Return preparers will have much to discuss with their clients about their 2011 returns, both before and after the year's end.
Although major legislation was not passed this year, expiring provisions, e-filing mandates and new preparer requirements will no doubt add to the conversation.
"It's been relatively quiet," said CCH principal tax analyst Mark Luscombe. "The Bush tax cuts were all extended so that's not a year-end issue. There might be some planning issues regarding extension of the AMT, and the deduction for state sales tax where you might want to go out of your way to take advantage of them in 2011. Usually Congress gets around to extending them but with the focus on fundamental tax reform, many of these could go away."
The mandatory e-filing requirement now requires preparers who file 11 or more returns to e-file, Luscombe noted. "This will push a lot more preparers into the mandatory requirement," he said.
Broker reporting of stock basis is new for 2011, noted Luscombe. "It only applies where stock is acquired after Jan. 1, 2011, so if you bought it sometime during the year and then sold it, the broker is required to include not only the sales price of the stock on the From 1099-B, but also the basis."
Conversions from a traditional IRA to a Roth IRA were big in 2010, Luscombe indicated, because of the elimination of the income limitation and the opportunity to spread the income from the conversion into 2011 and 2012.
(For more year-end tax planning tips, see Tax Strategy, page 16).
"Returns for 2011 will be the first year to report the income from the 2010 Roth conversion," observed Luscombe. "The default was the spread; to elect out of it, taxpayers paid the entire tax on their 2010 return. If they didn't, then they pay half on their 2011 return, and half on their 2012 return."
Another item from 2010 to be aware of is the employee retention credit, part of the HIRE Act, which applies to employees that were hired after March 10, 2010 and before the end of 2010. The credit is worth the lesser of $1,000 or 6.2 percent of the retained worker's wages during a consecutive 52-week period.
The Healthcare Reform Act contains a requirement for W-2 reporting of healthcare premiums, Luscombe noted. "This was so the IRS can track who is covered in terms of eventually imposing penalties on people who are not covered. It's optional for 2011, but some W-2s this year will reflect it," he said.
The Making Work Pay credit, which was on 2010 returns, has disappeared, replaced by a payroll tax deduction that isn't reflected on the tax return.
For the first time, there's a separate line on the return - Line 59(b) - for first-time homebuyers who have a repayment obligation that requires Form 5405 to be attached.
Some of the tax breaks available this year may be gone next year or may be around in a diminished form, advises Harris Abrams, senior tax analyst for Thomson Reuters. "There's a great deal of uncertainty over what Congress will do to stimulate the economy," he said. "It's generally better if you have an upcoming expense to do it this year rather than next. That's even more true with credits and deductions that may be gong away at the end of the year."
In particular, Abrams recommended "going green," by taking advantage of energy credits. "Look at ways to save energy around the house by replacing or upgrading windows, water heaters and skylights. At some point you'll have to replace them anyway, and it's better to buy something when you can get the credit for it. The credit is set to expire at the end of 2011. Sometimes these credits do get extended, but you can't bank on it," he cautioned.
For property placed in service in 2011, the non-business energy property credit is 10 percent of the cost of qualified energy improvements, plus the amount of residential energy property expenditures, up to a lifetime limit of $500 over the total credits allowed to the individual for all earlier tax years ending after 2005. The limit is $200 for windows and skylights, Abrams noted.
Other breaks that might be going away include the exclusion from gross income of 100 percent of gain on the sale of qualified small business stock held for more than five years, Abrams noted. "If the taxpayer buys qualified small business stock by Dec. 31, 2011, he or she may be able to exclude all gain," he said. But, if the taxpayer buys QSBS after Dec. 31, 2011, generally he or she will have to pay tax on one-half of the gain."
For businesses, the Section 179 expensing of purchases of machinery and equipment will bring in more this year than next year, said Abrams. "Up to the end of this year, there's an immediate deduction of up to $500,000 for new equipment. It goes way down after that."
The dollar limit drops from $500,000 to $125,000, and if the property is placed in service after December 31, only a 50 percent bonus depreciation allowance will apply.
BUT THAT'S NOT ALL
Other expiring items that may not be extended include the deduction for state and local sales tax, and the research credit.
More than 60 percent of the rules in Circular 230 are new or changed as of Aug. 2, 2011, said Allen Calhoun, managing editor, Business Entities and Tax Accounting at BNA Tax & Accounting.
"With the expansion of Circular 230, practice before the IRS now includes preparing the return or refund claim, not just filing the return or claim," he explained. "A lot of people who were preparing but not signing the return before are now under the umbrella of Circular 230. They have to register and get a PTIN [preparer tax identification number], take a test and will be subject to continuing education requirements."
Uncertain tax positions must be disclosed on Schedule UTP for certain C corporations, Calhoun pointed out. "The threshold is $100 million in assets this year, but that drops down rapidly. It will be down to $10 million with the 2014 tax year."
Compliance on state returns is becoming increasingly important, indicated Dan Hughes, managing director of the tax group at CBIZ. "We're seeing significantly more state notices," he said. "They are targeting non-filers as well as filers, so we're paying special attention to the filing requirements in state and local jurisdictions."
"They're chasing both people who owe, and those who don't own any tax. In some cases states are imposing a penalty even if no tax is due. In general, they're becoming more aggressive in revenue collection for both individuals and business entities."
"We're not anticipating any major legislation before the end of the year," he said. "We're encouraging our business clients to go ahead and make qualifying purchases before the end of the year to take advantage of bonus depreciation."
An important and sometimes overlooked break is the Section 179D Energy Efficient Commercial Buildings Deduction, explained Matt Becker, tax partner at BDO USA. "For businesses that have made investments in real estate, the accelerated deduction is for up to $1.80 per square foot. It mirrors the credit for energy-efficient home improvements on the individual side."
New York-based practitioner Barbara Weltman advises preparers to check the Small Business Health Care Tax Credit. "Many small businesses didn't know about it last year, or didn't take it because they didn't pay enough to qualify," she said.
A qualifying employer must cover at least 50 percent of the cost of healthcare coverage for some of its workers, and must have less than the equivalent of 25 full-time workers. Average annual wages must be below $50,000. The IRS is working to expand awareness of the credit.
MERCHANT CARD REPORTING
The merchant card reporting requirement has caused some consternation among preparers. The new rule requires the gross amount of reportable transactions for the calendar year and its corresponding months to be reported to the IRS and the business owner on Form 1099-K.
"The problem that many small businesses face is that their gross transactions are being reported and most small businesses just report the net sales on their tax returns, so by definition we have a mismatch, according to Roger Harris, president of Padgett Business Services.
"Most people don't have those records right now, said Harris. "Every day, when they account for cash back, tips and sales tax they have to create permanent records."
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