Taxmageddon

With the election just one short day away (FINALLY), the media and national spotlight is primarily centered on determining our next President.  While the election for President, House, and Senate are undoubtedly important, they are not the sole determining factor of the fiscal cliff that faces our nation and each and every one of us as taxpayers.  In our office, this fiscal cliff or taxmageddon are our primary concern as we move into the final two months of 2012.  

What is taxmageddon you ask?  First, it is a clever term the media has coined to highlight an important tax law shift.  Second, IT IS AN IMPORTANT TAX LAW SHIFT.  This shift is brought on primarily due to fact that there are many tax provisions expiring at the end of 2012.  Congress has yet to act on extending these provisions, therefore, the tax laws will shift and trigger many changes for taxpayers to face.  With no solution on tap at this time, it’s imperative the taxpayers, businesses and individuals, take time to work with their CPAs to determine if any action should be taken prior to year-end.

This list of tax provisions set to expire at 2012 is rather long, but I do want to highlight of few key provisions here:

• Tax Rates:  The 10% bracket currently in place will disappear and income in that bracket will revert back to 15%.  All other rates will revert back to a graduated rate schedule of 28%, 31%, 36%, and 39.6%.  Additionally, the taxation of qualified dividends and capital gains at preferential rates of 0% or 15% will expire as well. 
•  Payroll tax deduction: The lower 4.2% rate for employees’ portion of Social Security payroll will move back to 6.2%. 
•  Sec. 179 Deduction:  A huge deduction in the ability to utilize Sec. 179 for businesses is on the horizon.  The Sec. 179 limit will drop to $25,000.
• AMT “Patch”:  The question here is will Congress act again as they have for the last several years to patch the AMT exemption or will the AMT tax become a major force for many taxpayers who had previously gone unaffected by the tax.  

The bottom line is stay tuned and stay connected to your CPA.  Put a plan in place for that can be enacted by 12/31/12. And while you’re at it, put a backup plan in place as well.  As a CPA, we wish we could get our crystal ball and forecast how Congress will act.  Unfortunately, we cannot.  What we can do is work with you to determine your tax implications of various scenarios and what steps you can take to control those outcomes.

brad@mcarthurco.com

704.544.8429

Business Valuations Continued...

As seen in the last blog, there are multiple reasons to have your business valued.  In the same way, many different methods exist to determine that value.  Through this blog, we will examine a few to see which one might be right for you.

The Income Approach measures the present worth of the future benefits of business ownership through two types of methods: the Discounted Future Returns method and the Capitalized Returns method.  The first is used when a business’s future returns can be reasonably estimated and will differ greatly year to year from the current returns.  Factors such as economic conditions or a change in business structure can cause these differences.  The Capitalized returns method is used when the future operations of the business are not expected to change greatly from current or when those future earnings are expected to grow at a predictable rate.

Next, the Market Approach assumes that a value can be assigned to a business based on the sale of comparable businesses.  This same method is used most commonly to value homes in the real estate market.  Because of the search for truly comparable companies and the use of detailed ratios, this method is a very time consuming and expensive option making it best for large, publicly traded companies.

Like the Income Approach, the Asset-based Approach has two applications: the Net Asset Value method and the Liquidation Value method.  When using the Net Asset method, all assets are adjusted to their fair market value to then determine the value of the business.  With the Liquidation Value method, the net proceeds available after liquidating business assets and paying off liabilities is then discounted to its present value to determine the value of the business.

There are many other ways to value your business.  The most common for small businesses is the Excess Earnings Approach.  This method first determines the value of all net tangible assets and adds a reasonable rate of return on those net tangible assets.  Next, the value of the businesses’ intangible assets is computed.  These two amounts are then added together to determine the value of the business. 

In all business valuations, it is important to remember that many factors come together to determine the final value that is assigned to the business.  Business valuations can be used as tools for business sales, estate planning, gift valuations, buy-sell agreements and more.  Contact our Firm if have a need to explore this subject further.

brad@mcarthurco.com
704.544.8429

What is My Business Worth?

If you’re a small business owner, you’ve likely spent years and much of your own money building your business, but do you know what that business is now worth?  It is an important question for a number of reasons: 

·         When it’s time to sell, you’ll naturally need the businesses value
·         Owners often need this information when obtaining financing through a bank
·         Gift or estate tax valuations
·         Buy/sell agreements
·         Personal Financial Statements
·         Divorce proceedings
·         Charitable contributions
·         To defend FMV if the IRS were to ever examine a sale or acquisition

Over the next few blogs, we’ll look at a few basics of business valuations.  Today, let’s look at a few of those basics.  When a valuation is performed, it is based on a specific point in time and can be accomplished via a number of methods.  The value can even  be more than one number.  Any valuation is based upon judgments and estimates; the ultimate value of a business is based on each person’s assessment of benefits, risks, and future returns.  At the end of the day, a business is valued at the present worth of the future benefits of ownership:  a willing buyer and a willing seller. 

The general methods of valuation include the Income Approach, the Market Approach, an Asset-based Approach, Excess Earnings Approach, but there are other models as well.  Within each of these approaches there are sub-groups and multiple estimates to make.  Again, it is important to note that there are multiple decisions to make by the individual carrying out the valuation. 

In our next blog, we’ll look further into these methods and which one might be right for you.  In the meantime, if you feel you need these type of services, please contact our Firm to discuss further.

brad@mcarthurco.com

704.544.8429

Football is Back!

Football is Back – Can my business deduct the expense of Season tickets?

In cities across America, fans thronged to stadiums to support their favorite teams.  Perhaps a few of you business owners out there use this as an opportunity to entertain clients and prospects and to further your business growth and potential.  Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers.   If you buy season tickets for business use, you must treat each ticket in the season as a separate item. To determine the cost of individual tickets, divide the total cost (but not more than face value) by the number of games or performances in the season. You must keep records to show whether you use each ticket as a gift or entertainment. Also, you must be able to prove the cost of nonluxury box seat tickets if you rent a skybox or other private luxury box for more than one event.   For your luxury box rentals, if expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages must be reasonable. You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals.

With all entertainment related expenses, the general rules must be remembered to justify the expense and documented accordingly:

1      1.     Amount:  Cost of each separate expense. Incidental expenses such as taxis, telephones, etc., may be totaled on a daily basis.

        2.     Time: Date of entertainment.

3      3.     Place or Description:  Name and address or location of place of entertainment. Type of entertainment if not otherwise apparent.

4      4.  Business Purpose:  Business purpose for the expense or the business benefit gained or expected to be gained.  For entertainment, the nature of the business discussion or activity. If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. 

       5.  Business Relationship:  Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you.  For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal.

Enjoy football season and if your Panthers fan, it’s not time to panic yet…15 more games to go before a hopeful playoff birth!

brad@mcarthurco.com

704.544.8429

Extension Deadlines Looming

For anyone who extended their corporate returns, partnership returns, and/or individual returns, extension deadlines are approaching quickly. 

For Corporations and Partnerships who filed an extension, your tax returns are due by September 17, 2012.  Additionally, contributions to retirement plans must be made by September 17.

For Individuals who filed an extension, your tax returns are due by October 15, 2012. 

Penalties can pile up if not timely filed; therefore, please take the appropriate steps to file timely. 

If you need assistance completing your 2011 tax returns, please contact our office as soon as possible. 

brad@mcarthurco.com

704.544.8429 

What is AMT?

AMT is the Alternative Minimum Tax system and establishes a parallel set of tax rules for taxpayers and tax preparers to work with when filing individual income tax returns.  It was created as a method to establish a minimum tax for individuals making certain levels of income.  Over the years, various patches and exemptions have lessened the impact of the AMT, but it is still has a direct impact on many taxpayers. 

Whether you are aware of it or not, each taxpayer must calculate their taxes under both the “normal” tax guidelines as well as the AMT tax guidelines.  If you pay a CPA or other preparer to complete your tax returns or use TurboTax or similar software programs, this calculation is being completed.  The reason taxes are calculated under both guidelines is that you will owe the higher of the normal income taxes and the AMT tax. 

Why Should I Care?

Over the years, Congress has established exemption levels that have kept a large number of taxpayers from incurring AMT taxes.  However, as of this point of 2012, the AMT exemption level is set to drop to its lowest level since the early 2000’s.  In 2011, the AMT exemption amount was $74,450 for a couple married filing jointly and $48,450 for a single individual.  In 2012, the exemption amounts drop to $45,000 for a couple married filing jointly and $33,750 for a single individual. 

If you paid AMT in the past, this reduced exemption will likely increase your AMT tax.  If you have not been subject to AMT in the prior years, the reduced exemption could introduce this additional tax to you and your tax return. 

There is a light at the end of the tunnel.  It has been routine for Congress to pass AMT tax patches to increase or extend exemption amounts to avoid millions of additional taxpayers becoming subject to AMT tax.  To be clear, right now, no such patch has passed for 2012 and will not likely be entertained until after the November elections.  Between now and then, take a look at your tax picture with your CPA to see how the AMT changes may (or may not) affect your 2012 tax filings.

brad@mcarthurco.com

704.544.8429

NC Sales Tax Free Weekend is Here!!

The annual North Carolina sales tax holiday begins Friday, Aug. 3 and runs through Sunday, Aug. 5. Shoppers can save money on certain purchases of items like clothing, school supplies and computers.
The popular event includes clothing, footwear, and school supplies of $100 or less per item; school instructional materials of $300 or less per item; sports and recreational equipment of $50 or less per item; computers of $3,500 or less per item; and computer supplies of $250 or less per item from sales tax. Tablet computers and netbooks of $3,500 or less per item qualify; eReaders do not.
Items are not necessarily exempt from sales tax just because they are required by a child's school or sports team.  Visit NCDOR's website for a http://www.dornc.com/taxes/sales/holiday_exempt.pdf of items that qualify.

The holiday begins at 12:01 a.m. Friday and lasts until 11:59 p.m. Sunday. Participation in the sales tax holiday is required; retailers cannot opt out.

Retailers may not charge sales tax on exempt items sold during the holiday and tell shoppers to request a refund from the Department of Revenue. In cases where the sales tax is charged on purchases that should be exempt, a customer's only option to obtain a refund is from the retailer.

Discounts from retailers' coupons are deducted from the price of an item before determining if the item is eligible for the sales tax exemption. Example: a customer buys a dress priced at $105 and uses a retailer's coupon for a 10 percent discount. The discounted sales price of the dress is $94.50 ($105.00 - $10.50 = $94.50) and the dress is exempt from sales tax if purchased during the holiday. Manufacturers' coupons are treated just the opposite way and are not deducted from the sales price before determining an item's eligibility for the sales tax exemption.

Rebates do not affect the sales price of an item for the sales tax holiday. Example: a computer priced at $4,000 with a $600 rebate is not exempt from sales taxes. The amount of the rebate is not deducted from the sales price of the computer before determining if the computer is eligible for the sales tax exemption.

Happy shopping! 

brad@mcarthurco.com

704.544.8429

10 Tips on a Tax Credit for Child & Dependent Care Expenses

In IRS Tax Tip 2012-46, the IRS provides the basic guidelines to determining your eligibility the tax credits available for child and dependent care expenses.  Below are 10 points the IRS wants you to know about claiming the credit for child and dependent care expenses.

1. The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.

2. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

3. You – and your spouse if you file jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.

4. The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.

5. Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.

6. The qualifying person must have lived with you for more than half of 2011. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents.

7. The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.

8. For 2011, you could use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

9. The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income, such as a flexible spending account for daycare expenses.

10. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer and may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax.

Know your options related to child care expenses and do not miss this valuable tax credit opportunity.

brad@mcarthurco.com
704.544.8429

NC Provides New Deduction for Net Business Income

As detailed by the NC DOR on their website in Directive PD-12-2, NC law provides a deduction in calculating North Carolina taxable income for individuals equal to “An amount not to exceed fifty thousand dollars ($50,000) of net business income the taxpayer receives during the taxable year.  In the case of a married couple filing a joint return where both spouses receive or incur net business income, the maximum dollar amounts apply separately to each spouse’s net business income, not to exceed a total of one hundred thousand dollars ($100,000).  For purposes of this subdivision, the term ‘business income’ does not include income that is considered passive income under the Code.” 

Inherent to determining if this deduction is applicable to your tax situation is the determination if you or your spouse have “business income.”  The directive says that business income includes Schedule C, Schedule F, and Schedule E income as long as the income is not “passive income.” 

Our Firm will be actively communicating this information to our clients, but should you have any questions regarding the discussion please contact our Firm to discuss. 

brad@mcarthurco.com

704.544.8429 

NC Tax Credit for Children with Disabilities Requiring Special Education

The state of NC allows for a tax credit for taxpayers who pay tuition and special education and related services expenses for an eligible dependent child.  This credit is effective for tax years beginning on or after January 1, 2011.  For full details regarding this tax credit, please click on the following link:  http://www.dor.state.nc.us/practitioner/individual/directives/pd-12-1.pdf

In brief, the credit is the lesser of $3,000 per semester for each eligible dependent child or the amount the taxpayer paid during the tax year for tuition and special education and related services expenses.  For purposes of the credit, there are only two semesters during each tax year.  Therefore, for 2012, the maximum credit allowed per eligible dependent child is $6,000 ($3,000 for each semester).  The credit is limited to the amount of North Carolina income tax for the year reduced by the sum of any other credits.  However, any unused portion of the credit may be carried forward for three succeeding years.  There are items that both reduce the credit and disqualify and child from being eligible that should be further understood prior to applying the credit to your tax filing.  Additionally, there is a lengthy list of documentation that must be in your records to accurately claim the credit. 

An eligible dependent child for the purposes of this credit is defined as a child who is a NC resident and enrolled in grades kindergarten through 12 in a nonpublic or a public school where tuition is charged by the local board of education.  In addition, the child must meet ALL of the following criteria:

1.   Is a child with a disability who requires special education and related services because of that disability.

2    2.  Was determined to require an individualized education program.  An individualized education program is a written statement for a child with a disability that is developed, reviewed, implemented and revised consistent with IDEA and Sate law.

3    3.   Receives special education services on a daily basis.

4    4.  Is a child which the taxpayer is entitled to deduct a personal exemption under section 151(c) of the Code for the tax year.

Every three years, an eligible dependent child must be reevaluated by the local education agency to verify that the child continues to be a child with a disability who requires special education and related services because of that disability. 

If you feel you are eligible for this credit, please contact our offices for an evaluation as you want to make sure all of the appropriate steps are taken and the documentation is required is on file for the application of this credit.

brad@mcarthurco.com
704.544.8429

Residential Energy Efficient Property Credit

This tax credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit, which runs through 2016, is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property. Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; geothermal heat pumps qualify only when installed on or in connection with your main home located in the United States.

Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

If you're eligible, you can claim this credit on Form 5695, Residential Energy Credits when you file your Federal income tax return. Also, note this is a tax credit and not a deduction, so it will generally reduce the amount of tax owed dollar for dollar.  Finally, you may claim this credit regardless of whether you itemize deductions on IRS Schedule A.

For more details, you can visit http://www.energystar.gov/index.cfm?c=tax_credits.tx_index.

brad@mcarthurco.com

704.544.8429

What Do You Really Pay In Taxes?

One of the few certainties of life is that everyone pays taxes. Income and property tax are just part of the picture. When you pay a utility bill, rent a room and pump gas into your car, you also pay taxes. So how do all of the taxes you pay affect your bottom line? The AICPA's new tax calculator, Total Tax InsightsTM, gives the public a clearer view at no cost. Check out your tax life at http://www.totaltaxinsights.org/.

brad@mcarthurco.com

704.544.8429 

What should I do if I receive an IRS notice?

The IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be dealt with simply, without having to call or visit an IRS office.  One the most important things to keep in mind is to NOT automatically pay the amount due without fully understanding what the Notice states and what options you have available to you.  However, it is just as important to deal with the Notice in a timely manner.  The fact that it might be unpleasant or time consuming is not a valid excuse to ignore an IRS Notice.  The IRS is serious about its deadlines and the longer you neglect the required action, the more serious your issue may be come.
The IRS specifically lays out the following eight facts in Tax Tip 2012-73:

1. There are a number of reasons why the IRS might send you a notice. Notices may request payment, notify you of account changes, or request additional information. A notice normally covers a very specific issue about your account or tax return.

2. Each letter and notice offers specific instructions on what action you need to take.

3. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.

4. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.

5. If you do not agree with the correction the IRS made, it is important to respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left of the notice. Allow at least 30 days for a response.

6. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right of the notice. Have a copy of your tax return and the correspondence available when you call to help the IRS respond to your inquiry.

7. It’s important to keep copies of any correspondence with your records.

8. IRS notices and letters are sent by mail. The IRS does not correspond by email about taxpayer accounts or tax returns.

When all else fails, the best route is to contact your CPA and work with them to determine the best course of action.  

brad@mcarthurco.com

704.544.8429

The Deadline Looms

April 17th is right around the corner and marks the end of the line for taxpayers to either file their returns or file an extension.  Keep in mind that extending your return only extends your time to file, NOT your time to pay.  If you extend your tax filing and owe taxes, you should make a payment with your extension filing.  Otherwise, you will be subject to failure-to-pay penalties as well interest on the unpaid balance.  This is an important distinction for all of you out there filing an extension.  If you need assistance with getting an extension filed or determining how much tax you should pay with your extension, then please contact our office before time runs out.

In the meantime, good luck with the completion of this tax season and remember that an accurate and complete filing is just as important as a timely one!

brad@mcarthurco.com

704.544.8429

Mortgage Debt Forgiveness: 10 Key Points

Our friends at the IRS have provided another concise guide to an unfortunate aspect of these tough economic times.  In Tax Tip 2012-39, the IRS lays out the basics on dealing with debt forgiveness.  If you find yourself in this position and the below does not help address your tax reporting concerns, please contact our Firm to discuss further. 

Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.
The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated, you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.

brad@mcarthurco.com

704.544.8429

1099 Rules Reviewed

Generally, any trade or business that makes payments in the course of that trade or business of interest, rents, compensations, remuneration for services, annuities, etc. aggregating $600 or more for the year to a single payee is required to report the payments to the IRS and to the recipient of the payments by filing Form 1099. This reporting requirement generally does not apply to payments to corporations. However, the 1099 reporting requirements do apply to payments made to corporations for attorneys' fees, and to amounts paid to corporations providing medical or health care services.

A Form 1099 is generally required to be filed with the recipient of the payment by January 31 of the year following the year the payment is made. A copy of Form 1099 is generally required to be filed with the IRS by the end of February of the year following the year the payment is made.

The penalties for failing to file 1099s, or filing 1099s late, are significant. For example, if a Form 1099 is filed after August 1^st and the failure to file is not intentional, there is a $100 penalty for failing to file Form 1099 with the recipient of the payment and an additional $100 penalty for failing to file a copy of Form 1099 with the IRS (for a total penalty of $200).  Note! IRS may waive these penalties if you can show reasonable cause for failing to file the form. Caution! If you intentionally fail to file Form 1099, then the penalty increases to at least $500 per 1099 (a $250 penalty for failing to file Form 1099 with the recipient of the payment and a $250 penalty for failing to file a copy with the IRS).

The IRS has included two new questions concerning Form 1099 on all business returns, including Form 1040, Schedule C, Schedule F, and Schedule E as well as Forms 1065, 1120, and 1120-S. The questions are 1) “Did you make any payments in 2011 that would require you to file Form(s) 1099", and 2) “If ‘Yes,’ did you or will you file all required Forms 1099?”  These questions now must be answered when preparing your business returns.

               

The 1099 rules are confusing to many small business owners.  If you have questions on how you should treat a given service provider, please contact our Firm or your CPA for assistance. 

brad@mcarthurco.com

704.5448429

Eight Things to Know about Medical and Dental Expenses and Your Taxes

If you, your spouse or dependents had significant medical or dental costs in 2011, you may be able to deduct those expenses when you file your tax return. Here are eight things the IRS wants you to know about medical and dental expenses and other benefits.


1. You must itemize You deduct qualifying medical and dental expenses if you itemize on Form 1040, Schedule A.


2. Deduction is limited You can deduct total medical care expenses that exceed 7.5 percent of your adjusted gross income for the year. You figure this on Form 1040, Schedule A.


3. Expenses must have been paid in 2011 You can include the medical and dental expenses you paid during the year, regardless of when the services were provided. You’ll need to have good receipts or records to substantiate your expenses.


4. You can’t deduct reimbursed expenses Your total medical expenses for the year must be reduced by any reimbursement. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.


5. Whose expenses qualify You may include qualified medical expenses you pay for yourself, your spouse and your dependents. Some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement or those with a qualifying relative who is not your child.


6. Types of expenses that qualify You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance in your expenses. Starting in 2011, you can also include lactation supplies.


7. Transportation costs may qualify You may deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. You can deduct the actual fare for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 19 cents per mile for 2011.


8. Tax-favored saving for medical expenses Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses including prescription medication and insulin.

For additional information, see Publication 502, Medical and Dental Expenses or Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans,

The above information was from IRS Tax Tip 2012-30.  Please contact our Firm if you have any further questions.

brad@mcarthurco.com

704.544.8429

Tax Law Changes for the 2011 Federal Tax Returns

Our friends at the IRS provided a recent update of tax return changes that you should be aware of when filing your 2011 tax returns.  From IRS Tax Tip 2012-27,

Before you file your 2011 federal income tax return in 2012, you should be aware of a few important tax changes that took effect in 2011. Check www.IRS.gov before you file for updates on any new legislation that may affect your tax return.


Due date of return. File your federal tax return by April 17, 2012. The due date is April 17, instead of April 15, because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.


New forms. In most cases, you must report your capital gains and losses on the new Form 8949, Sales and Other Dispositions of Capital Assets. Then, you report certain totals from that form on Schedule D (Form 1040). If you had foreign financial assets in 2011, you may have to file the new Form 8938, Statement of Foreign Financial Assets, with your return.


Standard mileage rates. The 2011 rates for mileage are different for January 1 through June 30 than for July 1 through December 31. For business use of your car, you can deduct 51 cents a mile for miles driven the first half of the year and 55 ½ cents for the second half. Medical and moving mileage are both 19 cents per mile for the first half of the year and 23 ½ cents in the latter half.


Standard deduction and exemptions increased.

• The standard deduction increased for some taxpayers who do not itemize deductions on IRS Schedule A (Form 1040). The amount depends on your filing status.
• The amount you can deduct for each exemption has increased $50 to $3,700 for 2011.

Self-employed health insurance deduction. This deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.


Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount has increased to $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).


Health savings accounts (HSAs) and Archer MSAs. The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses increased to 20 percent. Beginning in 2011, only prescribed drugs or insulin are qualified medical expenses.


Roth IRAs. If you converted or rolled over an amount from a traditional IRA to a Roth IRA or designated Roth in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.


Alternative motor vehicle credit. You can claim the alternative motor vehicle credit for a 2011 purchase only if the vehicle is a new fuel cell motor vehicle.


First-time homebuyer credit. The credit is expired for most taxpayers for 2011. Some military personnel and members of the intelligence community can still claim the credit in 2011 for qualified purchases.


Health coverage tax credit. Recent legislation changed the amount of this credit, which pays qualified health insurance premiums for eligible individuals and their families. Participants who received the 65 percent tax credit in any month from March to December 2011 may claim an additional 7.5 percent retroactive credit when they file their 2011 tax return.


Mailing a return. The IRS changed the filing location for several areas. If you're mailing a paper return, see the Form 1040 instructions for the correct address.

Detailed information on these changes can be found on the IRS website – www.irs.gov.

brad@mcarthurco.com

704.544.8429

The S Corp Election

An S Corp is a corporation that elects and is eligible to choose S Corporation status.  There are advantages and disadvantages of selecting S Corp status for your eligible entity, and those should be considered carefully with your financial planning team, including your CPA.  Generally, an S Corp is a corporation that does not pay income taxes.  Rather, the income and deductions of the business are passed through to its shareholders.  In return, the shareholders report the income and deductions on their individual tax returns. There are a number of rules inherent in this election, but today I want to focus solely on how to make the election. 

Making the Election

The actual election for S Corp status is accomplished by filing Form 2553, Election by a Small Business Corporation.  The election must be made by the 15^th day of the 3^rd month of its tax year in order for the election to be effective beginning with the year made.  A few simple examples will clarify what that language means.

Example #1 – Entity XYZ was formed on and began operations on June 1, 2012.  In order for their S election to be filed timely and effective June 1, 2012, Form 2553 should be filed by August 15, 2012.

Example #2 –Entity XYZ was formed on and began operations on June 1, 2010.  They want their S election to be effective on January 1, 2011.  In order for their S election to be filed timely and effective January 1, 2011, Form 2553 should be filed by March 15, 2011.

Did you miss your election timeframe?

There are methods of requesting IRS relief for a late S election and your CPA should be consulted in order to carry out said late elections.  Most commonly, a late election can be filed with filing of the tax return and use of the reasonable cause exclusion as detailed in Revenue Procedure/Private Letter Rulings issued by the IRS.  Again, your CPA should be consulted closely to carry out this late election. 

As you analyze your filing status, the decision to file as an S Corp is one that should be weighed carefully with proper consultation.  There are numerous eligibility requirements that must be met.  Lastly, adhere to the timelines provided above.  If you are considering S Corp status for your entity and need assistance in filing your election or making the decision, please contact our Firm.

brad@mcarthurco.com
704.544.8429

Happy MLK Day!

From a sermon Dr. King preached at the Temple of Israel of Hollywood:

Each of us lives in two realms, the "within" and the "without." The within of our lives is somehow found in the realm of ends, the without in the realm of means. The within of our [lives], the bottom -- that realm of spiritual ends expressed in art, literature, morals, and religion for which at best we live. The without of our lives is that realm of instrumentalities, techniques, mechanisms by which we live. Now the great temptation of life and the great tragedy of life is that so often we allow the without of our lives to absorb the within of our lives. The great tragedy of life is that too often we allow the means by which we live to outdistance the ends for which we live.

And how much of our modern life can be summarized in that arresting dictum of the poet Thoreau, "Improved means to an unimproved end?" We have allowed our civilization to outrun our culture; we have allowed our technology to outdistance our theology and for this reason we find ourselves caught up with many problems. Through our scientific genius we made of the world a neighborhood, but we failed through moral commitment to make of it a brotherhood, and so we’ve ended up with guided missiles and misguided men. And the great challenge is to move out of the mountain of practical materialism and move on to another and higher mountain which recognizes somehow that we must live by and toward the basic ends of life. We must move on to that mountain which says in substance, "What doth it profit a man to gain the whole world of means -- airplanes, televisions, electric lights -- and lose the end: the soul?"

brad@mcarthurco.com

704.544.8429