IMPORTANT 2011 TAX CHANGES

TWO MONTH EXTENSION OF 4.2% OASDI RATE (H.R. 3765)

On December 23, 2011, the President signed H.R. 3765, the “Temporary Payroll Tax Cut Continuation Act of 2011.” Under the provision, the reduced employee OASDI tax rate of 4.2 percent under the FICA tax is extended to apply to covered wages paid in the first two months of 2012. The provision also provides for a recapture of any benefit a taxpayer may have received from the reduction in the OASDI tax rate for remuneration received during the first two months of 2012 in excess of $18,350 (1/6 X $110,100). The recapture is accomplished by a tax equal to two percent of the amount of wages received during the first two months of 2012 that exceed $18,350. The Bill directs the IRS to prescribe regulations or other guidance necessary to implement the recapture provision. In addition, for taxable years beginning in 2012, the OASDI rate for a self-employed individual is reduced to 10.4 percent, for self-employment income of up to $18,350 (reduced by wages subject to the lower OASDI rate for 2012). The provision also provides that a self-employed individual will be able to deduct 59.6% of the 10.4% OASDI paid for taxable years beginning in 2012 on self-employment income of up to $18,350. For self-employment income in excess of this amount, the deduction is equal to half of the OASDI portion of the Self-Employment tax paid.

In addition, as part of the agreement between the House and the Senate, Conferees were appointed to a House-Senate Conference Committee charged with negotiating a deal to extend the payroll tax cut through the end of 2012.

TAXPAYERS NOT REQUIRED TO SEPARATELY REPORT 1099-K AMOUNTS FOR 2011

Final versions of Form 1040, Schedule C, Schedule F, and Schedule E as well as Forms 1065, 1120, and 1120-S, all have two lines for reporting 2011 gross receipts. Line 1(a) is for reporting gross receipts reported to the taxpayer on Form 1099-K (amounts received from credit card sales, debit card sales, and sales from third party payment network transactions). Line 1(b) is for reporting gross receipts other than those reported to the taxpayer on Form 1099-K. However, the final versions of these forms and the related instructions state that line 1(a) is not to be completed for 2011. Instead, both 1099-K gross receipts and other gross receipts are to be reported on line 1(b) of the gross receipts section of each form.

NEW 1099 QUESTIONS ON ALL BUSINESS RETURNS FOR 2011

The IRS has included two new questions on all business forms, 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?” Return preparers should be prepared to answer these questions when filing 2011 returns

DUE DATE FOR 2011 1040s IS APRIL 17^th

Since April 15^th falls on a Sunday and April 16^th is a holiday in the District of Columbia, the due date for 2011 1040s is April 17, 2012.

GSA Releases 2012 Per Diem Rate Schedule (8/31/2011)

An updated 2012 set of federal per diem rates used to substantiate business travel expenses for the lower 48 continental United States (CONUS) was released by the General Services Administration. The federal per diem is equal to the sum of the federal lodging expense rate and the federal meal and incidental expense rate for the locality of travel. The federal government publishes per diem rates for federal employees traveling on government business that may be used by other employers to establish allowances that will satisfy the substantiation requirements, according to the Internal Revenue Service.

For fiscal year 2012, the standard per diem rate is $77 to reflect the average daily rate for lodging across the country. Reimbursement for meals and incidental expenses remains unchanged from fiscal 2011, ranging from $46 to $71 for meals per day, depending on location, and $5 for incidental expenses. About 2,600 counties are covered by the standard CONUS per diem rate of $123 ($77 lodging, $46 meals and incidental expenses). For 2012, about 400 locations were assigned rates higher than the standard CONUS rate.

If an employer's per diem rate is less than or equal to the federal per diem rate, the expenses are deemed substantiated and do not qualify as taxable income to employees. If the employer's per diem rate exceeds the federal rate, amounts paid in excess of the federal per diem must be substantiated by employees or treated as taxable income.

IRS allows employers to apply federal per diem rates to substantiate business-related travel expenses for the government's fiscal year, effective Oct. 1, or calendar year, if the employer elects to apply the rates on a calendar basis.

PRESIDENT SIGNS BILL REPEALING 1099 REPORTING REQUIREMENTS FOR SALES OF PROPERTY AND FOR LANDLORDS -

Background- Under the Health Care Act of 2010, effective for payments made after 2011, the 1099 reporting rules of §6041(a) for payments of compensation, emoluments, interest, rents, royalties, annuities, etc. aggregating $600 or moreHealth Care Act were expanded to apply to payments aggregating $600 or more made to corporations. In addition, also effective for payments made after 2011, the expanded the 1099 reporting requirements to include payments of $600 or more in consideration for property.

Furthermore, the Small Business Jobs Act of 2010 added §6041(h) providing that generally for purposes of the 1099 reporting rules of §6041(a), a person receiving rental income from real estate would be considered to be engaged in a trade or business of renting property for payments made after 2010. Thus, under the Jobs Act, recipients of rental income from real estate generally were subject to the same information reporting requirements as other taxpayers engaged in a trade or business. Therefore, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income were required by the Jobs Act to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider effective for payments made after 2010.

All Three Provisions Retroactively Repealed- On April 14, 2011, President Obama signed the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011 (HR 4). The Act repeals the provision of the Health Care Act of 2010 requiring 1099 reporting for the gross proceeds from the disposition of property. The Act also repeals the provision of the Health Care Act expanding the 1099 reporting rules to cover payments to corporations. However, the 1099 reporting requirements of §1041(a) continue to apply (as was the case prior to the Health Care Act) to payments made for attorneys' fees, and amounts paid to a corporation that provides medical or health care services.  Both of these provisions of the Health Care Act are repealed by this new legislation effective for payments made after 2011 (in other words these provisions are repealed as of their original effective dates).

The Act also repeals the provision of the Small Business Jobs Act of 2010 providing that landlords are considered to be in a trade or business and are therefore, required to file 1099s as provided by §6041. In other words, under the Act, the general information reporting requirement for payments of $600 or more does not apply to persons who receive rental income from real estate who are not otherwise engaged in the trade or business of renting property. Therefore, the treatment of a person as engaged in a trade or business for purposes of the 1099 reporting requirement, based solely upon the receipt of rental income from real estate, is repealed. The repeal of this provision is effective for payments made after 2010 (the effective date of the provision as provided by the Jobs Act).

Therefore, these three recently enacted 1099 provisions have been repealed as of their respective effective dates!

HIGHLIGHTS OF TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION, AND JOB CREATION ACT OF 2010 (THE “TAX RELIEF ACT”)

Ordinary Rates - The Tax Relief Act continues all current ordinary individual income tax rates for 2011 and 2012 (including the current income tax rates for estates and trusts).

Gains and Dividends - The Tax Relief Act continues the current 0% and 15% tax rates for long-term capital gains and qualified dividends for 2011 and 2012.

Exclusion For Qualified Small Business Stock (§1202 Stock). The 2010 Jobs Act, passed last September, increased the gain exclusion for Qualified Small Business Stock (QSBS) from 75% to 100% for stock purchased after September 27, 2010 and before 2011. The Tax Relief Act provides that the 100% gain exclusion applies to qualifying §1202 QSBS purchased after September 27, 2010 and before 2012. Note! To qualify for the QSBS exclusion, the stock must be held for more than 5 years.

AMT - On January 1, 2010, the AMT exemption amount for individuals filing jointly dropped to $45,000. The exemption amounts for single individuals dropped to $33,750. The Tax Relief Act provides that for 2010 the AMT exemption amounts are $72,450 on joint returns and $47,450 for single individuals. In addition, the Act provides that for 2011, the AMT exemption amounts will be $74,450 on joint returns and $48,450 for single individuals. Also, the Act continues to allow nonrefundable personal credits to reduce AMT for 2010 and 2011. These changes prevent approximately 21 million additional individuals from being subject to the AMT for 2010.

No Schedule A Deduction Phase-Outs Until 2013 (§68) - The 3% of AGI phase-out of Schedule A itemized deductions was repealed for 2010, but, was to be reinstated after 2010. The Act provides that there will be no 3% of AGI phase-out of itemized deductions through 2012.

Phase-Out Of Personal Exemptions Until 2013 (§151(d)(3)) - The rule reducing personal exemptions by 2% for each $2,500 or part of $2,500 of AGI in excess of a specified threshold amount was repealed for 2010, but was to be reinstated on January 1, 2011. However, the Tax Relief Act continues the repeal of the phase-out rule through 2012.

Child Credit (§24) - The child credit was to be reduced from a maximum of $1,000 to a maximum of $500 beginning in 2011. The Act provides that there will be no reduction or other changes to child credit through 2012.

Marriage Penalty - For 2010, the size of the 15% bracket for joint return filers is twice the size of the 15% bracket for single individuals. The size of the 15% bracket on a joint return was scheduled to be reduced to 167% of the size of the 15% bracket on a single return after 2010. In addition, the amount of the standard deduction on a joint return is twice the size of the standard deduction for single individuals. However, the amount of the standard deduction on a joint return was scheduled to be reduced to 167% of the standard deduction for single individuals. The Tax Relief Act provides that the size of the 15% bracket on a joint return and the amount of the standard deduction on a joint return will remain at 200% of the amounts for single individuals through 2012.

Coverdell Education Savings Accounts (§530) - For Coverdell education savings accounts (CESAs), several substantive provisions were scheduled to change for tax years beginning after 2010, including: 1) the annual contribution limit was to revert to $500 (from $2,000), 2) the AGI ceilings for eligible contributors were to once again reflect a marriage penalty, 3) tuition, room and board, etc. for elementary and secondary schools was to no longer be eligible for payment (tax-free) from the CESA, and 4) contributions for a taxable year after 2010 were to be required to be made by December 31st of that year (not by the following April 15th). The Tax Relief Act delays these changes until 2013.

Student Loan Interest (§221) - For the student loan interest deduction, several substantive provisions were scheduled to change for tax years beginning after 2010, including: 1) the deduction would not apply to interest payments paid after the first 60 months of payments, and 2) the deduction would phase out at lower AGI levels. The Act delays these changes until 2013.

American Opportunity Credit (§25A) - The American Opportunity Credit (previously the HOPE credit) was enhanced for 2009 and 2010. The enhancements include an increase in the maximum credit from $1,800 to $2,500, allowing the credit for up to 4 years rather than 2 years, and making up to 40% of the credit refundable. The Act continues these enhancements through 2012.

Employer-Provided Educational Assistance (§127) - The provisions of §127 allowing an employer to provide tax-free education benefits of up to $5,250 a year to employees was to expire after 2010. However, the Act extends the current $5,250 exclusion rules of §127 through 2012.

§168(k) Up-Front Deduction (§168(k)) - For Property Acquired and Placed In Service After 9/08/10 and Before 2012, the up-front §168(k) depreciation deduction is increased to 100%. In addition, the §168(k) deduction for property placed in service in calendar year 2012 is 50%. Also, the $8,000 §168(k) depreciation amount allowed for autos, trucks and vans subject to the §280F depreciation limitations (those vehicles with a rated weight of 6,000 lbs or less) is continued through 2012.

Extension Of The Increased §179 Deduction. As 2010 started, the §179 deduction was limited to $250,000, and was reduced by the amount that the §179 property acquisitions exceeded $800,000. For property placed-in-service in tax years beginning in 2010 and 2011, the previously-enacted Jobs Act of 2010 (Jobs Act) increased this cap from $250,000 to $500,000, and also increased the beginning phase-out threshold from $800,000 to $2,000,000. In addition, for 2010 and 2011 purchases, the Jobs Act temporarily expanded the §179 deduction to include "qualified real property." The maximum §179 deduction cap was scheduled to drop back to $25,000 for tax years beginning after 2011. The Tax Relief Act provides that the §179 deduction cap will drop to $125,000 (with a phase-out threshold for purchases beginning at $500,000) for tax years beginning in 2012 (the cap drops to $25,000 for tax years beginning after 2012). Planning Alert! The Tax Relief Act does not extend the temporary §179 deduction for "qualified real property" beyond its current expiration date that ends after 2011.

SUVs And Pick-Up Trucks Over 6,000 Lbs. SUVs with loaded vehicle weights over 6,000 lbs, although exempt from the annual depreciation limits that generally apply to passenger autos, are limited to a §179 deduction of $25,000 (instead of $500,000 for 2010 and 2011). However, unlike SUVs, pickup trucks with loaded vehicle weights over 6,000 lbs are not subject to the $25,000 limit imposed on SUVs, if the truck bed is at least six feet long.

Business Property That Qualifies For §179 But Not The 100% §168(k) Depreciation Deduction. The following purchases qualify for the enhanced §179 deduction for 2010 and 2011, but do not qualify for the 100% up-front depreciation deduction: 1) "used" property may qualify for the §179 deduction (only "new" property qualifies for the §168(k) depreciation deduction); 2) any property acquired and placed in service before September 9, 2010 may qualify for the §179 deduction, but will not qualify for the 100% up-front depreciation (although it may get the 50% §168(k) deduction); and 3) “qualified restaurant property”, placed in service for tax years beginning in 2010 and 2011, qualify for the §179 deduction (up to $250,000) but do not qualify for either the 100% or 50% §168(k) up-front depreciation deduction.

Selected Tax Provisions Extended Through 2011 - Generally, the tax provisions that expired after 2009 and that have been routinely extended in the past, have been extended by the Act through 2011. The following are selected provisions extended through 2011 (for a more detailed list of expiring items that were extended by the Tax Relief Act, please go to donfarmercpa.com and open the link entitled: “Expiring Items Extended By TRA 2010.”

• Selected “Individual” Tax Provisions Extended Through 2011 - 1) school teachers' deduction (up to $250) for certain school supplies; 2) election to deduct state and local sales tax; 3) deduction (up to $4,000) for qualified higher education expenses; 4) expanded deduction and carry over limits for charitable contributions of conservation easements; 5) deduction for mortgage insurance premiums as qualified residence interest; 6) D.C. first-time homebuyer’s credit; 7) qualifying tax-free transfers from IRAs to charities of up to $100,000 for those at least age 70½

• Selected “Business” Tax Provisions Extended Through 2011 - 1) 15-year (instead of 39-year) depreciation period for "qualified” leasehold improvements, restaurant property, and retail improvement property; 2) 7-year depreciation period for certain motor sports racetrack property; 3) research and development credit; 4) employer differential wage credit for payments to military personnel; 5) various tax incentives for investing in the District of Columbia; 6) favorable S corporation charitable contribution provisions; 7) temporary exclusion of 100% of gain on the sale of certain qualified small business stock; 8) a host of tax benefits for qualified energy-efficient expenditures; 9) enhanced charitable contribution rules for qualifying business entities contributing computer equipment, book, and food inventory; and 10) the work opportunity tax credit for qualified employees who begin work through December 31, 2011.

Selected Tax Provisions Extended Through 2012. The Tax Relief Act extends through 2012 several provisions that were scheduled to expire after 2010. The following are selected provisions extended through 2012. Practice Pointer! Generally, any tax provision that was to expire after 2010 because of the 2001 Act sunset rules has been extended through 2012.

• Selected “Individual” Tax Provisions Extended Through 2012 - 1) the $2,000 contribution limitation, etc. for Coverdell education savings accounts; 2) the higher AGI levels, etc. for the student loan interest deduction; 3) the enhanced earned income tax credit; 4) the higher $1,000 child credit; 5) the higher limitations for the child and dependent care credit; 6) the maximum $2,500 American Opportunity Tax credit (formerly the “Hope” credit); and 7) the expanded rules for tax-free treatment of scholarships under the NHSC Scholarship Program and the Armed Forces Scholarship Program.

• Selected “Business” Tax Provisions Extended Through 2012 - 1) the election for C corps to exchange bonus depreciation for refundable AMT credits; 2) tax-free employer-provided education assistance; 3) the credit for employer-provided child-care facilities; and 4) continuing the accumulated earnings and personal holding company tax rates at 15%.