Tax Relief/Job Creation Act of 2010 - Payroll Withholdings Impact

The IRS tells employers (Notice 1036) to implement the new withholding tables as soon as possible and no later than Jan. 31, 2011.


The 2011 withholding tables reveal the continuance of the lower tax rates first ratified by the Economic Growth and Tax Relief Reconciliation Act in 2001. They also reflect the lower Social Security tax rate for employees (4.2%), instituted for 2011 by the Tax Relief act. Employers are instructed to execute the new lower 4.2% Social Security tax rate as soon as possible, and not later than Jan. 31, 2011. They are also instructed to make an offsetting adjustment in a later pay period—but no later than March 31—to correct for any overwithholding of Social Security tax that may have occurred at the start of the year from a failure to adjust for the 4.2% .

Employers are reminded of two expired tax items that have not been extended by the Tax Relief bill. There is no adjustment for the Making Work Pay Credit in the 2011 tables, as it expires at the end of 2010, and any additional withholding adjustment for pensions will cease. The ability to elect to receive advanced earned income credit payments also expires at the end of 2010.

KEY POINTS

Must implement new tables no later than 1/31/2011- see the attached Notice 1036 for details. 

Social Security wage limits – no change from 2010 base limit of $106,800.             

Medicare – no wage base limit to Medicare withheld.

Making work pay credit expires 12/31/2010.

There will no longer be any Earned Income Credit available in advance as a payroll adjustment.


Follow the attached link to view the compete IRS Notice 1036. http://www.irs.gov/pub/irs-pdf/n1036.pdf

For more information on how this will affect you and your business, please don’t hesitate to contact either of our offices. We will be happy to discuss exactly what these changes will mean for you.

Dover, Delaware                                             Ocean City, Maryland

302-674-4305                                                      410-213-8700

Small Business Jobs Act of 2010

Recently Congress passed the Small Business Jobs Act of 2010. The Act's purpose is to provide tax incentives for small businesses during these tough economic times. Some of these provisions may be useful to you and may present planning opportunities for the remainder of the year. Here are some of the highlights that we want to bring to your attention.


Bonus Depreciation and First Year Write Off of Qualified Assets


In an attempt to spur economic activity, for the last few years Congress has increased the amount of depreciable assets placed in service that taxpayers are allowed to deduct (the deduction). As 2010 began, the deduction was limited to $250,000. However, this amount is reduced by the amount by which the cost of property placed in service during the year exceeds a certain threshold amount. For 2010, the threshold amount was set at $800,000.

 Congress has increased both the amount and the corresponding threshold amount for both 2010 and 2011. For 2010 and 2011, the amount is increased to $500,000, and the phase-out, or threshold amount is increased to $2 million. This may provide you with some planning opportunities.

Congress has also temporarily expanded the definition of qualifying property to include certain real property - specifically, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The maximum amount that may be expensed for such real property is $250,000. If it's advantageous to your particular situation, however, you can elect to exclude real property from the definition of property.

In addition to allowing a greater deduction, Congress is also extending the additional 50% first-year bonus depreciation deduction into 2010. The extension applies for qualified property acquired and placed in service during 2010. With this change, first-year depreciation limitations on automobiles is increased by $8,000. Therefore, for 2010, the first-year depreciation deduction for business cars placed in service in 2010 is $11,060.

Deduction for Health Insurance Costs

Effective for tax years after December 31, 2009, health insurance costs of Self-Employed Individuals will be taken into account when calculating net earnings from self-employment, for purposes of the tax on Self-Employment Income.

Rental Property Expense Payments

Effective for payments made after December 31, 2010, rental income recipients who made payments of $600 or more to a service provider (e.g., a plumber, painter, or accountant) in the course of earning rental income now will have to provide a Form 1099-Misc to the IRS and service provider.


It is important to note that the penalties for everyone who does not file the required Form 1099-Misc. have been heavily increased.

General Business Credit Carrybacks

For business tax year beginning in 2010, Congress has extended the one-year carryback to 5 years for an eligible small business. Additionally, Congress has provided that this eligible small business credit may offset both regular and alternative minimum tax liability. For these purposes, an eligible small business is a non-publically traded corporation, or a partnership, if the annual gross receipts of the entity for the three-tax-year period ending with the prior tax year does not exceed $50 million. For sole proprietors, this $50 million test is applied as if it were a corporation.

This provision will allow some eligible small businesses to take advantage of the general business credit at an accelerated rate, rather than possibly having to carry the credits forward up to 20 years.

Some of the eligible small business credits included are:

Research & Development (R&D) Tax Credit

Work Opportunity Credit

Low-Income Housing Credit

Temporary Reduction in Recognition Period for S Corporation Built in Gains Tax

The recognition period for the Built in Gains Tax is normally a 10 year period from the point of C corporation conversion to an S corporation. Provisions within the American Recovery and Reinvestment Act of 2009 state that for any taxable year beginning in 2009 and 2010, no built in gains tax is imposed on the corporation for built-in gains if the seventh taxable year in the corporation's recognition period preceded such taxable year. Under the Small Business Jobs Act of 2010, for taxable years beginning in 2011 the seventh year is replaced with five years following the date which the entity became an S corporation.

Start-Up Expenses


For new businesses in the 2010 year, $10,000 may be expensed with a phase out after $60,000 of qualified Start-Up expenses. This was a $5,000 amount with a $50,000 phase out.

Temporary Exclusion of 100% of Gain on Certain Small Business Stock

Section 1202 provides that individuals may exclude 100% of gain from the sale of certain small business stock (must be a C corporation) acquired between September 28, 2010 through December 31, 2010.

Additional Tax Highlights

E-Filing Mandate for Individual Federal Returns

Beginning January 1, 2011, tax preparers filing 100 or more federal individual returns are required to file returns electronically. The "100 or more" is replaced with "11 or more" in 2012.

The IRS will release regulations for taxpayers to opt out of electronic filing if they so chose.

Delaware: Retail Beverage Container License and Recycling Fee

Beginning December 1, 2010, the State of Delaware now requires any person or business engaged as a retailer in selling any "beverage" in beverage containers must obtain a State of Delaware Retail Beverage Container Business License (at no cost) for each location at which beverage containers are sold and remit to the State a Recycling Coupon with the $0.04 Recycling Fee for each beverage container sold.

This fee applies only to non-aluminous containers containing less than 2 quarts of beverage under pressure of carbonation. This requirement expires December 1, 2014.

Letter to Congress seeks to Repeal New 1099 Reporting Requirements

Recently, the U.S. Chamber of Commerce initiated an effort with more than 1,000 local Chambers of Commerce, business associations, and companies of varying sizes in composing a letter to Congress calling for a repeal of the 1099 reporting mandate that is part of the new health care law. This tax filing requirement imposes a significant burden on nonprofits, governments, and especially small businesses.

"The 1099 reporting mandate will impose substantial
reporting and paperwork requirements on these entities,
with the largest burden falling on small businesses,
who may have limited resources."

"By including this burdensome reporting requirement in the health care bill, Congress prioritized regulation ahead of job creation," said Bruce Josten, Executive Vice President of Government Affairs at the U.S. Chamber. "Small businesses will now have to spend time and money implementing new accounting systems and filling out stacks of forms instead of growing their businesses and hiring new employees."

The letter emphasizes the business community's commitment to repealing Section 9006 of the Patient Protection and Affordable Care Act prior to it going into effect in 2012.

What impact could this have on your small business?

     • Forty million entities - including businesses of all sizes, nonprofits, and governments will be required to    report to the IRS on virtually all non-credit card purchases totaling $600 or more from any vendor in a tax year;

     • The 1099 reporting mandate will impose substantial reporting and paperwork requirements on these entities, with the largest burden falling on small businesses, who may have limited resources;

     • Compliance will require these entities to institute complex record-keeping systems that can track every purchase by vendor and payment method;

     • This provision will dramatically increase accounting costs, expose businesses to costly and unjustified IRS audits, and subject more small businesses to the challenges of electronic filing.

Take Action - Sign the Petition to Congress

Take action today! Read the letter sent by the United States Chamber of Commerce to the United State Congress and if you are inclined, please sign the petition. To read the letter or to become a signatory, click here.

If you would like clarification on any of the points made in the letter or on how this new reporting mandate could affect you and your small business, please call Faw, Casson & Co., LLP at 302-674-4305 or 410-213-8700.

Restaurant Employers May Not Be Able to Claim a Full Tip Credit for Certain Tipped Employees

Normally, tipped employees are paid a fraction of the federal minimum wage ($2.23 in Delaware, $3.63 in Maryland). Tips collected that place the employee’s hourly wage above $5.15 are eligible for a federal credit equal to 7.65% of the excess tips.

A recent federal court ruling denies the tip credit for employees who spend a considerable amount of time performing tasks for which they will receive no tips. Department of Labor regulations state that if an employee spends more than 20% of their time performing general preparation work or maintenance, the tip credit cannot be claimed for that time and the employee would be paid federal minimum wage for those hours.

Applebee’s was taken to court by former and current servers and bartenders. The plaintiffs testified that Applebee’s required them to clean and set up the restaurant before it opened and after it was closed. They were required to clean bathrooms during their shifts, to sweep the restaurant, to clean and stock service areas, roll silverware, and do other duties not directed at specific customers. Applebee’s claimed the tip credit for all work performed by servers and bartenders, even when more than 20% of their time was spent in preparation and maintenance.

The court’s ruling against Applebee’s said it is up to the plaintiffs to provide evidence of hours not properly compensated. If Applebee’s cannot provide documentation of the hours the employees spent on specific duties, then the burden of proof will fall on Applebee’s to show that the plaintiffs’ calculations were unreasonable.

Delaware Revamps Gross Receipts Tax Filing System in 2010

In an effort to reduce costs in Delaware, the State is strongly encouraging businesses to file their gross receipts tax returns online and has ceased mailing out gross receipts tax coupon booklets to area businesses.

Submitting your gross receipts tax online at www.revenue.delaware.gov will continue to be free. The information will be kept secure by Department of Revenue’s security software and will be safe and confidential. This new system was created with the help of the business community and its leadership and should save time and money for both the State and the taxpayers.

“This is just one of the many changes that are taking place in state government to make our operations more efficient. By not mailing gross receipts tax booklets, we estimate that the State of Delaware will save over $100,000 annually in printing and postage costs,” Secretary of Finance Thomas J. Cook said. “Delaware’s gross receipts filing system has been fully tested and we are confident that this is a service businesses want. Paying taxes online is a convenience. No need to first find a remittance coupon or mail a payment, both of which cost businesses time and money,” said Patrick Carter, Director of Revenue for the State of Delaware.

To assist businesses with this change the Division of Revenue is launching two new services. One is “Live Support” or “Live Chat” where businesses can communicate with a Revenue Customer Representative online to help them with any questions. The other is an on-line tutorial program that shows businesses how to file these tax returns. Both services are available through Revenue’s webpage.

Businesses that wish to mail their coupons instead of filing online can still print a paper coupon from the Division of Revenue website: www.revenue.delaware.gov. Coupons should then be mailed to the address listed on the individual coupon. Taxpayers without Internet access or who need filing assistance are asked to gain access to the online filing system at any State of Delaware library.

IRS TO LAUNCH COMPLIANCE INITIATIVE AIMED AT EMPLOYER REPORTING OF EMPLOYMENT TAXES ON UNREPORTED TIP INCOME

The IRS is initiating a new compliance program geared towards employers who may have failed to report their share of employment taxes on unreported employee tips. In an unprecedented ruling from the IRS, Form 4137: Social Security and Medicare Tax on Unreported Tip Income will now be closely reviewed by the IRS to ascertain what Social Security, Medicare, and FICA taxes should have been paid by the employer on unreported tips in excess of $20.00.

According to IRS representative John Tuzynski, in remarks made at the American Payroll Association’s (APA) 2010 Capitol Summit in Washington, D.C. on March 12, the IRS “has never looked to see if employers are paying their share of” these taxes on tip income that the employee has reported on Form 4137 to their employers. The employers will be sent a Code Sec. 3121(q) notice and demand for taxes owed. If employers cooperate with the program, no penalties or interest will be assessed on the amounts owed. The employer will also have the right to challenge the IRS evaluation, Mr. Tuzynski added.

Form 4137 is used to compute an employee’s liability for Medicare and Social Security taxes on monthly tips in excess of $20.00 that were not reported to the employer or on tips allocated by a large food and beverage establishment.

A news release will be issued in the coming weeks from the IRS to inform those who are not aware of the program and answer frequently asked questions about the initiative.

LISA HASTINGS NAMED HONORARY COMMANDER AT DOVER AIR FORCE BASE

On February 5th, Lisa S. Hastings of Faw, Casson & Co., LLP was inducted as an Honorary Commander of the Comptroller Squadron of the 436th Airlift Wing at Dover Air Force Base, Delaware. The Comptroller Squadron is currently under the command of Major Fernando Waldron.

The Honorary Commander Program first began at Dover in 1992, matching civic leaders with military commanders, both active duty and reserve. The program provides an opportunity for community members to partner with commanders, to better understand each others’ programs and roles, and to support one another. Community members are educated about the base and the important role of today’s military.

This program builds relationships, provides opportunities for information to be exchanged, and strengthens the partnership between DAFB and the community which makes TEAM DOVER.

Pictured: Lisa S. Hastings, CPA and Lt Col Richard Pues, 436th Airlift Wing Director of Staff