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

PROFIT SHARING & 401(K) TRENDS

The profit sharing/401k Council of America (PSCA), a national nonprofit association committed to retirement savings through employee-sponsored defined contribution programs, has released its 52nd Annual Survey of Profit Sharing and 401(k) Plans, which provides the most up-to-date information available on current practices and trends in profit sharing and 401(k) plans.

The survey of 2008 plan years covers a wide variety of topics relevant to plan sponsors and the industry at large. Below are some of the highlights from the survey:

• Automatic Enrollment: 40% of all plans and more than half of large plans currently use automatic enrollment.

• Asset Allocation: The typical plan has approximately 60% of assets invested in equities.

• Company Contributions: Company contributions average 4% of payroll, the same as in 2007. They are highest in profit sharing plans (9% of pay) and lowest in 401(k) plans (3% of pay). Only 1% of respondents indicated that they suspended their employer match. Among profit sharing plans, the most common type of company contribution is a discretionary profit sharing contribution, which is present in 65.

• Employee Participation: 82% of eligible employees have balances in their 401(k) plans.

• Investment Options: Plans offer an average of 18 funds for participant contributions.

• Roth 401(k): 37% of plans permit Roth 401(k) contributions.

• Target-Date Funds: The availability and use of target-date funds continues to grow. 58% of plans now offer them.

• Vesting: Immediate vesting is present for matching contributions in 37% of plans and for non-matching contributions in 26% of plans. Among plans that do not have immediate vesting, graduated vesting tends to be the most common arrangement for all plan types.

President of PSCA, David Wray, states “Even in this economic period, plan sponsors remain committed to improving their plans. Participants continue to invest and save for the long-term.”

FOUR WAYS TO MINIMIZE UNEMPLOYMENT COSTS

In these days of rampant unemployment, employees are not the only ones who are suffering. Employers also have a burden to bear in the form of rising unemployment costs.

How it works: Under the Federal Unemployment Tax Act (FUTA), employers are charged 6.2% of the first $7,000 of every worker’s wages, although a state unemployment tax credit of 5.4% may reduce the federal rate to 0.8%. This works out to a maximum FUTA tax of $56 per employee (0.8% of $7,000) on an annual basis. One critical factor in maintaining the 5.4% credit under state unemployment systems is to demonstrate stability.

In effect, employers with more unemployment benefit claims are generally required to pay more in state unemployment taxes. Thus, there is an extra financial incentive for keeping claims to a minimum. For instance, if an employee seeks unemployment benefits, the employer may be able to demonstrate that the employee quit voluntarily or that he or she was terminated for willful misconduct.

Short of using these two defenses, or some variation, the key to reducing unemployment costs is to avoid having claims filed in the first place. Here are four practical suggestions:

1. Hire with discretion. If an employee will be required to work unusual shifts, weekends and holidays, present this information at the outset. Even better, the employer can put such notice in a prominent place on the employment application and have the new hire sign it. In that case, if the employee leaves the job due to the work schedule, the departure should be considered voluntary and unemployment benefits may not be triggered.

2. Fire with discretion. If employment is terminated due to misconduct, such as insubordination or work rule violations, explain in writing the reasons for the dismissal. Copies of performance evaluation forms showing prior warnings should be given to the departing employee, along with a final statement showing no improvement in the deficient area.

3. Conduct an exit interview. When an employee leaves voluntarily, find out the reason. Have multiple employees interview the departing employee and retain notes from each meeting. Ask for a formal letter of resignation. This may defuse a claim for unemployment benefits. It may also alert you to a condition you want to correct to head off more departures.

4. Challenge questionable claims. This could signal the launch of a wrongful discharge lawsuit, so prepare documentation showing that the claim is groundless. You may want to involve your attorney from the outset.

By following these basic suggestions, employers may able to keep their merit rating high and their costs low. Take a proactive stance in this area.

ROTH IRA CONVERSIONS: FIGURE IN THE VARIABLES

The floodgates are finally open to high-income taxpayers: Beginning in 2010, an individual can convert a traditional IRA into a Roth IRA, regardless of his or her income level. Prior to this year, a conversion was allowed only in a year in which the individual’s modified adjusted gross income (MAGI) did not exceed $100,000.

Normally, such a conversion is taxed at ordinary income tax rates in the year of the conversion. However, for a conversion in 2010, the participant may pay the tax over the following two years—2011 and 2012.

These changes have been in the works for years. They were included in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), which was enacted in 2006.

Should a high-income taxpayer convert or not this year? The answer is not always as simple as it first appears.

Background: As with a traditional IRA, a participant may contribute up to $5,000 to a Roth IRA (less any traditional IRA contributions) for the 2009 tax year. An extra $1,000 “catch-up contribution” is allowed for someone age 50 or older. But the ability to make contributions is phased out for taxpayers with a MAGI above certain income levels.

One key benefit of Roth IRAs is that “qualified distributions” are completely exempt from income tax. To qualify, a distribution must be made from a Roth in existence for at least five years and after the participant has reached age 59½, upon the death or disability of the participant or to pay for first-time home-buyer expenses (up to a lifetime limit of $10,000). Pre-age 59½ withdrawals are also subject to a 10% tax penalty.

Furthermore, unlike a traditional IRA, minimum lifetime distributions are not required. This enables a participant to preserve a bigger nest egg for heirs.

Nevertheless, the decision to convert or not must take into account a number of variables. These include the following:


*The age of the IRA participant, his or her spouse (if married) and the ages of the beneficiaries

*The value of the assets in the traditional IRAs

*The tax year of the conversion

*The need to receive Roth IRA distributions in the future

*The projected investment rate of return

*The participant’s current income tax rate and expected tax rate in the future

*State and local tax liability on the conversion

*Amounts that were contributed to traditional IRAs on a nondeductible basis

*Whether any portion of the tax must be paid out of IRA funds


These variables will have a substantial impact on the decision. For example, if the tax must be paid out of IRA funds, it will dilute the benefit of the conversion. Other “wild cards,” such as inflation and the likelihood of future tax rate increases, should also be considered. Note that a partial conversion of funds in a participant’s traditional IRAs is permitted.

Bottom line: Do not make assumptions about Roth IRA conversions. Online calculators often do not include all the necessary variables. With professional guidance, an informed decision can be reached.