The Advisor Fall 2011


New IRS Program for Employers to Reclassify Workers

The IRS has launched a new program that will enable many employers to resolve past worker classification issues at a relatively low tax cost by voluntarily reclassifying their workers. This new program offers employers an opportunity to come into compliance by making a payment covering past payroll tax obligations.

This IRS "Fresh Start" initiative coincides with another new government Department of Labor program to crack down on employers who misclassify employees as independent contractors (see below for more information).

According to the IRS, the new Voluntary Classification Settlement Program "is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers, and the government." Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The IRS program is available to many organizations, tax-exempt organizations, and government entities that now erroneously treat workers as non-employees or independent contractors, and want to reclassify them as employees.


To be eligible, an applicant must:

  • Consistently have treated the workers in the past as non-employees.
  • Have filed all required Forms 1099 for the workers for the previous three years.
  • Not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers.

Here are the results for employers accepted into the program:

  • They will pay 10 percent of the amount of employment taxes that would otherwise have been due on compensation paid for the most recent tax year to the workers, calculated under the reduced rates of section 3509 of the Internal Revenue Code.
  • No interest or penalties will be due.
  • The employers will not be audited on payroll taxes related to these workers for prior years.
  • Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

If a business signs up for the IRS program, do all of its workers have to be reclassified as employees? No. The program permits taxpayers to reclassify some, or all, of their workers. However, once a taxpayer chooses to reclassify certain workers as employees, all individuals in the same class must be treated as employees for employment tax purposes.

For example, a construction firm currently contracts with drywall installers, electricians, and plumbers to perform services at housing construction sites. The company wants to voluntarily reclassify its drywall installers as employees. Once a closing agreement is executed with the IRS, the company must treat all drywall installers as employees for employment tax purposes.

Consult with your tax adviser if your business is interested in participating in the IRS Voluntary Classification Settlement Program. It may not make sense in some situations.

Information Sharing Program Announced by Labor Department

Just two days before the IRS launched its voluntary reclassification program, the U.S. Department of Labor kicked off a program "to end the business practice of misclassifying employees in order to avoid providing employment protections."

The Labor Department signed a "memorandum of understanding" with the IRS, other federal agencies, and numerous states. The parties agreed to share information and coordinate law enforcement efforts involving worker misclassification. The states that have already signed the agreement are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington. States that have agreed to sign are Hawaii, Illinois, Montana, and New York.

The memorandums of understanding arose as part of the department's Misclassification Initiative. The Labor Department has called the misclassification of employees as independent contractors "an alarming trend, particularly in industries such as construction that often employ low-wage, vulnerable workers."

 

 

IRS Guidance: How to Get Tax-Free Treatment of Cell Phones

The IRS has issued new guidance designed to clarify the tax treatment of employer-provided cell phones and similar telecommunications devices. The guidance relates to a provision in the Small Business Jobs Act of 2010, enacted last year, that removed cell phones from the definition of "listed property," a category under tax law that normally requires additional recordkeeping by taxpayers.

Prior to the legislation, cell phone use triggered the same strict substantiation rules that apply to business use of vehicles. In other words, you had to track your business and personal use in order to claim deductions. The 2010 law removed these requirements for cell phones and similar communication devices, and treats employer-provided devices as tax-free fringe benefits, as long as certain requirements are met.

The IRS states that when an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the business and personal use of the cell phone is generally not taxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment (IRS Notice 2011-72).

What does the IRS consider business reasons? The tax agency listed some possible scenarios:

  • An employer needs to contact the employee at all times for work related emergencies.
  • An employer requires that an employee be available to speak with clients at times when the employee is away from the office.
  • An employee needs to speak with clients located in other time zones at times outside of his or her normal work day.

"A cell phone provided to promote the morale or good will of employees, to attract a prospective employee, or as a means of furnishing additional compensation to an employee is not provided primarily for non-compensatory business reasons," the IRS added.

The IRS also announced in a memo to its examiners a similar administrative approach that applies when businesses give cash allowances and reimbursements for work-related use of personally owned cell phones. Under this approach, employers that require employees to use personal cell phones for business may treat reimbursements of the employees' expenses for reasonable cell phone coverage as non-taxable. This treatment does not apply to unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee's regular wages.

Bottom line: When employers provide cell phones to employees or when employers reimburse employees for business use of personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable.

 

Taxes: Beware of the Perils of Poor Recordkeeping

The importance of keeping thorough and accurate records can't be emphasized enough. If you have incomplete or no records and get audited by the IRS, it can cost you valuable deductions.

One recent Tax Court case illustrates the potential pitfalls facing some taxpayers.

Facts of the case: Adan Sucilla operated a sole proprietorship providing farm labor services in California. He claimed deductions for various business expenses in 2007 and 2008, including travel and entertainment, car and truck expenses, repairs, maintenance, supplies, taxes, and insurance. But Sucilla didn't keep separate books for his business operation. Instead, he relied on bank statements, subcontractor checks, and receipts to account for the expenses. Sucilla did, however, hire an accountant to prepare his federal tax returns for the years in question.

The IRS agent who examined the returns for these two years found that all the business income was reported accurately, but some expenses were not substantiated because Sucilla had either lost or misplaced the receipts.

For 2007, out of a total of $2,262,421 in expenses, the IRS found $165,386 was unsubstantiated. For 2008, out of a total of $1,287,945 in expenses, $35,920 was unsubstantiated.

However, the IRS allowed deductions totaling $38,635 and $18,585 for 2007 and 2008, respectively, for previously unclaimed but allowable expenses.

Tax outcome: Citing a lack of information concerning the deductions claimed on the tax returns, the Tax Court agreed with the IRS. Other than the deductions conceded, the court stated, the taxpayer "failed to provide receipts, logs, books, or any other kind of documentation to substantiate the deductions."

The court added that the "Cohan rule," which allows estimates of expenses without complete documentation, does not apply to certain expenses (The Cohan rule is described below).

One consolation: Because Sucilla acted with reasonable cause and in good faith, the court ruled that he was not liable for accuracy-related penalties for substantially understating income (Sucilla, TC Memo 2011-197).

The substantial understatement penalty is one of the most commonly assessed federal income tax penalties. It can also be one of the most expensive. The penalty equals 20 percent of any tax underpayment caused by a substantial understatement of income tax liability on a federal return.

However, there is an important penalty exception when the taxpayer:

  • Had reasonable cause for taking the tax position that caused the substantial understatement; and
  • Acted in good faith.

One of the ways to demonstrate reasonable cause and good faith is to give a competent, independent tax professional all the relevant information and then rely on his or her advice and tax preparation efforts.

The moral of this case is pretty simple: Don't leave the important matter of documentation to chance. With guidance from your tax adviser, you can prepare tax return records that will stand up to close scrutiny from the IRS.

There is no one way to keep records. In fact, the IRS states on its website that "you may choose any recordkeeping system suited to your business that clearly shows your income and expenses." However, in a few cases, the law does require certain records and imposes requirements. For example, with respect to travel, entertainment, gifts, and listed property expenses, a taxpayer must generally substantiate with records:

1. The amount of the expense.

2. The time and place the expense was incurred.

3. The business purpose.

4. In the case of a business entertainment or gift expense, the business relationship.

5. For listed property, a taxpayer must establish the amount of business use and the amount of total use.

For more information about tax recordkeeping, consult with your tax adviser.


A Tax Fall-Back Position

When all else fails, the "Cohan rule" might bail taxpayers out of a tax recordkeeping jam.

In a landmark case decided more than 80 years ago, the Second Circuit Court of Appeals allowed legendary Broadway showman George M. Cohan to deduct various expenses he could not substantiate. The court reasoned that he had provided credible evidence that some expenses had been incurred, so it permitted deductions on a limited basis (Cohan, 39 F.2d 540, 2d Cir., 1930).

As the Tax Court explained in the Sucilla case: "In these instances, the court is permitted to make as close an approximation of the allowable expense as it can, bearing heavily against the taxpayer whose inexactitude is of his or her own making." (In some cases, the Cohan rule is allowed when records are lost for reasons beyond a taxpayer's control, such as a fire or natural disaster.)

When making estimates under the Cohan rule, the court added that there must be some basis upon which they are made or an allowance "would amount to unguided largesse."

Travel and entertainment expenses are not allowed. Since the original Cohan case, the courts have determined that the strict substantiation requirements for travel and entertainment expenses and listed property override the application of the Cohan rule. Therefore, courts cannot estimate them without documentation.

Caution: The Cohan rule should be viewed only as a last resort. The best approach is to keep detailed records required to substantiate deductions.

 

Employees Using Tablet Computers: Assess the Risks

When Apple launched the iPad, it created a new class of device that met with rave reviews and sold more than three million devices in the first few months. Currently, more than 29 million iPads have been sold, and the third generation is rumored to be hitting the stores in the spring of 2012.

Tablet computers are here to stay, as evidenced by the popularity of the iPad and the introduction of competitors such as Amazon's lower priced Kindle Fire.

The devices are popping up in all types of businesses including luxury car dealerships, restaurants, retail stores, and hotels. Many people find the portability and functionality provide a competitive edge. In situations where it is impractical to pull out a laptop, boot it up, and load information, you can easily whip out a tablet and review information with customers, prospects, suppliers, and others.

But like many new technology devices, in addition to improving how businesses operate, they can involve a great deal of risk. Yet many tablet users, managers, and executives do not understand the risks and have not taken steps to mitigate them.

When new technology hits the market, most businesses do not adopt it right away. However, some of their employees will buy new devices and begin using them to conduct business without the knowledge or approval of their employers.

The vast number of applications that exist for the iPad can be a double-edged sword. Employees may utilize their iPads in beneficial ways their employers have not envisioned. At the same time, employees may use tablet computers for tasks that could cause angst for senior executives, such as working on the company's yet-to-be released product or storing confidential blue prints on a cloud computing platform.


For many users, a tablet may seem like a more convenient laptop computer. But laptops have more security programs designed to protect them from theft, viruses, and hacking. Lower-priced tablets, such as the Amazon Kindle Fire, could pose a bigger problem for employers since more employees will be able to afford to conduct business with them.

Don't ignore the threats posed by tablets. Instead, take the time to assess the risks and deploy countermeasures:

Does it make sense to buy tablet computers for employees? Depending on the size and the role they could play in your business, it may make sense to buy tablet computers for employees. Doing so can avoid the "gray area" of enforcing corporate policies for employees who use their personal devices to conduct business. If your company chooses to purchase tablets for those with a defined business need, maintain an up-to-date inventory.

Once an employee leaves or is terminated from the company, the devices must be returned. Some companies allow their employees to keep cell phones, laptops, and other devices once they leave because the business has no use for now obsolete technology. But while the technology may be obsolete, the data it could contain is not. It is crucial to have an accurate inventory of devices deployed, as well as processes in place to ensure that managers collect them.

Better to be safe than sorry. Take another look at your company's computer use policy. Most companies have a policy that mandates employees establish a strong password (made up of letters, numbers, and symbols) that they don't share in response to e-mail requests or phishing e-mails. Policies also prohibit employees from disabling anti-virus software.

 

Before allowing employees to use tablet computers in whatever manner you deem appropriate, ensure that all aspects of your computer use policy can be applied to them. Consider the following additional aspects of a computer policy that can be amended to apply to tablets:

  • Deploy standard security such as a password and remote detonation of data in the event the tablet is lost or stolen. There's a good chance someone may forget a tablet in a cab or leave one unattended at a coffee shop, airport, or even a conference attended by your company's competitors.
  • Only permit the installation of a suite of company-approved applications. Employees should also be made aware that all other apps that reside on the iPad are not approved for use in connection with business-related tasks.
  • Periodically submit the tablets to your company's IT personnel for review to ensure that there are no viruses or unauthorized apps being used to store company data.

Update your company data retention policies. In the event that your company becomes involved in litigation, it will likely be required to produce all types of paper and electronic documentation during the discovery phase. Your company's data retention policies should be updated to include how tablet-related data is being stored, managed, and gathered during litigation. Keep in mind that Rule 34 of the Federal Rules of Civil Procedure is generally written to cover devices, such as tablet computers.

Consider forcing all e-mails to be routed through your company server so you can archive messages, rather than allowing employees to configure devices to use personal e-mail services. It potentially limits information leakage and makes it harder for employees to steal data through their personal e-mail accounts. It can also limit the probability of a virus being transmitted to the company's networks.

Your attorney can provide best practices in data retention and management. In addition, place an unobtrusive bar code on the device so that it can be tracked and recorded throughout the discovery process.

Should iPads and tablet computers be banned at your company? Is the risk posed too great to allow the use of the devices? For example, if your company works on government contracts and handles classified information, the risk that the data could be lost or stolen may be too great to allow employees to use tablet computers. The same may be true for a medical company with confidential patient information. Banning tablets should only be undertaken in extreme circumstances, but it may be appropriate if the risk far outstrips the return.

As with most new types of technology, the inherent risk is far greater at the outset. iPads became very popular in a short period, in part due to companies and individuals adopting the new technology within the first six months of its launch.

Now is the time to pause and assess the real risk that iPads create in the workplace. While security vendors continue to develop software to protect iPads, your company should employ a mixture of technology, policies, and procedures to ensure that the risk does not exceed the return.

 

IRS Releases Guidance
Regarding First-Year Bonus Depreciation

The IRS has issued some much needed guidance on how the new business depreciation tax breaks work and the options available to taxpayers. (IRS Revenue Procedure 2011-26)

 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act included a favorable provision that allows 100 percent first-year bonus depreciation for qualified new assets. The new IRS guidance includes rules clarifying the deduction, as well as rules about a retroactive extension of 50 percent bonus depreciation for part of last year.

 

Here is a quick summary of the key points in IRS Revenue Procedure 2011-26.


What Is Qualified Property?

 

To be eligible for 100 percent bonus depreciation, an asset must meet all three of the following requirements:

 

1. It must be qualified property, which includes personal property with an MACRS depreciation period of 20 years or less, certain leasehold improvement property, and certain water utility property. Software that is not required to be amortized over 15 years also qualifies.

 

2. It must be acquired between September 9, 2010, and December 31, 2011. However, the acquisition and placed-in-service deadlines are extended to December 31, 2012, for certain assets with longer production periods, such as transportation equipment and aircraft. (Under the extended deadline deal, only the portion of an asset's basis that is allocable to costs that are incurred by December 31, 2012 is eligible for 100 percent bonus depreciation.)

 

3. The original use of the property must begin by no later than December 31, 2011, or by December 31, 2012, for certain property with longer production periods. In other words, the property must be new rather than used when it is placed in service.

 

Self-Constructed Property Components

 

The acquisition date for property a business constructs for use in its own operations (which we will call self-constructed property) is deemed to be the date when the taxpayer begins construction.

 

What if a business began construction of an item of self-constructed property before September 9, 2010? The item would have qualified for 100 percent bonus depreciation except for the fact that its acquisition date preceded September 9, 2010. The business can elect to claim 100 percent bonus depreciation for components of the self-constructed property. To qualify for the election, the components must be:

  • Acquired or self-constructed after September 8, 2010; and
  • Placed in service by December 31, 2011 (December 31, 2012, for certain components with longer production periods).

 

Restaurant and Retail Improvement Property


Qualified leasehold improvement property is eligible for 100 percent bonus depreciation if the acquisition and placed-in-service date rules are met.

 

The new IRS guidance clarifies that qualified restaurant property and qualified retail improvement property are eligible for 100 percent bonus depreciation if they also meet the definition of qualified leasehold improvement property, and the acquisition and placed-in-service date rules are met.

 

Vehicles Subject to Luxury Auto Depreciation Limits

 

Claiming 100 percent bonus depreciation for a new passenger auto, light truck, or light van that is subject to the luxury auto depreciation limits will increase the maximum first-year depreciation allowance by an even $8,000.

 

For new autos placed in service in 2010, the maximum first-year depreciation allowance is increased to $11,060. The same $11,060 maximum first-year allowance applies to new autos placed in service in 2011.

 

For new light trucks and light vans placed in service in 2010, the maximum first-year depreciation allowance is increased to $11,160. For 2011, the maximum first-year allowance is increased to $11,260.

 

Taxpayers Can Step Down to 50 Percent Bonus Depreciation

 

For qualified property placed in service in tax years that include September 9, 2010, Revenue Procedure 2011-26 says taxpayers can elect 50 percent bonus depreciation instead of 100 percent. This bonus depreciation "step-down election" can be made for any class of property placed in service during the tax year that includes September 9, 2010.

 

Key Point: The IRS previously stated bonus depreciation step-down elections were not allowed.

 

Taxpayers Can Also Elect to Forego Bonus Depreciation

 

Taxpayers can also elect to entirely give up 50 and 100 percent bonus depreciation for a particular class of qualified property that is placed in service during the tax year. Making this election could be advisable if your business has an expiring net operating loss, an expiring capital loss carryover, or you believe that higher tax rates will be paid in future years.

 

Rules to Implement the Retroactive Extension of 50 Percent Bonus Depreciation

 

In addition to establishing the new 100 percent bonus depreciation break, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act also retroactively restored the 50 percent bonus depreciation break for qualified property placed in service between January 1, 2010 and September 8, 2010. Because the law did not become effective until December of 2010, many taxpayers already filed returns that did not take advantage of 50 percent bonus depreciation. Revenue Procedure 2011-26 supplies guidance for taxpayers in this situation.


The guidance only applies to already-filed returns for:

  • 12-month tax years that began in 2009 and ended in 2010; and
  • Short tax years that ended in 2010.

Retroactively claiming the deduction. If your already-filed return for the applicable year did not claim 50 percent bonus depreciation for qualified assets, it can be retroactively claimed by filing an amended return before the return for the subsequent tax year is filed. Alternatively, the taxpayer can file a request for a change in accounting method (on Form 3115) to retroactively claim 50 percent bonus depreciation.

Revoking an earlier election to forego the deduction. If a taxpayer's already-filed return for the applicable year included an election to forego 50 percent bonus depreciation for one or more classes of property, the taxpayer can revoke the election and thereby retroactively claim the deduction for one or more of the property classes by filing an amended return. The amended return must be filed by the later of June 17, 2011, or the day before the return for the subsequent tax year is filed.

 

Miller & Company’s Portal System

How would you like a secured document storage site that allows you 24-7 access to any document you choose to store free of charge?  You may have noticed during our last tax filing season part of our e-filing process we used the new delivery system called NetClient CS found on our website, www.millercocpas.net, to communicate with you in a very secure environment.

 

New technology has been implemented in our office and we would like to share it with you. We have selected Thomson Reuters and Identified by GeoTrust to host the site.  No one can see your information but you and us.  It’s like logging onto your banking website to view your account.

We are no longer willing to send financial information and tax returns via e-mail unless it is encrypted. This is for the protection of your identity.

 

The portal is provided as part of our service to all clients to maintain their own personal electronic file cabinet.  Each year we will place a signed copy of your personal and/or business returns, scanned documents you provide to be used to complete the returns, and copies of any monthly, quarterly, or annual financial information or reports we issue in your portal.

 

We will set up certain folder names for the items to be filed under, and everything should have a date on it so you can easily identify what is there and the period it affects.  There will also be an action file, so you can identify steps needed to complete the filing of a return or whatever we are working with you on at the time.

 

To access the portal, please go to our website and use the pre-assigned login ID and password.  If you have not already received an e-mail with this information and instructions, you will by year end.  We are still in the process of setting them all up.  Please call Melissa Brooks in our office if you would like immediate access, have trouble logging in, cannot remember your login information previously provided, or need any other assistance with the portal.


Once logged in you will see the four folders we have created:


  1. Tax Returns-this one is pretty self explanatory.  Signed copies of your finalized tax returns will be stored here for future access.

  2. Source Documents-this is where we will place the documents associated with the return preparation, sorted by year.

  3. Action Items-this is where information that needs immediate action or attention such as authorizations to be signed, tax notices, or signed authorizations will be placed either by you or by us.

  4. Personal Storage-this folder is your folder to store any other documents of your choosing such as buy-sell agreements, a will, partnership agreement, loan documents or mortgage.  To store items, you can upload directly from your computer and save them to the portal via our website.

 

The system automatically alerts you via e-mail when new information comes into your portal as well as alerting us when you place new information into your portal.

 

 

 

Did You Know?

If you are a homeowner in Arkansas, you can claim a $350 homestead credit against your property taxes.  You can claim this credit regardless of your age or financial situation.  This homestead credit was part of Amendment 79, passed by a majority vote of the people of Arkansas in the statewide general election in 2000 to provide property tax relief for Arkansas homeowners.

 

To qualify as a homestead, the property must be your principal place of residence.  According to the Arkansas Assessment Coordination Department, you must be the owner of record, by deed or by a recorded sales contract.  You could also be the beneficiary of a revocable trust that owns the homestead.  If you live in a nursing home or retirement center and own a home, you are still eligible for the homestead credit.   And if you have deeded your home to someone else but you retain the right to live in the home for life, under a life estate, you can also claim the homestead credit.

 

If you are 65 or older, you can also qualify for a freeze on the assessed value of your principal home for property tax purposes.  You can qualify for the freeze and also claim the homestead credit.  Like the homestead credit, you must apply for the assessment freeze.  Some counties have a form you can download to apply for the freeze, and in other counties you should call the county tax assessor’s office.

 

 

 

 

Last Minute Details !

 

As year-end approaches please remember there are things that need to be done to wrap up 2011, and things to do to be prepared for 2012.

 

1099s are required for any non corporate payees you paid for services in 2011.

 

Annual sales and use tax reports are required to be filed with the State of Arkansas by January 20,

2012 if the amount of tax for which the taxpayer is liable for the previous fiscal year does not exceed $25 per month.  Otherwise, sales and use tax due dates are monthly.  Please visit http://www.dfa.arkansas.gov/offices/exciseTax/salesanduse/Pages/DueDates.aspx for more details.

 

Personal property tax assessment is due May 31, 2012.

 

Arkansas State Franchise tax report is due May 1, 2012

 

Out of state franchise reports are due depending on individual state requirements.

 

2012 W-2’s must reflect amounts you pay for employee’s health care in box 12(d).

 

 

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