2012 Tax Changes

It seems that much of the focus has been on the upcoming changes to the 2013 tax year, you know the fiscal cliff, it still is important to remember that IRS tweaks the tax code each year based on expiring provisions and items required to adjusted for inflation.  We have outlined some of the major changes that will affect your tax return this year according to Rapid Tax Blog. 
 

• Income limits for excluding education savings bond interest increased – Your modified adjusted gross income (MAGI) must be less than $87,850 if you’re a single filer or less than $139,250 if you’re married filing jointly or a qualifying widow(er) in order to exclude education savings bond interest.
• Foreign earned income exclusion – The maximum exclusion is now $95,100.
• Standard mileage rates – The deductible costs of using your automobile for business have increased to 55.5 cents/mile and for getting medical care or moving to 23 cents/mile. The rate for charitable use has remained the same at 14 cents/mile.
• Personal exemption increased – The personal exemption is now $3,800.
• Standard deduction increased - The standard deduction is now $5,950 for single filers and $11,900 for married filing jointly.
• Alternative minimum tax (AMT) exemption amount decreased – The new AMT exemption amounts are $33,750 if single, $45,000 if married filing jointly or a qualifying widow(er), and $22,500 if married filing separately.
• Lifetime learning credit income limits decreased – Your modified adjusted gross income must be less than $52,000 if single or $104,000 if married filing jointly in order to claim the lifetime learning credit.
• Retirement savings contribution credit income limits increased – Your modified adjusted gross income (MAGI) must be less than $28,750 if single, $57,500 if married filing jointly, and $43,125 if head of household in order to claim the retirement savings contribution credit.
• Adoption credit or exclusion – The maximum amount of the adoption credit you can receive, or the maximum amount of employer-provided adoption benefits that you can exclude, has decreased to $12,650. Note that your modified adjusted gross income (MAGI) must be less than $229,710 in order to take advantage of it.
• Adoption credit no longer refundable – The adoption credit is no longer refundable starting in 2012.
• Earned Income Credit (EIC)- The income thresholds for claiming the EIC have changed slightly for 2012.
  • If three or more children lived with you, single filers must earn less than $45,060 and married couples filing jointly less than $50,270.
  • If two children lived with you, single filers must earn less than $41,592 and married couples filing jointly less than $47,162.
  • If one child lived with you, single filers must earn less than $36,920 and married couples filing jointly less than $42,130.
  • If a child did not live with you, single filers must earn less than $13,980 and married couples filing jointly less than $19,190.
  • Also note that you cannot have more than $3,200 in investment income and still claim the credit.

Read more: http://www.rapidtax.com/blog/index.php/irs-2012-tax-changes/#ixzz2GJMSNs1m

S Corporation Fact Sheet

Saving Business Taxes with an S Corporation: A Short Primer

S corporations, or Sub chapter S corporations, produce several tax benefits as compared to sole proprietorships, partnerships, and C corporations.

The big benefit--and the one that people usually talk about--is the payroll tax savings.

To understand how this works, let me compare two alternatives: A sole proprietor making $90,000 a year and an S Corporation making $90,000 a year.

Of course, the taxes that a sole proprietor pays depends on his or her filing status, itemized deductions and family size, but typically such a person might pay about $12,000 in federal income taxes. The person might also pay another chunk in state income taxes.
In addition to these income taxes, the proprietor also pays a 15.3% self-employment tax on the $90,000 of business profits. Roughly, this self-employment tax (which is equivalent to Social security and Medicare tax) equals $13,000.

Things usually work differently for the S corporation, however. To make calculations easy, assume the S corporation is owned by a single shareholder. In this case, the S corporation must break the $90,000 of profit into two buckets: wages and the leftover (which is called a distributive share). If the wages equal $40,000 and the leftover distributive share equals $50,000, the business pays Social Security and Medicare taxes (equivalent to self-employment tax) equal to roughly $6,000.

In this case, even though the two businesses make the exact same amount of money, the S corporation pays roughly $7,000 less in tax each year.

By the way, in addition to the big benefit of self-employment tax reduction, S Corporations also provide two other useful benefits--benefits which are a little more difficult to quantify but still important nonetheless.

One such benefit is that S corporation losses (such as those that often occur in the early start-up years) can be used as tax deductions on the shareholder's personal income tax returns.
Another such benefit is that the S corporation isn't taxed on S corporation profits--at least by the federal government.

Once you've made the decision to structure your business as a corporation (most likely for the liability protection a corporation offers), you still have a decision to make: Will you form a C Corporation or an S Corporation?

Tax concerns often play a major role in this decision. Like the partnership business structure, S Corporations do not pay any federal income taxes. Instead, the business's profits and losses are passed through to the shareholders, who must then report the income and losses on their personal tax returns. Referred to as "single taxation," this process differs from C Corporations, which face "double taxation." That means C Corporations pay federal income tax, and any dividends paid to shareholders are taxed as well.

Although tax concerns are important, they don't tell the whole story. The advantages of forming an S 

Corporation include:
 

• Eliminating double taxation: In an S corporation, profits and losses are passed through to shareholders, and taxes are only paid once. Check with your state to see how it handles S Corporations. Some states do not recognize S Corporations and will tax such businesses as a regular C Corporation. Some states charge S Corporations a state tax, although the corporation will not have to pay federal tax. 
• Protection from liability: As the owner of an S Corporation, your personal assets are separate from the business's assets and are therefore protected in case any judgments occur against the business.
• More room for investors: S Corporations can have up to 100 shareholders.
• Easier accounting rules: S Corporations without any inventory can use the cash method of accounting, which is much simpler than the accrual method. Check with your accountant about which option makes sense for your business.

Here are some disadvantages of forming an S Corporation:

• Rules and fees: Like a C Corporation, S Corporations are required to file a number of official state and federal documents, including Articles of Incorporation and corporate minutes. They must also hold regular shareholder meetings and pay the required government fees.
• Shareholder restrictions: Realize that if an S Corporation has shareholders, the shareholders will be taxed for any income the company has, even if they did not receive any portion of that income. (In a C Corporation, shareholders are taxed only if they receive dividends.) In addition, S Corporations are only allowed to issue one class of stock, which may discourage some investors.
• Salary requirements: The Internal Revenue Service requires all officers and owners of an S Corporation to make a salary, even if the company is not yet making a profit. This could be problematic for new businesses struggling to make payroll. A "reasonable salary" is what a person with the appropriate skills needed for the position would be paid on the free market.

Source: all business.com

“You must pay taxes. But there’s no law that says you gotta leave a tip.”  can’t quite remember who said it but I sure remember the quote.

S Corporations are a no brainer.

1. The most popular form of business structure in America today.  60% of all corporation tax returns filed this year are S Corporations.
2. Limited liability.
3. Limited IRS exposure.
4. Significant tax savings.

Now that you are incorporated there are three things you absolutely must do....or risk IRS problems

1. Open a corporate checking account. Paying all corporate (business) bills from that checking account.
2. Avoid paying any personal bills from that checking account.
3. Pay yourself a salary.  Mainly used to pay your personal income tax salary. The John Edwards tax loophole.

Donald C. Fuener E.A.

S Corporation Fact Sheet updated December 19, 2012
 

December 1, 2012 Client Newsletter

I was talking with a long time client yesterday.  Frankly I was venting.  Way back in December 2007 the law changed concerning the late filing of S Corporation returns.  Until 2008 if you filed your S Corporation late there was no problem as long as the shareholders reported the correct amount of taxable income or loss on their returns. Things have changed dramatically.  A late penalty revenue raiser was created in 2007. The easiest way to explain why this very Draconian, extremely unfair penalty, is to provide an example of what happens if a corporation accidentally files a late return.

An S-corporation with a calendar-year end (Jan 1-Dec 31) is required to file the 1120S annual tax return on the 15th day of the third month following the close of the tax year—or March 15th of the following year. If the corporation has 3 shareholders, no extension of time to file was submitted and the return was filed on July 16th, the late filing penalty is calculated as follows:

Number of shareholders during the year = 3

Months late = 5 (March 16th – July 16th)

*if submitted on July 15th it’s only 4 months late

$195 penalty x (3 shareholders) x (5 months late) = $2,835

or $567 per month

Here is the problem.  An S Corporation return is in reality an information return.  Similar to a W2 or 1099 form.  No tax is owed on the S Corporation return.  All income flows to the individual shareholders and is paid on their individual return.  Since most taxpayers pay the tax owed with their return on a timely basis, there seems little point in assessing such a large penalty.  It is overkill. Some of our clients have been assessed this late payment penalty in the past couple of years. In many cases the late filing penalty exceeded their total federal income tax liability.  We have successfully gotten the penalty abated in all but one case...and that case is an extreme exception since the client somehow felt the need to represent themselves with IRS Appeals and got taken to the woodshed financially.  But that is another story.

But there appears to be some good news.  In researching the current status of S Corporation penalty I found a recent tax court case in which the tax court recently overruled the IRS (Ensyc Technologies, TC Summ. OP. 2012-55) and stated that forgetting to mail the return can be a “reasonable cause” for filing late and having the penalty waived.
The case revolved around an accountant who, each year, prepared the tax return for an S Corporation and mailed it to the company’s president to sign and mail to the IRS.  One year he thought he had mailed the return to the company’s president to sign and mail to the IRS, but he had mistakenly filed it away instead.   He did mail the K-1s to the shareholders, who used the data on their timely filed 1040s. Six months later, he mailed the corporate tax return, and the IRS assessed a penalty for late filing.

Keep in mind that each case is unique, and must be carefully evaluated. But if you’re faced with large penalties and an IRS fight, it pays to first review your case carefully rather than just “paying the penalty.”   Call us we are here to help.  We can only wish with all the political talk about tax fairness and fiscal cliffs maybe just maybe we will see a change in this penalty.

An S corporation cannot deduct health, dental, and other medical premiums for a shareholder who owns more than 2 percent. Their premiums should be tracked separately in the accounting system throughout the year.

• If your corporation did not pay the health insurance premiums during the year, make sure the corporation reimburses you, write a check , before the end of the year.

• Before the final payroll run next month,  we will calculate the total shareholder health, dental, and other medical insurance premiums paid or reimbursed by your corporation as this figure will be needed for the final payroll and the shareholder’s W-2.

• The amount of premiums for the year is paid to shareholder as payroll, but there is special payroll tax treatment for this payment. The amount is subject to Federal and State withholding, but it is not subject to social security or Medicare tax.

• On the W-2, we will record the amount of the premiums in box 1 wages, in the state wages, and in box 14 as “S/H Health Ins” or a similar description.

• Finally, on your individual tax return, the amount of shareholder health insurance is deducted as self-employed health insurance on the front of Form 1040

This month you will be receiving a change in rate for your Illinois unemployment tax for 2013.  Please help us to help you avoid paying late penalties and interest.  Please forward the notice of rate that you receive from IDES to us right away.  

As we get ready for the upcoming tax season we are asking you for a few comments about what you like about us and our service.  I appreciate all the great comments from our clients so far.  We are upgrading our marketing for the new tax season and real life clients with real life recommendations are great.  Thanks for your help.