
- It has an individual provision that would reduce the Social Security tax on individuals to 3.1% in 2012, extending and increasing the social security tax reduction in place in 2011.
Hiring an employee is big investment that is driven by demand for a business’ goods and services, not by tax gimmicks. The problem with this bill is that it is unlikely to accomplish the purpose of stimulating job growth. While these provisions would result in reduce labor costs, it is doubtful that it is enough to induce a company to hire someone they would not have already hired without the tax incentives. This bill could be an exercise in futility and a source of further economic uncertainty.
Tax Savings Opportunity – 100% Bonus Depreciation
Business owners may deduct 100% of the cost of qualified business property if they place it in service before the end of the year. The property must be acquired and placed in service after September 8, 2010 and before January 1, 2012. To qualify, the property must have a recovery life of no longer than 20 years, and the original use of the property must begin with the taxpayer.
Taxpayers may elect to use the 50% bonus depreciation provisions instead of the 100%. In that case they have until January 1, 2013 to acquire the property and place it in service.
Contractors vs. Employees
A major issue that often arises in tax audits is the question of whether individuals paid as “independent contractors” are really contractors or whether they should be treated as employees. Taxing authorities at all levels prefer employees for two reasons. First, it is easier and faster to collect taxes from employees. Secondly, the wages and salaries of employees are subject to employer taxes, which do not apply to contractors, including federal and state unemployment taxes and workman’s compensation assessments. The factors that auditors consider in assessing employee vs. contractor issues can be summed up in these three questions.
- How much operational control does the employer exercise over the contractor?
- How much financial or business control does the employer have over the contractor?
- What is the nature of the employer’s contractual relationship with the contractor?
The determination is based on facts and circumstances. The more control an employer exercises operationally and financially, and the more the relationship between the company and the contractors looks like an employment situation, the more likely a contractor will be considered an employee by auditors. Page six and seven of the “Employer’s Supplemental Tax Guide” provides an informative summary of these three areas.
Posted in Corporate Taxes, Payroll, S-Corporation Tax Issues, Tax audits, Taxation | Tags: income taxes, individual income taxes, Payroll, Tax audits | 2 Comments »
Filing Extensions for Partnerships, Trusts, and Estates
The IRS finalized regulations that set the time for automatic extensions of partnership, trust, and estate tax returns. The automatic extension date for these types of entities was reduced from six months to five months under temporary regulations issued in 2008. This change is now final and the automatic extension date is September 15 for these types of entities, reporting on a calendar year basis, and five months following the original due date for fiscal year filers.
The change was implemented to help individual filers get the Schedule K-1’s from partnerships, trusts, and estates needed to file their individual returns by the individual extended due date on October 15.
Form 7004 must be filed on or before the original due date in order to receive an automatic extension for these types of entities.
Tax Audits and Related Party Loans
Get ready to be audited. Taxing authorities at all levels are stepping up audit and collection efforts to help fill the gap in tax revenues created by the bad economy. One area that is often a problem in business audits is the lack of documentation in loans between a business and its owners. No documentation gives auditors the opportunity to re-characterize loans as dividend payments or equity transactions resulting in costly audit adjustments. A few minutes of effort can potentially save business owners thousands in additional taxes, penalties, and interest that result from poor loan documentation. Here are some tips:
- Document related party loans with a promissory note.
- Make sure loans are approved by your Board of Directors, and document that approval in the meeting minutes.
- Insure that the terms of the loans include a market rate of interest.
- Make the payments according to the terms of the note. If the loan is payable on demand, pay the principal and interest off at least annually and make a new loan.
The key here is to provide supporting documentation that clearly demonstrates the intentions and substance of the loan transaction. When it comes to related party loans, ambiguity creates opportunity for tax auditors.
Three Steps to Preventing Fraud
If you run a small business you need to be concerned about fraud. Small businesses are particularly vulnerable to losses from fraud and misappropriation of their resources because they generally have weaker internal controls in place to prevent or detect these problems.
The estimated annual loss from occupational fraud worldwide is $2.9 trillion dollars. The median loss in fraud cases was $140,000 and they lasted 18 months on average before being detected. Ninety percent of the fraud cases involve asset misappropriation.
Fraud usually involves three elements, incentive, opportunity, and rational. By addressing these issues, small business owners can prevent catastrophic losses from fraud. Here are three simple steps:
- Make honesty and integrity an important value in your company’s culture. If dishonest, illegal, or unethical practices are tolerated or encouraged, for the sake of profit, by owners and managers, it makes it easy for an employee to rationalize stealing company resources through some sort of fraud scheme. Good values should be part of the company’s written policy and should be continually communicated to managers and employees.
- Owners should be an integral part of the company’s internal control. Simple steps, such as receiving and reviewing bank statements, signing checks after examining invoices, and looking over an income statement periodically and asking questions can do a lot toward removing opportunities for fraud and detecting problems.
- Take some time to assess the risks of fraud in your organization with particular attention to policies and practices that may create incentives. For example, commission arrangements or bonus arrangements based on financial performance can create an incentive for employees to employ schemes that boost their compensation fraudulently. When your practices create such incentives, it is important to put safeguards in place to prevent or detect fraud.
Being proactive about fraud can protect your company from catastrophic losses that can lead to the failure of your business.