Repairs & maintenance
The IRS is expected to introduce new rules on capitalization of repair and maintenance costs by the end of 2011. The new regulations will likely give better guidance as to whether the costs can be fully deducted in the year incurred or depreciated over a longer period. Officials at the Treasury have indicated that this is the most comprehensive guidance in more than twenty years regarding cost capitalization. The guidance is not expected to be taxpayer friendly and could have a material impact on your taxable income.

W-2 reporting of health coverage
Scheduled to begin in 2011, all employers are required to report the cost of employer-sponsored health coverage on their employee’s W-2s. The IRS just recently granted a reprieve from this requirement. The IRS said such reporting will be optional for 2011 and those failing to include information on 2011 W-2s will not be subject to penalties. Note, this reporting is informational only.

Small employer health insurance credit
Starting in 2010 and running through 2013, eligible small employers (employers with 25 or fewer full-time equivalent employees and average wages of $50,000 or less) may claim a nonrefundable credit equal to 35% of non-elective contributions the company makes toward employee insurance premiums. The employer must pay at least 50% of the premium and must pay a uniform percentage for all employees in order to qualify.

Tool reimbursement plans
Reimbursements are tax-free to the employee and are not subject to withholding or payroll taxes if made under an accountable plan. To be treated as made under an accountable plan, a reimbursement must meet certain requirements. Use caution when entering into any sponsored plan that has not received IRS approval due to the significant payroll tax risk. There is guidance from a favorable ruling issued by the IRS to a taxpayer on its newly designed plan. Although this new plan does not provide tax benefits as generous as some of the older plans being marketed, it does carry the IRS’ approval.

Fixed assets
Fixed assets are an area where you can maximize your tax deductions and minimize your tax expense. Generally, review your fixed asset purchases and expense all items where appropriate. When disposing of property and acquiring new property, consider the like-kind exchange provisions to defer the gain. If you have recently acquired a building or completed new construction, consider a cost segregation study to take advantage of shorter tax lives on certain costs as some components of the construction can be written off over shorter lives. Contact Baker Tilly for more information about cost segregation studies.

Reconcile balance sheet accounts – All balance sheet accounts should be reconciled prior to the year-end closing. All schedules should be audited and cleaned up. All missing documents should be accounted for.

S Corporation shareholder insurance premiums
Similar to prior years, health and life insurance premiums paid by an S corporation on behalf of a shareholder owning more than two percent of the corporation’s stock are taxable fringe benefits. The amount paid on behalf of the shareholder must be included on the shareholder’s W-2 as wages. Health insurance is not subject to Social Security or Medicare tax, but life insurance is subject to both.

Shareholder related expenses
Salaries and other payments owed to any shareholders of an S-corporation, or to shareholders of a C-corporation owning more than 50 percent of the company’s stock, must be paid by year-end to be able to deduct the expenses. This includes expenses owed to individuals related to the shareholder.

Cafeteria plans (§125 Plan)
Verify that all participants are eligible. S-corporation stockholders who own two percent or more of the stock and certain family members are not eligible to participate. Partners in a partnership and LLC members, regardless of ownership percentage, are ineligible.

Starting in 2011, eligible employers with fewer than 100 employees are permitted to set up "simple cafeteria plans." The health care law provides eligible small employers with a safe harbor from the nondiscrimination requirements (related to highly compensated participants or key employees) of regular cafeteria plans.

Employee group-term life insurance over $50K
Employer provided group-term life insurance with a value $50,000 or less is a tax-free benefit to the employee if it is non-discriminatory. The value in excess of $50,000 is taxable income and must be reported on Form W-2. The taxable cost of group-term coverage may be determined using the Uniform Premium Table below based on the employee’s age at year-end. The taxable amount is the excess coverage times the table rate amount times the number of months of coverage. That amount is reduced by any employee paid premiums.  

Guaranteed payments versus employee wages (Form W-2) – Individual owners of businesses taxed as partnerships (e.g. LLCs) should receive their compensation in the form of a guaranteed payment, not employee wages. Unlike employee wages, guaranteed payments are not subject to employee payroll withholding taxes. Instead, the individual partner is responsible for paying the federal/state income and federal self-employment (i.e. Social Security) taxes related to the guaranteed payments by making timely estimated tax payments. In addition, guaranteed payments are reported on the partner’s Schedule K-1, not Form W-2.

Personal use of company vehicles – The personal use of company vehicles and other taxable benefits (e.g. personal use of company airplane, etc.) should be added to the employee/owner’s wages and reported on Form W-2 or should be added to the partner’s guaranteed payment and reported on Schedule K-1.

Form 1099-MISC
Form 1099-MISC is required for all non-employee service providers (except corporations) which you paid $600 or more in 2011. A 1099-MISC must be sent to all entities providing legal services. Other payments that require 1099s include rent, interest, dividends to the owner (not including S-corporation distributions), and prizes and awards given to contest winners.

Form 1099 reporting was scheduled to be expanded in 2012 and later to include reporting all payments of $600 or more in a calendar year made to a single provider of goods or services. In April 2011, an act was passed that repealed this expansion of Form 1099 reporting. Contact Baker Tilly if you have questions about filing 1099s.

Form 1099-C
Taxpayers engaged in a trade or business of lending money are required to issue 1099-Cs when a debt is discharged. The IRS has issued proposed regulations explaining when a discharge occurs and reporting is required. For buy-here-pay-here operations, a reporting requirement is triggered for either a complete or partial discharge of debt upon repossession or a 36-month period without payment or significant collection effort.

Form 8300
IRS Form 8300 was revised for transactions occurring after June 30, 2011 to report the receipt of more than $10,000 in cash in one transaction or in two or more related transactions. The revisions do not affect the two pages of the form that are typically completed by a dealer. However, the form does mandate that the new version be used for transactions after June 30, 2011. The updated form is available at IRS.gov and can be filled in online.

Additional hiring tax credit - New hire retention credit
Employers who hired individuals after February 3, 2010 and before January 1, 2011 who were previously unemployed at least sixty days may be eligible for a tax credit of 6.2% of the wages paid up to $1,000. To qualify, the employee must have been on the payroll for at least 52 consecutive weeks and the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. Additionally, the qualified employee cannot be a replacement for another employee unless the other employee separated from employment voluntarily or for cause (including downsizing). You cannot claim the credit unless the employee completes and signs Form W-11.

FATCA (Foreign Account Tax Compliance Act) reporting
Reporting requirements for holders of foreign financial assets have been suspended until the IRS releases new Form 8938 Statement of Foreign Financial Assets. IRS Code Section 6038D requires that US persons with any interest in a "specified foreign financial asset" with an aggregate value in all assets in excess of $50,000, file Form 8938, "Statement of Specified Foreign Financial Assets" with their individual income tax returns. After Form 8938 is released in its final form, individuals will have to attach the form for the suspended tax year to their next income tax return required to be filed with the IRS.

Compliance with section 6038D does not relieve a person from the responsibility to file Form TDF 90-22.1, "Report of Foreign Bank and Financial Accounts" to report a financial interest in, signature authority or other authority over one or more financial accounts in foreign countries aggregating more than $10,000 in value.

Veterans' jobs credits
On November 21, 2011 the Vow to Hire Heroes Act was signed into law. This act creates a Returning Heroes Tax Credit for employers who hire certain military veterans. Employers may be eligible for a tax credit of 40% of the first $14,000 of wages (up to $5,600), for hiring certain eligible veterans who have been unemployed for more than six months, and 40% of the first $6,000 of wages (up to $2,400) for certain eligible veterans who have been unemployed more than four weeks and less than six months. These credits are available for veterans who begin work after November 21, 2011.

There is also a Wounded Warrior Tax Credit for hiring certain eligible veterans with service-connected disabilities who have been unemployed more than six months. The credit is for 40% of the first $24,000 of wages (up to $9,600).

Further guidance is expected, but most likely, some type of certification of the eligible employees will be required to claim these credits.

Additional considerations

• Write off all uncollectible accounts receivable by year-end to claim a tax deduction.
• Accrue payroll and commissions earned in December, but not paid until January.
• Consider making charitable contributions in December to get the tax benefit in the current year.
• Rev Proc 2002-9 allows you to credit certain interest and/or advertising credits against your year-end inventory, rather than recognizing them as income in the current year. However, a request to the IRS for an automatic change in accounting method may be required.
• Long term care insurance premiums paid by C Corporations are fully deductible by the corporation and nontaxable to the employee.