10 Tax Tips For A Happy New Year

December is the time of year when we all start thinking about our new year’s resolutions – many of which, let’s admit, we’ll fail to keep. But one resolution every trucking executive should make and keep is to do a good job of tax planning.

Tax planning is even more important than it has been in the past because of the government’s current fiscal situation. If you’ve been following the news lately, you know that the federal government is broke and looking for money wherever it can find it. If that money has to come from a hard-working, job-creating trucking company, well, so be it. Bell & Company has been in business 30 years. We’re seeing more audits now than we can remember seeing in a long time, and those audits are hitting carriers of all sizes.

How can you ensure that six months from now, you’re not sitting across a table from an IRS agent who wants to use your company’s profits to reduce the federal budget deficit? These seven tips will help. Pay special attention to the first two, because if you get them right, the rest will take care of themselves.

First, discuss your tax situation with a qualified accounting firm at least quarterly. You should plan and strategize, not react and hope. Waiting until April to dump your records on your accountant makes it more likely you’ll face something unexpected, and when it comes to tax planning, surprises are bad. In fact, even a “good” surprise – a refund – is bad because that means a carrier has been paying too many taxes throughout the year instead of using that money to build its business. By providing information to your accountant throughout the year, he or she more likely will catch variances, spot developing problems, and keep you from paying too much or too little. Plus, you’ll have more peace of mind. As Jimmy Starr, owner of the Camden-based carrier Woodfield, Inc., put it, “If we see something turn either direction, then we can adjust to it throughout the year instead of having any kind of surprises that would be devastating for our cash flow.”

Also, don’t wait until December to start asking your accountant about last-minute purchases. A good tax benefit won’t outweigh a bad business decision. You don’t want to haphazardly buy assets in December like a last-minute Christmas shopper filling her cart with whatever is left on the shelf. Besides, the trucking industry doesn’t lend itself to that kind of purchase. The most important assets, trucks and trailers, need to be spec’d and ordered months in advance of the end of the year in order to take advantage of the full tax benefits.

Second, make sure your financial statements are complete and accurate. Even the best accountants may not catch something if you don’t provide them the right information, and that could lead to problems. Plus, sloppy record-keeping adds to the expense of preparing the return. The more times an accountant has to stop working, call to ask a question, work on someone else’s return while he waits for the carrier to call back, decide if the answer made sense – the more he’ll have to charge for the time. Meanwhile, he’ll have already produced a cheaper, mistake-free return for the client’s more organized competitor. Which carrier do you want to be?

As part of your records, make sure your fixed asset additions are detailed for your CPA to add to your depreciation schedule. It may not be obvious that you’ve added trucks or trailers, done major repairs, or completed a big renovation to your office. Year over year, the expense may look the same, but there may be some capitalizable items within that profit and loss statement that need to be added to the balance sheet and to the depreciation schedule. Remember, accountants don’t like surprises.

Third, ask your CPA if leasing or purchasing is right for you. Leasing means the payment will be lower, and you can deduct expenses over time. Purchasing enables you to deduct 50 percent of the expense during the first year.

Fourth, periodically revisit your accounting method – cash or accrual. In the accrual method, you pay taxes on receivables even if you haven’t collected payment. Using the cash method, you pay taxes only on your actual revenues. Obviously, the cash method makes more sense for most trucking companies because not every shipper pays in a timely manner and some don’t pay at all. However, certain types of IRS Schedule C corporation companies are required to use the accrual method.

Which brings us to the fifth tip: If you still are a C corporation, you should ask your accountant about converting to an S corporation. S corporations are pass-through entities that are not subject to income taxes, though shareholders’ incomes are. However, there are some additional reporting requirements. The S corporation is best for most carriers, but it may not be right for you.

Sixth, ask your accountant about the government’s changing tax laws. Even if you like to defer paying taxes, you may want to distribute your earnings as a dividend this year rather than wait until the beginning of next year because capital gains taxes may increase in 2013. If that happens, you might be better off paying fewer taxes now rather than more taxes later. Also, ask your accountant if you should take the 50 percent bonus depreciation on new purchases next year or if you should elect out and take the depreciation over time. If taxes increase – as they eventually will – you may want to spread the depreciation out to reduce your tax burden over several years’ time.

Last but not least, make sure your company is paying taxes in all the states where taxes are owed. Many companies are unaware they have multi-state tax issues. They may think that paying their International Fuel Tax Agreement taxes takes care of those state-by-state demands, but IFTA is not an income tax. Also, different states have different rules. For example, if you haul from Arkansas into Texas, that state doesn’t expect you to pay anything. If you simply drive through Arkansas, you owe that state money according to the number of miles traveled through its borders. One particular carrier had no idea it owed money until a tax auditor happened to see one of its trucks arriving at a shipper’s location, wrote the carrier’s name down from the side of the truck, and researched the company’s tax history. That turned out to be a costly delivery – seven years of taxes owed in multiple states.

When it comes to tax planning, there is not always a right or wrong answer because each carrier has different needs and philosophies. Some carriers like to defer taxes as much as possible so they can use the money to build their business. Some prefer to pay their taxes as they go so they don’t have a big future expense coming due at a bad time.

But no one likes an unexpected tax bill, and no one likes an audit. Following these seven tips will help keep either of those from happening so that 2013 is a happy new year for you and your business.

7 Tax Tips For A Happy New Year

December is the time of year when we all start thinking about our new year’s resolutions – many of which, let’s admit, we’ll fail to keep. But one resolution every trucking executive should make and keep is to do a good job of tax planning.

Tax planning is even more important than it has been in the past because of the government’s current fiscal situation. If you’ve been following the news lately, you know that the federal government is broke and looking for money wherever it can find it. If that money has to come from a hard-working, job-creating trucking company, well, so be it. Bell & Company has been in business 30 years. We’re seeing more audits now than we can remember seeing in a long time, and those audits are hitting carriers of all sizes.

How can you ensure that, six months from now, you’re not sitting across a table from an IRS agent who wants to use your company’s profits to reduce the federal budget deficit? These seven tips will help. Pay special attention to the first two, because if you get them right, the rest will take care of themselves.

First, discuss your tax situation with a qualified accounting firm at least quarterly. You should plan and strategize, not react and hope. Waiting until April to dump your records on your accountant makes it more likely you’ll face something unexpected, and when it comes to tax planning, surprises are bad. In fact, even a “good” surprise – a refund– is bad because that means a carrier has been paying too many taxes throughout the year instead of using that money to build its business. By providing information to your accountant throughout the year, he or she more likely will catch variances, spot developing problems, and keep you from paying too much or too little. Plus, you’ll have more peace of mind. As Jimmy Starr, owner of the Camden-based carrier Woodfield, Inc., put it, “If we see something turn either direction, then we can adjust to it throughout the year instead of having any kind of surprises that would be devastating for our cash flow.”

Also, don’t wait until December to start asking your accountant about last-minute purchases. A good tax benefit won’t outweigh a bad business decision. You don’t want to haphazardly buy assets in December like a last-minute Christmas shopper filling her cart with whatever is left on the shelf. Besides, the trucking industry doesn’t lend itself to that kind of purchase. The most important assets, trucks and trailers, need to be spec’d and ordered months in advance of the end of the year in order to take advantage of the full tax benefits.

Second, make sure your financial statements are complete and accurate. Even the best accountants may not catch something if you don’t provide them the right information, and that could lead to problems.

As part of your records, make sure your fixed asset additions are detailed for your CPA to add to your depreciation schedule. It may not be obvious that you’ve added trucks or trailers, done major repairs, or completed a big renovation to your office. Year over year, the expense may look the same, but there may be some capitalizable items within that profit and loss statement that need to be added to the balance sheet and to the depreciation schedule. Remember, accountants don’t like surprises.

Third, ask your CPA if leasing or purchasing is right for you. Leasing means the payment will be lower, and you can deduct expenses over time. For 2012 purchasing enables you to deduct 50 percent of the expense during the first year.

Fourth, periodically revisit your accounting method – cash or accrual. In the accrual method, you pay taxes on receivables even if you haven’t collected payment. Using the cash method, you pay taxes only on your actual collected revenues. Obviously, the cash method makes more sense for most trucking companies because of the timing issues (i.e. you pay your payables every day and get paid by your shippers every thirty days).  However, C corporations are sometimes required to use the accrual method.

Which brings us to the fifth tip: If you still are a C corporation, you should ask your accountant about converting to an S corporation. S corporations are pass-through entities that are not subject to income taxes, though shareholders’ incomes are. However, there are some additional reporting requirements. The S corporation is best for most carriers, but it may not be right for you.

Sixth, ask your accountant about the government’s changing tax laws. Even if you like to defer paying taxes, you may want to distribute your C Corporation earnings as a dividend this year rather than wait until the beginning of this year because capital gains taxes may increase in 2013. If that happens, you might be better off paying fewer taxes now rather than more taxes later. Also, ask your accountant if you should take the 50 percent bonus depreciation on new purchases this year or if you should elect out and take the depreciation over time. If taxes increase – as they eventually will – you may want to spread the depreciation out to reduce your tax burden over several years’ time.

Last but not least, make sure your company is paying taxes in all the states where taxes are owed. Many companies are unaware they have multi-state tax issues. They may think that paying their International Fuel Tax Agreement taxes takes care of those state-by-state demands, but IFTA is not an income tax. Also, different states have different rules. For example, if you haul from Texas to Arkansas, Texas doesn’t expect you to pay anything. In driving through Arkansas, you owe Arkansas money according to the number of miles traveled through its borders. One particular carrier had no idea it owed money until a tax auditor happened to see one of its trucks arriving at a shipper’s location, wrote the carrier’s name down from the side of the truck, and researched the company’s tax history. This is happening more often now that the states are searching for revenue sources.   

When it comes to tax planning, there is not always a right or wrong answer because each carrier has different needs and philosophies. Some carriers like to defer taxes as much as possible so they can use the money to build their business. Some prefer to pay their taxes as they go so they don’t have a big future expense coming due at a bad time.

But no one likes an unexpected tax bill, and no one likes an audit. Following these seven tips will help keep either of those from happening so that 2013 is a happy new year for you and your business.

A Closer Look at Home Office Deductions Working from Home

Home office deductions can save taxpayers a bundle if they meet the tax law qualifications. However, claiming expenses for a home office has long been a red flag for an IRS audit since many people don't qualify. But don't be afraid to take a home office deduction if you're entitled to it. You just need to pay close attention to the rules to ensure that you're eligible -- and that your recordkeeping is complete.

Beware: IRS Hot Button

The IRS often scrutinizes home office deductions claimed on tax returns. In one recent U.S. Tax Court case, many of the taxpayer's claimed expenses were disallowed once she became an employee. The case illustrates a number of issues that you should consider before deducting home office expenses.

Facts of the Case

Jean Marie Fontayne and her husband worked for Vitesse Semiconductor Sales Corporation. The husband was an employee, but Jean was a part-time independent contractor who worked from her home from January to July 2008.

After Jean's supervisor retired, his replacement hired Jean as a full-time employee in July 2008. As an employee, she was required to work from Vitesse's office at least two days a week and could work from home up to three days a week.

The taxpayers moved into their home in January 2008. Jean designated a room with a closet and a bathroom as her office space. Later that year, the taxpayers enlarged the home office. A contractor removed an office wall and replaced it 14 inches further into the living room.

In the home office area, the taxpayers replaced the carpet, re-tiled the bath, and added under-the-floor heating, a central vacuum, and a fireproof safe in the closet.

The Fontaynes reported a tentative profit from the business of $24,728 and expenses of $24,728 ($22,883 plus $1,845 for a casualty loss and depreciation) for business use of their home. That amount included direct expenses of $16,501 for repairs and maintenance, as well as an allocable portion of indirect expenses, such as utilities and homeowners insurance.

The taxpayers claimed that the office occupied 17.87 percent of their home (554 square feet in the home office divided by 3,100 feet in the total house). Their home office measurement included the hallway, entryway, room, bathroom and closet. In addition, the taxpayers calculated square footage from the outside of the house.

The IRS allowed deductions of just $1,113 for business use of home expenses. This included $391 of real estate taxes removed from Schedule A and re-characterized as home office expenses.

Tax Court Findings:

The court agreed that the taxpayers qualified for home office deductions for part of the year. The rest of the time, the court noted the taxpayer was an employee who wasn't required to work from home, although it might have made her more productive.

The taxpayers presented a letter from Vitesse stating Jean's part-time home office was beneficial for the company but wasn't required. Instead, she had to work at the company's location at least two days a week. The court ruled Jean didn't meet the "convenience of employer" requirement and disallowed home office deductions for the second half of the year.

The court also ruled the bathroom wasn't used exclusively and regularly for business. Neither was the closet, because Jean wasn't required to store inventory or other items for work. In addition, most of the claimed repairs were capital improvements which couldn't be deducted.

Ultimately, the Court allowed a home office deduction for the first half of the year when Jean was a contractor. The judge also scaled back on many of the taxpayers' computed direct and indirect expenses. (Fontayne, T.C. Summ. Op. 2013-54)

For Self-Employed Individuals

For self-employed individuals, a home office qualifies for deductions if it is used:

  • Exclusively and regularly as your principal place of business;
  • Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or
  • In the case of a separate structure, in connection with your trade or business.

There are also special rules for portions of a home used as a child care facility or for storage of inventory or product samples. If you are self employed, have no other business location and perform the work at home, you should qualify. You can also qualify if you perform administrative or management activities in a home office and have no other fixed location where you can conduct such activities.

For example, suppose you're self-employed and take orders while visiting clients. Your only location for processing orders and following up on inquiries is your home office, so it likely qualifies for a tax deduction. Regularly meeting customers or clients at a home office also qualifies it. The key word is regularly. 

Seeing customers twice a month is unlikely to meet the threshold. The exclusive use requirement is also strictly interpreted. A spare bedroom converted into a home office will probably qualify, unless your relatives use the room when they come to visit.

For Employees

The rules for employees are stricter. An employee's home office qualifies if it is:

  • For the employer's convenience and
  • Required as a condition of employment.

To be a condition of your employment means it is necessary for you to properly perform your work. For example, suppose you're an engineer who inspects construction sites during the day and performs administrative tasks at night. If your employer's office is locked after hours, your home office would probably qualify for home office deductions if you use it to write up daily reports. In these types of cases, get a letter from your employer to substantiate the facts.

Crunching the Numbers

When computing your deduction, there are two types of expenses that are deductible -- indirect and direct. Indirect expenses are those that pertain to the whole house, such as utilities and homeowners insurance. Those are apportioned based on the percentage of the space used for business.

Some expenses -- such as housekeeping and gardening expenses or repairs to another room in the house -- don't qualify as an indirect expense and would not be deductible at all.

Direct expenses don't have to be apportioned. For example, if you have a separate electric line and meter for your home office, the full amount of the electric bill for that meter would be deductible.

New Simplified Option

Starting in 2013, you can deduct a simplified safe harbor amount of $5 per square foot up to a maximum of $1,500 (300 square feet). That's not overly generous, but it means you can itemize your full mortgage interest and real estate taxes on Schedule A of your personal tax return.

In some parts of the country, the effective savings of the new simplified option may be as much as if you claimed actual home office expenses. But if you live near a major metropolitan area, the simplified option might amount to a fraction of the actual expenses.

Keep in mind, the simplified option only makes the recordkeeping burden easier. It does not change the criteria for who can claim home office deductions. There's no simplified method for qualifying in the first place.

Pick One Method for the Year

Below is a chart from the IRS comparing the two options for claiming home office expenses. Once you choose a method for the tax year, you cannot change to the other method for the same year. If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business.

If you have questions about whether you qualify to claim home office deductions on your tax return, consult with your tax adviser.

New Simplified Option

Regular Method

Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes

The same rules apply

  • Allowable square footage of business home use (not to exceed 300 square feet)
  • Percentage of home used for business
  • Standard $5 per square foot used to determine home business deduction
  • Actual expenses determined and records maintained
  • Home-related itemized deductions claimed in full on Schedule A
  • Home-related itemized deductions apportioned between Schedule A and business Schedule C or F
  • No depreciation deduction
  • Depreciation deduction for portion of home used for business
  • No recapture of depreciation upon sale of home
  • Recapture of depreciation on gain upon sale of home
  • Deduction cannot exceed gross income from business use of the home, less business expenses

The same rules apply

  • Amount in excess of gross income limitation may not be carried over
  • Amount in excess of gross income limitation may be carried over
  • Loss carryover from use of regular method in prior year may not be claimed
  • Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year

Arkansas Sales and Use Tax Rate Increases July 1, 2013

Effective July 1, 2013, the Arkansas Sales and Use Tax percentage is increasing from 6% to 6.5%.

You should make sure your computerized or manual accounting system reflects the new 6.5% rate effective July 1, 2013.  The Arkansas Sales and Use Tax website says that the 6.5% rate is in effect for approximately the next 10 years and will end when there are no bonds outstanding to which tax collections have been allocated.

The State of Arkansas usually provides updated Sales and Use Tax paper reports with the new tax rates, so watch your mail in the next few weeks for the updated forms.  You can also visit http://www.dfa.arkansas.gov/offices/exciseTax/salesanduse/Documents/whatsnew2013.pdf for additional information.  If you have any questions please give Andrew Griffith a call or email andrew.griffith@bellandcompany.net

Legislative Wrap Up by Ron Fuller, May 3, 2013

At your request, I am providing you a brief wrap up of the recently completed 100 day session. The AR House and AR Senate was controlled by Republicans for the first time since Reconstruction. While a good bit was accomplished, there was an air of partnership that has not been present in the past. Due to the staggered nature of state senate terms, the Republicans will in all likelihood remain in control of the state senate. The Republicans will have a battle on their hands to remain in control of the house due to the large number of party members who are affected by term limits.

The governor's race will probably come down to a real battle between former congressman Mike Ross (D) and former congressman Asa Hutchinson (R). I would expect this to be one of the most expensive governor's races in our history.

Senator Mark Pryor has announced and is raising money. Arkansas congressman Tom Cotton is being encouraged by numerous individuals to challenge Senator Pryor.   

 

Major Legislative Issues:

The legislature passed and the governor signed legislation allowing Medicaid funds to be used to pay for private insurance for approximately 250 thousand additional Medicaid enrollees. Arkansas has roughly 750 thousand people on the current Medicaid rolls and the passage of this law means that another 250 thousand will be receiving some level of assistance to help them pay for health care. Arkansas population is currently 2.9 million people.  The Federal Government has agreed with this approach in principle but details are still being worked out.

A package of tax cuts was passed totaling roughly $140 million dollars. These tax cuts included brakes for manufactures, farmers and armed service members. It also included cuts in the state's taxes on income and capitol gains.

The sales tax on groceries was also approved if bond obligations or desegregation payments to the three Little Rock-area school districts decline over a six-month period.  

Social issues were front and center at times as legislators overrode a pair of vetoes by Governor Beebe regarding abortion restrictions and legislation requiring voters to show photo identification at the polls. Also passed were extended gun rights in the state. Churches and campuses may now allow concealed handguns to be carried on their premises.

Bell & Company Wins National Public Service Award

10.22.12

Bell & Company, PA was selected by the American Institute of Certified Public Accountants as the recepient of the 2011 Public Service award where we traveled to Ameila Island Florida to receive.

Here is the press release from the award.

Amelia Island, Fla. (Oct. 22, 2012) – The American Institute of CPAs is pleased to announce that Johnny K. Hudson, CPA is the 2011 recipient of the Institute’s Public Service Award for Individuals. Bell & Company, North Little Rock, Ark. and the Reznick Group, Bethesda, Md. have received the 2011 Public Service Award for Firms. The annual awards honor members and firms of the AICPA who have made significant contributions to their communities. The recipients received their awards at the fall meeting of the Institute’s governing Council in Amelia Island, Fla.

Kathy G. Eddy, chair of the awards committee presented the awards.

“The many strong candidates for these awards make it difficult to select individuals and firms. So many make significant contributions to their communities,” said Kathy Eddy, chair of the AICPA’s awards committee, “It is our belief that all of compassionate and tireless volunteers should be recognized. But this year’s winners, Johnny K. Hudson, Bell & Company and the Reznick Group clearly stand out.”

Bell & Company’s partners and employees have served in pivotal roles in community organizations throughout North Little Rock, Ark. and Haiti. Following the 2010 earthquake in Haiti, the firm raised much needed funds for school supplies for children residing a remote village. The firm gathered, sorted and packed the supplies into 400 individual containers per child. In the same village, Bell & Company supported a medical clinic by providing Internet service and funding a full-time nurse. The firms sent two employees to the location to personally distribute the school supplies and help set up the clinic.

In Arkansas, Bell& amp; Company supports the Arkansas State Mental Hospital through volunteerism and donations, staff members serve meals for the homeless at the Salvation Army the first Wed. of each month and is actively involved in the Susan G. Komen Race for the Cure and Hearts and Hooves, a therapeutic horse riding and teaching facility for those with disabilities.

Independent Contractors

Richard Bell recently spoke at the TEANA conference in New Orleans. Here is a link to the White Paper he handed out: "The Five Evil Sisters: An Attack on Independent Contractors"

The following is what TEANA said about the topic:

"Transportation accountant Richard Bell pointed out threats facing the independent contractor model many TEANA members utilize. Bell contends business owners do a better job of allocating and managing resources than government, as local, state and federal authorities seek revenue during times when tax coffers are thinning. Bell encourages TEANA members aggregate against government controlling independent contractor law and for members to work towards changing state workers compensation laws to make them statutory. Bell advises all members to understand the definition of "employee" in each state they provide services, for workers compensation purposes."

If you would like more information on this topic or would like the exhibits in the white paper listed above please, contact deanna.lovelady@bellandcompany.net or call Richard Bell at 501.753.9700.

Charitable Donations

Have you noticed the following language at the bottom of a receipt you receive for your donations?

No goods, services, or other tangible benefits were received in exchange for these contributions.

The language is magical. In a recent tax court case, Durden v Commissioner, T.C. memo 2012-40, a case out of Texas, a $25,000 charitable deduction was disallowed on the taxpayer's 1040. A computer generated notice in 2009 asked for verification for the 2007 itemized charitable deduction. A letter from the church which was the bulk of the donations was sent to the IRS along with the cancelled checks for verification. The IRS said it was not adequate documentation. A second letter was sent from the church that added the statement if any goods or services were provided in consideration for the contribution. The second letter was rejected by the IRS.  The IRS PREVAILED because the letter was not obtained prior to the filing of the return including extensions.

Bell & Co will step up its efforts in 2013 to review your charitable contributions if significant for the proper paper work.

If you have any questions, please give us a call at 501.753.9700.

Job Search Expenses

If you’re looking for a new job, you may be able to deduct some of your job hunting expenses on your tax return. 

 

·        The deduction will be an itemized deduction on schedule A, to be combined with other miscellaneous expenses, deductible to the extent that the total exceeds 2% of your adjusted gross income.

 

·        To qualify for a deduction, your job search must be in your current occupation.  You cannot deduct expenses when searching for a job in a new occupation, if you’re looking for a job for the first time, or if there was a substantial break between your last job and the time you began looking for a new job.

 

·        You can deduct amounts spent in preparing and mailing your resume to prospective employers.

 

·        Travel expenses in looking for a new job may be deductible.  The trip must be primarily for a new job.  The amount of time spent in personal activities versus looking for a new job is important in determining the deductible amount of travel expenses.

 

·        Any amounts paid to an employment or outplacement agency are deductible.  However, if your employer pays you back for those fees in a later year, you then have to include that amount in income, up to the benefit you received from the deduction. 

 

If you have questions about this deduction, call Kelly Phillips at Bell and Company at 501.753.9700.

IRS Annoucements

For the unemployed or SE income earners with a 25% reduction in Gross receipts, in order to assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.

The IRS announced today that effective immediately, the threshold for using an installment agreement without having to supply the IRS with a financial statement has been raised from $25,000 to $50,000. This is a significant reduction in taxpayer burden.

 

Cost Segregation

If you are in the process of buying or selling a company, you may want to review the recent tax case Peco Foods v. Commissioner, TC Memo 2012-18. This case dealt with a proposed reallocation of asset values by the purchaser from a broad classification and large dollar value allocation of asset types (e.g. 26 categories of class types) contained in the sales agreement, which was then followed by subsequent cost studies by the purchaser after closing.

The subsequent cost segregation study allocated the 26 class groups into over 300 sub-asset groups; thus creating  smaller, more specific groupings with shortened tax lives for depreciation purposes. The Tax Court ruled that the cost segregation study would be disregarded and the previously negotiated groupings contained in the sales agreement would be binding. This resulted in less annual depreciation deductions by the purchaser on the front end. What lesson is to be learned from this case?

LOOK AT THE COST SEGREGATION STUDY PRIOR TO CLOSING, which should be followed by the negotiated acceptance by the buyer and seller to treat the study as acceptable by both sides and made part of the sales agreement. I would suggest, for example, that the 300 sub-asset groups be attached to Form 8594, which is an IRS form that reports the acquisition and sale by the respective parties in the year of sale.  

If you have questions, please contact Richard Bell, CPA 501.753.9700 or e-mail richard.bell@bellandcompany.net 

A link to a copy of the case can be found here: PecoFoods V Commissioner Case

New Proposed Regs

The IRS has issued new proposed regs on capitalization vs. expensing of materials and supplies. I usually think about pens or pencils, paper, etc. as supplies and never considered a computer to meet the definition of materials and supplies, but computers are used as an example to explain one section of the proposed regs.  The de minimis rule exception for capitalization can now apply to computer equipment. 

If you file a timely election on your tax return for 2012 and thereafter, and if you have a written policy in place for expensing such computer items under a certain dollar amount, for example- $500 per unit, then you may deduct the total purchase of computers for the year that meet your policy guideline of $500 or less per unit times the number of units purchased.  This is subject to the upper limit of .1% times the gross sales of the business, or 2% of the total amount of depreciation and amortization claimed.    

For additional information, give Kelly Phillips, Pancho Espejo, or myself a call.

 

Richard Bell, CPA

501.753.9700

1099s

The deadline for providing 1099s to recipients is January 31. We wanted to make you aware of some new questions that you have to answer on your tax returns.  The IRS wants to make sure that you are following the rules on providing 1099s to those who meet the reporting threshold.  If you pay a non-incorporated service provider at least $600 during the calendar year in the course of your business or farm activity, you are required to report those payments to them on a Form 1099.  Attorneys are a special category of vendors, in that you are required to send them a 1099 for all payments.

The IRS is asking if you have made payments to a service provider that would require a Form 1099 to be filed.  If you answer this question yes, they ask if you have filed the Form 1099 or are going to do so.  If you have questions on 1099’s please give Jeff Lovelady a call 501.753.9700 or e-mail jeff.lovelady@bellandcompany.net.

 

 

 

Tax Gap

I read a recent PPC article which reported on the tax gap between tax paid and not paid on 2006 income.  What this is saying is that when there are requirements and guidelines as to the issuance of W-2s and 1099s, the misreporting of income is impacted positively.  Fewer taxpayers are misreporting income. 

The point of this study will lead to increased reporting requirements in future years, for payment of goods and services.  You can expect these requirement increases to be piggy backed on bills that are proposed and probably passed by Congress. The recent repeal of the enhanced 1099 reporting bill passed as part of the Health Affordability Act would have greatly increased the reporting requirements of company payments for goods and services in 2012.   

Consider the repeal temporary, with this type of data reported on the income gap between payments and reported income, expect Congress to move in this direction again in the future irrespective of which party controls congress or the executive branch. Bell & Company continues to emphasize to our client base the importance of compliance reporting, especially in the area of 1099’s. If you have any questions, give us a call to discuss.