Periodically, you hear about a huge loss caused by an employee who's been quietly embezzling cash for years. But many smaller cases are never noticed. And it's not always employees at fault. In fact, the vast majority of employees are scrupulously honest and loyal. Outsiders can be stealing your cash too, by submitting false or inflated invoices that are paid without proper review.

What can you do to reduce the risk of losses? The textbook answer is "internal controls." This refers to things such as standard procedures for approving and paying bills. It includes segregation of duties - having more than one person involved in preparing, signing, and reconciling checks. Unfortunately many small companies don't implement proper controls - either because there's not enough staff or because they think it's too much trouble.

Regardless of the size of your business, here are some steps you can take:

* Maintain a strict rule that all invoices must have an approval signature before being paid. Nothing focuses a person's mind like having to sign his or her name on something.

* Have a policy that all employee expense reports must be signed off by a higher-level employee.

* Make it a rule that the person who prepares a company check can't sign that check.

* Ask your bookkeeper or accountant to give you a signed note each month affirming that the bank statement has been reviewed and balanced.

* Check personally to make sure that these procedures are being followed.

* On occasion, ask to see the bank statement and canceled checks for the prior month. Review them in detail. Not only will this increase your chances of spotting fraud, but it will also remind you just what the company's cash is being spent on.

Please contact our office for details or for assistance in improving controls over your company's cash.

The cash method of accounting is the easiest and simplest because it is similar to recording transactions in your personal checkbook.  Revenue is recorded when cash is received, and expenses are recorded when cash is paid out.  Many nonprofits use the cash method due to its ease.  This method is more comfortable for nonprofit executives that may not have a significant amount of accounting experience or resources.  Because this method only records cash inflows and outflows, it is the easiest way to manage cash flows when cash is tight.    Under the cash method, a pledge of $10,000 is not recorded on the organization’s books until the cash is actually received by the organization.  Also under the cash method of accounting, there are no receivables, prepaids, payables, accruals or fixed assets.  The only accounts on the organization’s books are cash, revenues and expenses.

The accrual method of accounting is more difficult than the cash method.  The accrual method focuses on recording revenues and expenses when transactions take place, rather than when cash is exchanged.  Accounts receivable and accounts payable accounts are utilized under this method to record revenue earned but not yet received and expenses incurred but not yet paid.  The $10,000 pledge noted above is recorded in revenue and receivables when the organization is awarded the grant, regardless of whether the actual cash has been received.  In the same manner, an expense and payable are recorded when the bill is received even if the payment will not be made until later. Because the accrual method records revenue and expenses when events actually take place, it provides a more complete picture for the entire year’s activities.

The modified cash method of accounting starts with the cash method of accounting and includes aspects of the accrual method.  The most common modifications are to record payroll liabilities, fixed assets and related depreciation, and unrealized gains/losses on investments.  By recording these additional items, which are usually significant to the organization, the financial picture for the year is more accurate then that provided by the cash method.

Accounting methods vary with organizations.  It is more likely that organizations with smaller budgets and limited resources lean towards using the cash method; however, this is not always true.   You should take into consideration the users of your financial statements in determining which method to use.  Often times, large foundations and government agencies require their funding recipients to use the accrual method.  Management and the board of directors also need to understand the method being used so that they have an accurate view of the organization for budgeting and decision making.

It is up to the organization to decide the best method to be used.  The method selected should be used consistently and only rarely changed.

Posted by: Carrie Minnich, CPA
]]> http://www.dwdcpa.com/blog/cash-or-accrual/ Wed, 05 Jun 2013 10:55:00 +0000 http://www.dwdcpa.com/blog/make-the-most-of-your-professional-advisors/ Who's on your team? No, not your sports or reality-show dancing team, your business team, that group of professional advisors who are ready and willing to help you tackle tough financial decisions.

Those decisions can have an effect on your taxes this year as well as in the future, so you want to be sure your advisors know each other - and are working together for your benefit.

As you begin your midyear planning review, here are three areas where coordinating the advice you receive can pay off.

* Investments. Capital gains and losses from sales of your securities affect your taxes, of course, but the kind of investments you make can also have an impact. For instance, buying municipal bonds to generate tax-free interest may result in the unintended outcome of creating income subject to the alternative minimum tax.

* Insurance. The type of health insurance plan you select can have tax implications. An example: A Health Savings Account (HSA), used in conjunction with a high-deductible health plan, can save premium and tax dollars. You fund an HSA with pre-tax cash and take tax-free withdrawals to pay medical expenses.

* Estate planning. Wills, trusts, and beneficiary designations provide the framework for carrying out your wishes after your death. Communication between your tax and legal advisors helps ensure that these documents offer the greatest protection for your heirs while minimizing estate tax consequences.

Please call us to schedule a comprehensive review of your goals. We're delighted to be part of your professional team.

Moneylenders such as banks, retailers, auto dealers, and finance companies sell credit life insurance to pay off your loan balance in the event of your death. Some lenders also sell credit disability insurance to cover your loan payments in the event you become disabled.

State laws vary, but some permit very high premiums on this type of insurance. A borrower's health is often not a factor in being eligible for credit insurance, and therefore, the underwriters need to charge everyone higher premiums to cover the potential risks. The insurance premium is often added into the loan. This may make it harder for you to determine your actual cost.

Moneylenders may require that you have insurance to pay off the loan in the event of your death or disability. In most cases, however, you should have the right to buy a policy from another insurance agent or to assign the benefits from an existing policy. Your age, health, and size of the loan are all factors to consider in determining whether to use an outside insurance agent or to purchase the lender's credit insurance.

Some lenders don't require credit insurance if the loan is properly collateralized. When completing a loan application, ask what loan insurance, if any, is required. This will allow you time to review your best insurance alternatives before you actually sign for the loan.

If you would like assistance in analyzing a loan, or with other financial matters, please contact us. We are here to help you.

* First, the IRS will look at your relationship to the company. If you're the sole shareholder with full control over earnings, that may weaken your case that the loan is genuine. On the other hand, if you're one of several shareholders and none of the others received similar payments, that suggests it might be a genuine loan.

* Next, the IRS will look at the details of the loan. Did you sign a formal promissory note? Did you pledge any security against the loan? Does the loan have a specific maturity date, or is there a repayment schedule? What rate of interest are you paying? Have you missed any payments, and if so, has the company tried to collect them? The more businesslike the terms of the loan, the more it will appear to be a genuine debt.

* Finally, the IRS will consider other factors. Is your company paying you a salary that's in line with the work you perform? Has the company paid dividends, or is this the only payment to its shareholder? Is the size of the loan within your ability to repay? How does the size of the loan compare to the company's profits?

Whether the IRS will try to tax you on the "loan" will depend on all these factors. If you've paid attention to the details, the loan should withstand IRS scrutiny. Contact us if you'd like more information about borrowing money from your closely held corporation.

* Talk to your parents about their financial affairs. Parents may be reluctant to discuss their finances, but someone needs to know the names of their lawyer and accountant. Someone needs to know where their important financial papers are located. If they are still fit, encourage your parents to make a detailed financial list for you, including information about bank accounts, investments, insurance policies, retirement plans, location of safe deposit boxes, etc. Getting familiar with important information now will be much easier than trying to find this information after a parent becomes physically or mentally impaired.

* Review your parents' financial picture together. Do your parents have enough retirement income and savings to provide for their needs? Should steps be taken to help stretch their assets over their life expectancies? What if they eventually need nursing home care? Assess whether long-term care insurance makes sense for them.

* Consider these important documents. A durable power of attorney allows another person to make financial decisions on a parent's behalf if he or she becomes incapacitated. A medical directive or living will is a document stating a parent's wishes about medical treatment in case he or she becomes too ill to communicate these wishes.

* Help put your parents' estates in order. Does each parent have a will, and if so, where are the wills stored? When were their wills last updated? The 2001 Tax Act made major changes to the estate and gift tax rules. Have their estate plans taken these changes into account? Encourage your parents to review their beneficiary designations on insurance policies, annuities, and retirement plans to make sure their choices are still suitable.

Talking finances with your parents now can make caring for your parents in the future much easier. For assistance, give us a call.
 

If your child chooses a typical wage-paying job, he or she will soon be confronted with the task of calculating withholding allowances on Form W-4. Claiming zero allowances and thereby withholding the maximum amount is the safest option, but it might also unnecessarily tie up hard-earned cash until this year's tax return is filed. However, claiming too many allowances, especially if the child holds multiple part-time jobs, might cause underwithholding. For help figuring the right number, try the withholding calculator at www.irs.gov. (Look under "Filing Information for Individuals.")

If your child decides to mow lawns or perform other tasks and be his own boss, there are a few more tax issues to consider. Such activity will likely generate taxable income, on which federal and state income taxes might be due. If net earnings are $400 or more, self-employment taxes will also be owed. These taxes can often be paid at the time that the child files a 2013 tax return, but if the income is substantial enough, estimated tax deposits might be necessary.

Being self-employed also means keeping detailed records of income and business expenses. Encourage your teen to purchase a simple low-cost ledger book to help organize the records. And when tracking income, remind the child that tips received are not just tokens of gratitude - they are considered taxable income by the IRS.

Summer jobs can provide tax breaks for some parents. Business owners can hire their own children and deduct the wages paid to them, effectively shifting income from the parent's higher income bracket to the child's lower bracket. What's more, if operating as a sole proprietor, you do not have to pay FICA taxes if your teen is under age 18 nor pay federal unemployment taxes if the child is under age 21. Just remember, the wages you pay your child must be appropriate for the services actually rendered.

Looking for a little icing on the summer employment cake? When your child receives earned income, he or she can also qualify for a Roth IRA. The lower of $5,500 or the child's annual earned income can be contributed to a Roth by the teen, parent, or someone else.

Summer employment can be your teen's first exposure to the real world. Help them make it a tax-smart experience. If you have questions about taxes and summer jobs, give us a call.

Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities.

Capital gain on vacation properties. Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property's contract price (including any mortgage assumed or taken "subject to"), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. "Adjusted proceeds" include the property's sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There's no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.

Vacation home rentals. Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

Income from rentals totaling not more than 14 days per year is nontaxable.
Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property, which entitled them to a greater number of deductions.

Small seller exemption

The Marketplace Fairness Act includes an exception intended to protect small businesses. For example, a state would not be allowed to require tax collection by a seller that had gross annual receipts in total remote sales in the preceding year of $1 million or less. Persons with one or more ownership relationships to one another would have their sales aggregated if such relationships were determined to have been designed with the principal purpose of avoiding the application of the Act.

Proponents of the bill say that the main issue is fairness. Brick-and-mortar retailers have long argued that the physical presence restriction provides Internet sellers with an unfair advantage. By not collecting sales tax, an online retailer seller can, in effect, sell an item at a lower price than a store. Retailers who operate stores have increasingly complained of "showrooming" by customers who come to a store to browse and then order the same merchandise online where they will not be charged for sales tax.

On the other hand, opponents of the bill say it would kill jobs and place an unreasonable compliance burden on small online businesses that are forced to deal with more bureaucracy and collect tax in approximately 9,600 jurisdictions. Conservative groups also contend that the Marketplace Fairness Act allows overreaching by state governments.

Authority to require tax collection

The Marketplace Fairness Act would allow a state to require all online sellers that do not qualify for the small seller exemption to collect tax on all taxable sales sources to that state. Streamlined sales tax member states would be granted this authority beginning 180 days after the state publishes notice of its intent to exercise its taxing authority under the Act, but not earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the Act.

Non-streamlined sales tax member states, on the other hand, would receive this authority beginning no earlier than the first day of the calendar quarter that is at least six months after the date that the state enacts legislation to exercise the authority and implements the Marketplace Fairness Act's mandatory simplification requirements.

The Marketplace Fairness Act is currently sitting in the House of Representatives. For information on any recent developments, please contact our offices.
 

The health law provisions interact. Individuals are supposed to carry health insurance or pay a tax. Employers are supposed to offer coverage or pay a tax. The exchanges will provide information about the availability of different health care plans and will certify individuals eligible for the premium assistance tax credit. Individuals who cannot obtain affordable coverage may purchase insurance through an exchange and may be entitled to a premium assistance tax credit.

Exchanges

The DOL, in a technical release, provided temporary guidance to employers about their obligation to notify their employees of the availability of health insurance through an exchange and of the potential to qualify for the premium assistance tax credit if they purchase insurance through an exchange. Exchanges will begin operating January 1, 2014 and will provide open enrollment for their coverage beginning October 1, 2013. DOL provided model notices for employers to send out beginning October 1, 2013. Notices must be issued to all employees, whether or not the employer offers insurance and whether or not the employee enrolls in the employer's insurance.

Employer mandate

As part of the regulatory process, the IRS recently held a hearing on proposed regulations regarding the employer mandate, which imposes a penalty on employers who fail to provide adequate health insurance coverage in certain circumstances. The employer mandate takes effect January 1, 2014. Twenty different groups testified on relevant issues, including: the definition of a large employer subject to the penalty, the definition of a full-time employee who must be offered coverage, and the determination whether the coverage is affordable.

Minimum value

The IRS issued proposed regulations to clarify the minimum value requirement for employer-provided health insurance. The regulations provide additional guidance on how to determine whether an individual is eligible for the premium assistance tax credit. Taxpayers will not be eligible for the credit if they are eligible for other "minimum essential (health insurance) coverage" (MEC). MEC includes employer-sponsored coverage that is affordable and that provides minimum value. Employer coverage fails to provide minimum value if the employer pays less than 60 percent of the cost of plan benefits. Taxpayers may rely on the proposed regulations for years ending before January 1, 2015.

Medical loss ratio (MLR)

The IRS issued proposed regulations on MLRs. Insurance companies must provide premium rebates to their customers if they fail to spend at least 80 percent (85 percent for large companies) of their premiums directly on health care, as opposed to executive salaries and other expenses. The provision took effect in 2012; and the first round of MLR rebates was distributed in 2012. The IRS issued several notices to implement the program; the proposed regulation would apply to tax years beginning after December 31, 2013.

Annual limits on benefits

PPACA generally prohibits group health plans and health insurance issuers that offer group or individual health insurance from imposing annual or lifetime limits on the value of essential health benefits. Although some limits are allowed for plan years beginning before January 1, 2014, HHS regulations provide that HHS may waive the limits if they would cause a significant decrease in benefits or significant increase in premiums. IRS, DOL, and HHS issued frequently asked questions (FAQs) to clarify that plan or issuer receiving a waiver may not extend the waiver to a different plan or policy year.

Summary of benefits and coverage

PPACA generally requires insurers, employers and other health care plan providers to give a Summary of Benefits and Coverage (SBC) to participants and other affected individuals. In recent FAQs, the three government agencies advised that an updated SBC template and a sample SBC are available on the DOL's website. These documents can be used for coverage beginning in 2014. The agencies also extended certain enforcement relief. The agencies issued final regulations in 2012, and indicated that providers can continue to use coverage examples in current guidance, without adding new examples to their SBC.

Employer reporting

The Treasury Inspector General for Tax Administration (TIGTA) issued a recent report on some of the new information reporting requirements that PPACA has imposed on employers. For example, health insurance providers must report information for each individual who receives coverage. Large employers must report details about the coverage offered to employees and their dependents, including the premiums and the employer's share of costs. Employers must also report the cost of coverage to employees on their Forms W-2. The IRS will use these reports to administer PPACA's requirements.

PPACA is a complicated law. Many of its most important provisions take effect in 2014. The IRS and other responsible federal agencies continue to issue guidance and to take comments on the administration of the law.

If you have any questions about PPACA and what strategies you or your business might adopt, please contact our office.

Applications for tax-exemption

In 2012, a House Committee asked the Treasury Inspector General for Tax Administration (TIGTA) to investigate reports of the IRS improperly handling applications for tax-exempt status from conservative groups. TIGTA launched a lengthy investigation that included interviewing IRS employees in Cincinnati, who process applications for tax-exempt status. On May 10, a few days before TIGTA was scheduled to release its findings, an IRS official apologized for the agency's inappropriate treatment of applications for tax-exemption from conservative groups.

TIGTA confirmed what the IRS official had said. TIGTA found that the IRS personnel in Cincinnati had used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions. These included names such as Tea Party, Patriots and 9/12.

TIGTA further discovered that the IRS had sent requests for unnecessary information to these organizations. According to TIGTA, examples of this unnecessary information included the names of past and future donors, listings of all issues important to the organization and what the organization's positions were regarding the issues, and whether officers or directors have run for public office or would be running for public office in the future. TIGTA told Congress that all of the IRS's actions were inappropriate because they went beyond what was authorized by federal law and regulations. The IRS's inappropriate criteria may have led to inconsistent treatment of organizations applying for tax-exempt status, TIGTA concluded.

New leader, 30-day review

On May 15, President Obama announced that the Acting Commissioner of the IRS had resigned at his request. President Obama appointed Daniel Werfel, a career government employee, as the new Acting Commissioner.  "The American people deserve to have the utmost confidence and trust in their government as we work to get to the bottom of what happened in the IRS," the President said.

Werfel has been ordered by the White House to undertake a 30-day review of the agency's operations, processes and practices. Werfel is to report his findings and recommendations for improvements to President Obama before the end of June. Since Werfel's appointment, the head of the IRS Tax-Exempt Division has retired and the official who oversaw the Cincinnati office was placed on administrative leave, after reportedly being asked to resign by Werfel. White House officials have indicated that more personnel changes may take place after the results of the 30-day review are announced.

Congressional investigations

Three Congressional Committees - the Senate Finance Committee, the House Oversight and Government Reform Committee and the House Ways and Means Committee - held hearings in May. The former Commissioner of the IRS, Douglas Shulman, and the ex-Acting Commissioner, Steven Miller, both told lawmakers that they were dismayed at TIGTA's report. "As a general principle, as the IRS commissioner, I didn't touch individual cases and I certainly didn't touch cases that involved political activity." Shulman said. Shulman added that he was "saddened" that these activities occurred on his watch.  Miller acknowledged that the IRS had acted improperly but denied any partisan motivation for the conduct of employees.

For many lawmakers, the key question is whether IRS officials mislead them in previous hearings. "We are concerned about the extent to which senior officials became aware of these practices, when they found out, and what they did or did not do to put a stop to them. And, perhaps most important, we want to know why the IRS purposefully misled Congress when they led us to believe that no groups were being targeted," Sen. Orrin Hatch, R-Utah, said.

More Congressional hearings are scheduled. "We need to understand how and why this targeting occurred," Senate Finance Committee Chair Max Baucus, D-Montana, said. "We need to know who was involved and who was responsible, and we need to install new safeguards to ensure this targeting never happens again."

Criminal investigation

The U.S. Department of Justice has opened a criminal investigation into the IRS's scrutiny of applications from conservative groups.  "The FBI is coordinating with the Justice Department to see if any laws were broken in connection with those matters related to the IRS," Attorney General Eric Holder said on May 14. Holder has not said when the results of the investigation will be released.

The statement of cash flows is a requirement of financial statements prepared in accordance with generally accepted accounting principles.  This statement reports an organization’s cash generated and used during a specific period, classified into operating activities, investing activities and financing activities.

Since the statement of activities is prepared under the accrual basis of accounting, some of the revenues included may not have been collected yet and some of the expenses may not have been paid yet.  Basically the statement of cash flows reconciles the beginning cash balance of the period to the ending cash balance of the period by converting the change in net assets (“net income”) on the statement of activities from the accrual basis to the cash basis.

Cash flows from operating activities can be reported one of two ways, with the same result.  The direct method shows actual cash received and cash paid.  The indirect method, which is the more common method, starts with “net income” and makes adjustments for noncash items, such as depreciation, and then analyzes changes in operating assets and liabilities.

The result is the cash received (or paid out, if negative) for everyday operations.  A positive amount is desired because it shows that the everyday operations are producing cash for the organization to use to continue its existence.

Cash flows from investing activities include cash used from lending money to others, purchasing investments and fixed assets and cash received from collecting on loans, selling investments and selling fixed assets.  These transactions are not a part of everyday operations so they are not included in cash flows from operating activities.  The result is the amount of cash from (or used in, if negative) investing activities.

Cash flows from financing activities include cash received from borrowing money and cash used in repaying amounts borrowed.  Again, these transactions are not a part of everyday operations of the organization so they are not included in cash flows from operating activities.  The result is the amount of cash from (or used in, if negative) financing activities.

It is important for management to understand where cash is coming from and what it is being used for to better manage the organization.

Posted by: Carrie Minnich

A public hearing on the existing regulations, held at IRS headquarters in Washington, D.C., in early April 2013, only confirmed how the application of the NII Tax to certain categories of income—particularly income arising from "passive activities"—is challenging even the experts. Nevertheless, taxpayers are not getting a reprieve from the immediate application of this new tax.  The 3.8 percent Medicare surtax on net investment income (NII) became effective January 1, 2013. Current confusion over exactly how the 3.8 percent operates can impact on tax strategies that should be put into motion in 2013. Any misinterpretation can also bear on 2013 estimated tax that may be due to cover any 3.8 percent NII Tax liability.

NII Tax Thresholds

For tax years beginning after December 31, 2012, the NII surtax on individuals equals 3.8 percent of the lesser of: net investment income for the tax year, or the excess, if any, of:

the individual's modified adjusted gross income (MAGI) for the tax year, over
the threshold amount.
The threshold amount in turn is equal to:

$250,000 in the case of a taxpayer making a joint return or a surviving spouse,
$125,000 in the case of a married taxpayer filing a separate return, and
$200,000 in any other case.
Trusts and estates are also subject to the NII surtax, to the extent of the lesser of: (i) undistributed net investment income, or (ii) the excess of adjusted gross income over the dollar amount at which the highest tax bracket begins (which, for 2013, is $11,950).

Net Investment Income

The primary confusion over application of the 3.8 percent NII Tax revolves around finding a precise definition of "net investment income" as enacted by Congress. To appreciate the complexity of the task, just look at the applicable Internal Revenue Code provision. Code Sec. 1411(c)(1) defines net investment income as the sum of:

Category (i) income: Gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in Code Sec. 1411(c)(2);
Category (ii) income: Other gross income derived from a trade or business described in Code Sec. 1411(c)(2); and
Category (iii) income: Net gain attributable to the disposition of property, other than property held in a trade or business not described in Code Sec. 1411(c)(2); over
Deductions properly allocable to such gross income or net gain.

A Code Sec. 1411(c)(2) trade or business includes a passive activity under Code Sec. 469 with respect to the taxpayer or trading in financial instruments or commodities.

Comment.  Code Sec 1411 effectively creates a new tax and a new tax base, on top of the income tax, alternative minimum tax, self-employment tax and payroll taxes. Nevertheless the Preamble to the proposed regs states that, except as otherwise provided, the income tax rules should apply to Code Sec. 1411 unless good cause otherwise exists. Practitioners have asked the IRS that the final regulations give greater reassurance of this general rule.

Complexity

The IRS has stated that the principal purpose of Code Sec. 1411 is "to impose a tax on unearned income or investments of certain individuals, estates, and trusts." Unfortunately, Code Sec. 1411 is not so direct and simple, with its three categories of income (that is, (i), (ii) and (iii), above), complicating matters, albeit in an effort to close every door to those who try to "game the system."

Application of the 3.8 percent NII Tax to capital gains and dividends from a personal stock portfolio is clear under this rule of thumb. But clarity breaks down when a "trade or business" is thrown into the mix and the concept of "passive activity" is added to it.

If gain or other income is the result of an active business activity, it generally escapes NII Tax. However, when the "active" business is a passive activity (for example, a rental business), it may be deemed to generate income that is subject to the NII Tax. Furthermore, when a passive activity is not merely incidental to a business however otherwise active that business should be, the NII Tax also becomes an issue.

Passive Activity

Any revised or additional rules from the IRS on the application of the NII Tax on passive activities should be made more user friendly to the broad middle range of taxpayers and their advisors, one expert at the hearing recommended.  The IRS should err on the side of explaining things clearly and simply, even at the expense of not covering every possible nuance of interpretation.

At the same time, however, other experts are asking for more detail, at least in the way of clarification. For example, the IRS has stated that passive activity for NII Tax purposes should be applied within a narrower scope than the passive activity loss rules under Code 469.  Those Code Sec. 469 rules restrict "passive losses" from reducing income that is not "passive income."  Experts want the IRS to explain exactly what they mean by a "narrower scope."

Self-Rental Activities/Grouping

The self-rental recharacterization rule under Code Sec. 469 affects taxpayers who rent property to a trade or business in which they materially participate. Concern has been expressed over the possibility of interpreting net investment income under Code Sec. 1411 to include rental income from a self-rental activity grouped with a trade or business activity in which the taxpayer materially participates.

The material participation and trade or business requirements should be tested on the grouped activity as a whole rather than on a component basis, one expert in particular stressed at the hearing. If that test is passed, he argued, the trade or business income and rental income from the grouped activity should be excluded from the reach of the NII Tax. For example, the owners of self-rental properties should not have that rent considered as separate from their overall business activity and subject to the net investment tax simply because properties are held in a separate LLC to avoid tort liability.

Regrouping deadline

The proposed regulations permit businesses subject to the NII Tax to elect to regroup their activities for passive-loss purposes in 2013 or 2014. This regrouping election allows taxpayers with a fresh start to accommodate the new NII surtax. Without permitting regroupings, taxpayers would be bound by their original grouping decisions, some of which may have been made as many as 20 years ago, only for purpose of Code Sec. 469 passive loss rules and not the NII Tax. Some small business representatives are also concerned that, because of the complexity of the rules, the final regulations should extend the deadline for a regrouping election through 2015.

Application of the net investment income tax is particularly difficult to get a handle on in a variety of situations.  Unfortunately, however, at 3.8 percent, it is costly enough not to be ignored.

If you have any questions about how the NII Tax may apply to your business, rental operations, or overall investment strategy, please do not hesitate to call our office.

Federal withholding

If you received a large tax refund, it might be time for you to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. You would want to do this in cases where your adjustments to income, exemptions, and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.

If you do not change your withholding allowances, the government essentially is holding your money for a year without paying any interest on it. You may lose some potential investment opportunity or, at the very least, the ability to increase your monthly discretionary income. On the other hand, many taxpayers prefer to receive the large refund check after tax filing season because it is a no-hassle way to ensure large savings at the end of the year.

Conversely, many taxpayers may want to change their withholding allowances because they owe the government a significant amount of money at the end of the year. Taxpayers who expect to owe at least $1,000 in tax for the 2013 tax year, after subtracting withholding and any refundable credits, and who also expect their 2013 withholding and credits to be significantly less than the projected tax owed for 2013, may need to file estimated taxes. Failure to do so could result in penalties. Alternatively, taxpayers should consider making quarterly estimated tax payments, especially if they anticipate a significant amount of investment gains for the year or other income unrelated to wage compensation.

State withholding

Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund which they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed, which would exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses, and more because of certain AGI caps on these benefits.

Tax rates and adjusted gross income

As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6-percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.

In addition, for tax years beginning in 2013, the 33-percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households, and single individuals. If you were hovering near the bottom of the 35-percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33-percent category.

Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8-percent surtax on net investment income and a .9-percent Additional Medicare Tax. Look at your adjusted gross income for last year. Does it approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.

Investments

At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.

Reviewing the Schedule D and Form 8949, which cover Capital Gains and Losses from last year's return and from the past three or four years, can be an eye-opener for many. Did you hold stocks long enough to be entitled to the long-term capital gains rate? Did you try to balance short-term gains with short-term losses? Are you bouncing from one investment trend to another without a long-term investment plan that achieves long-term needs? Are your mutual funds "tax smart"? Become familiar with different types of banking institutions and their products. Find out about CDs, money-market funds, government securities, mutual funds, index funds, and sector funds and how they interrelate with the determination of your tax liability each year. You may want to put that knowledge to work in your investment strategy.

Medical costs

Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn't pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.

Retirement planning

Don't forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement. 

When you are reviewing last year's tax return, it may help to review some of what you've learned from it. This could foster an important conversation with your tax advisor about how to establish or modify your plan for your financial future. If you would like to review last year's completed tax return with future planning in mind, please feel free to give us a call and set up a time when we can meet and discuss this matter.

Let’s start with the basics.  The operating reserve is a portion of unrestricted net assets that is set aside by the board for use in emergencies or unexpected situations.  This might be from an unexpected shortfall in revenue in which a major funding source ceases or significantly decreases its support of the organization.  It could also be from unexpected demands on the organization’s resources, an unanticipated opportunity that becomes available to the organization or when a project that everyone thought would succeed falls short.   The operating reserve should not be used for non-operating expenses such as purchasing a new building or establishing an endowment.

The reserve can be funded by the organization with any funds that are not temporarily or permanently restricted.  This could include contributions from individuals or corporations, fees for goods or services, investment income or surpluses resulting from annual operations.

In order for the operating reserve to work properly, there should be a written policy in place including the following details.
• Reason for establishing the reserve
• Desired dollar amount of the reserve and the timeline for achieving it
• How the reserve is going to be funded
• Circumstances of when the funds can be used
• Procedures for approving the use of the funds
• How the organization will react to continued shortfalls in the reserve

The amount of the reserve fund will vary by organization.  Each organization should set their own reserve goal based on its cash flows and expenses.  Organizations need to examine where their money is coming from and where it is going.  Those organizations that receive regularly scheduled payments from grants or contracts do not need as much in an operating reserve as those that rely on periodic grants or fund raisers as their main support.  Many nonprofits make it a goal to fund the reserve so it will cover three to six months of expenses.  Three to six months can be used as a guide but there is no one size fits all for all organizations in setting up a reserve.  At a minimum, the reserve should be enough to cover one payroll.   

By setting up an operating reserve, the organization is making sure that there are sufficient funds to manage the day to day operations, as well as planning for the long-term financial stability of the organization.

Posted by: Carrie Minnich

You are required to file "Treasury Department Form 90-22.1," the "Report of Foreign Bank and Financial Accounts," if you have a financial interest in or signature authority over a foreign financial account. These accounts include bank accounts, brokerage accounts, mutual funds, or other types of foreign financial accounts. This is not a form that you file with your tax return. Rather it is a separate form due June 30 each year that is filed with the Treasury Department in Detroit (due June 28 this year since June 30 is a Sunday). Generally, this report is required to be filed if you have an interest in such accounts, and the aggregate value of those accounts exceeds $10,000 at any time during the calendar year.

If you do have assets in foreign banks or brokerages, be sure to meet your filing obligation. The requirements can get complicated, and the penalties for nonfiling are severe. For details or filing assistance, contact our office.

An example of these bogus e-mails: You receive a message confirming IRS receipt of your tax return, but the IRS needs more information to process your return. The e-mail looks official and completely legitimate. But it isn’t. The IRS does NOT contact taxpayers asking for personal and financial information. These e-mails should be deleted immediately. Fake IRS websites are also created by scammers to lure victims into filling out forms providing information that results in identity theft.
 

Keep records that directly support income or expense items on your tax return. For income, this includes W-2s, 1099s, and Form K-1s. Also keep records of any other income you might have received from other sources. It's also a good idea to save your bank statements and investment statements from brokers.

For expense items, keep your cancelled checks as well as support for any itemized deductions you claimed. This includes acknowledgments from charitable organizations and backup for taxes paid, mortgage interest, medical deductions, work expenses, and miscellaneous deductions. Even if you don't itemize, keep records of expenses for child care, medical insurance if you're self-employed, and any other expenses that appear on your return.

The IRS can audit you routinely for three years after you file your return. But in cases where income is underreported, they can audit for up to six years. To be safe, keep your records for seven years.

Keep certain other records longer. These include records relating to your house purchase and any improvements you make. Also keep records of investment purchases, dividends reinvested, retirement plan contributions, and any major gifts you make or receive. And finally, keep copies of all your tax returns and W-2s in case you ever need to prove your earnings for social security purposes.

Please call our office if you have specific questions about recordkeeping.
 

The general rule is that you have three years to amend a personal or business return. Special rules may apply if you paid your taxes late, or are claiming certain business losses or carrybacks. You may have as long as seven years if you are filing to claim a loss on a worthless security or bad debt.

Many amended returns are filed each year. Form 1040X is used to show the items of income or deductions that you want to change or the different elections you want to make. A separate form must be filed for each previous year you want to change. You’ll have to file a paper copy to amend your return, even if you originally filed electronically or by telephone. If you want to change a corporate return, you file a Form 1120X, but the procedures are similar.

If you owe additional tax because of the change, you should send a check at the time you file your amended return. The IRS will let you know if you owe additional interest or penalties.

Please contact our office if you have questions about any return that's already been filed. We can let you know whether you need to file an amended return and help you with any of the necessary paperwork.

Reducing your withholding is as simple as filing a new Form W-4 with your employer. The form comes with a worksheet to figure out how many allowances you should claim. Don’t forget to allow for other taxable income besides wages, such as dividends or investment gains.

If you’re concerned about underpaying taxes and exposing yourself to penalties, there are a few rules you should know. Generally, you won’t face a penalty if you pay for 2013, through withholding or quarterly estimated payments, at least 100% of your 2012 taxes (110% if your adjusted gross income is over $150,000), or if you pay at least 90% of what you’ll owe for 2013.

Any changes in an organization’s name, address, structure or operations must be reported to the IRS on its annual informational return (Form 990 or 990-EZ).  If the organization is not required to file an annual return, it must report these changes to the Exempt Organizations Determinations Office. 

If you are unsure as to the effect of the changes on your organization’s exempt status or public charity status, you may request a determination letter or private letter ruling.  Requests for determination letters and letter rulings require the submission of specific information and documentation, as well as a user fee.

In some instances there are additional requirements that the organization must take to report changes.  For example, a change in the organization’s name requires the organization to attach amendments to the articles of incorporation with proof of filing with the state of incorporation to the annual return.   A change in accounting period or a change in accounting method, require even more steps.
For a change in accounting period to take effect, you must timely file the organization’s applicable informational return with the appropriate Internal Revenue Service Center for the short period for which the return is required.  Form 990 should indicate a change of accounting period is being made.  The short period form is due the fifteenth day of the fifth month following the close of the short period.  If your organization has previously changed its annual accounting period at any time within the last ten calendar years ending with the calendar year the includes the beginning of the current short period, you must file Form 1128, Application for Change in Accounting Period.  It also must be filed by the fifteenth day of the fifth month following the close of the short period.  Organizations described in sections 526, 527, or 528 must file Form 1128.

To request a change in accounting method, you must file Form 3115, Application for Change in Accounting Method.  Form 3115 should be filed with your annual information return for the year of change.  In special situations Form 3115 must be filed during the tax year for which the change is requested.

If your organization undergoes any changes, make sure you properly report them to the IRS to ensure the organization’s tax-exempt status is not jeopardized.

Posted by: Carrie Minnich

The three main types of functional expenses are program, management and general, and fund raising.  Both management and general and fund raising are considered supporting services.

Program services expenses are those costs that are directly and indirectly related to providing program services.

Management and general expenses relate to the overall operations of the organization and are not identifiable with a specific program, fund raising activity or membership development activity.

Fund raising expenses are those costs related to inducing potential donors to contribute to the organization.

Some expenses relate directly to a single program or supporting service (direct expenses), while others relate to multiple activities (indirect expenses) and need to be allocated between various services.  Nonprofits should apply a reasonable and consistent method of allocating indirect expenses.  For example, salaries and related expenses are often allocated based on time studies detailing how much time each employee spends on each function.  Rent and utilities are often allocated based on square footage.  Whatever method is used to allocate expenses, the method should be evaluated periodically to verify the allocation is still appropriate.

The percentages by function vary by nonprofit, depending on the organization’s size, age and location, as well as mission and programs.  Although the percentages vary, there are some recommended standards that third parties use to evaluate expense allocations.  The Better Business Bureau looks for at least 65% of total expenses spent on program services and no more than 35% of related contributions spent on fund raising expenses.  CharityWatch (formerly the American Institute of Philanthropy) views 60% or greater spent on programs as reasonable for most charities.  The 60% program percentage indicates a satisfactory rating from CharityWatch, while most high efficient charities are able to spend 75% or more on programs according to CharityWatch.  Charity Navigator ranks highest the organizations that spend 15% or less on management and general and 10% or less on fund raising.  The United Way of Allen County recommends no more than 25% spent on supporting services.  The average functional expense percentages for DWD nonprofit clients are as follows.

Potential donors normally want to give their money to organizations where they know their money is being spent wisely - a majority of the resources used to further programs and provide services, a minimal amount of administrative expenses and some fund raising efforts.   The presentation of functional expenses is one of the tools used to determine if the nonprofit is using its resources efficiently.

Posted by: Carrie Minnich

0.9 Percent Additional Medicare Tax

The IRS reminded employers that the Additional Medicare Tax, enacted by the Patient Protection and Affordable Care Act (PPACA) applies effective January 1, 2013. The Additional Medicare Tax is imposed to the extent covered wages, compensation and/or self-employment income exceed threshold amounts ($200,000 for single individuals, $250,000 for married couples filing joint returns and $125,000 for married couples filing separately). Employers, however, must withhold Additional Medicare Tax from wages paid to an individual in excess of $200,000 in a calendar year, without regard to the individual employee's filing status or other wages/compensation.

It is up to the employee to make adjustments to account for any shortfall (if subject to the $125,000 threshold or if the combined wages of a married couple exceed $250,000) or overage (if subject to the $250,000 threshold). Employees cannot request additional withholding specifically for Additional Medicare Tax but can request a change in overall income taxes withheld by their employer. Taxpayers anticipating they will owe Additional Medicare Tax, and who did not request additional income tax withholding, may need to make estimated tax payments.

The standard Medicare tax equals 1.45 percent of covered wages. The 1.45 percent employee-share of Medicare tax is matched by the employer. There is no employer match for the Additional Medicare Tax, however.

The IRS further explained that an employer must begin withholding the 0.9 percent Additional Medicare Tax in the pay period in which they pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. The IRS has added line 5d, Taxable wages & tips subject to Additional Medicare Tax withholding, to Form 941.

Payroll Tax Holiday Ends

The IRS also has reminded taxpayers that the OASDI tax rate is 6.2 percent for both employers and employees for calendar year 2013. The payroll tax holiday, effective for calendar years 2011 and 2012, was not renewed by the American Taxpayer Relief Act of 2012 (ATRA) or other legislation and has expired. The Social Security wage base for calendar year 2013 is $113,700, up from $110,100 for calendar year 2012. The payroll tax holiday had reduced the employee-share of OASDI taxes from 6.2 percent to 4.2 percent (with a comparable benefit for self-employed individuals).

 Comment. The timely filing, timely mailing rule requires that the return be postmarked within the prescribed filing period. Thus, an individual return postmarked April 16 and received on April 20 is considered filed on April 20.

Private carriers. A return delivered by a designated private carrier is timely if the carrier marks or records the return no later than the due date of the return. However, a return delivered by means other than the U.S. mail or a designated private carrier must be delivered to the appropriate IRS office on or before its due date to be timely.

The IRS can designate a private carrier if the carrier: is available to the general public; is as timely and reliable as U.S. first class mail; records the date on which the package was given to it for delivery; and satisfies other conditions. The IRS has identified DHL Express, Federal Express, and United Parcel Service as designated carriers.

No postmarks; other postmarks. If there is no postmark, the taxpayer may establish the mailing date by extrinsic evidence. A return in an envelope with a foreign postmark or private meter machine postmark is timely filed if the postmark is on or before the due date of the return and the return is received no later than if it had been postmarked by the postal service on the last day for filing the return.

Registered, certified. A receipt showing that a return was sent by registered or certified mail is proof that the return was delivered to the place that it was addressed. Returns sent by registered mail are deemed to be postmarked on the date of registration. Returns sent by certified mail are deemed to be postmarked on the date stamped on the receipt, under the timely mailed, timely filed rule. However, if a taxpayer mails a return certified but does not obtain a certified receipt, the postmark on the envelope determines the filing date.

Comment. A taxpayer mailing a return on or near its due date should use registered or certified mail with a postmarked receipt. Documents sent in this manner are automatically timely filed.

Electronic. An electronically-filed return with a timely electronic postmark is timely filed, provided that the return is filed in the manner prescribed for electronic returns. An electronic postmark is a record of the date and time, in the taxpayer's time zone, that an authorized electronic return transmitter receives the e-filed document on its host system.

Questions?  Please contact your accountant in our Fort Wayne or Marion office.

"Check-the-Box" Election

An LLC with more than one member can elect:

• Partnership
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

An LLC with only one member can elect:

• Disregarded entity
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

The IRS will assign these classifications if no entity election is filed for an LLC (the default rules):

• any business entity that is not a corporation is classified as a partnership
• any entity that is wholly-owned by a single person will be disregarded as an entity separate from its owner (taxed as a sole proprietorship).

Typically, an LLC with more than one member will elect to be taxed as a partnership, whereas a single-member LLC will elect to be disregarded and taxed as a sole proprietorship.

If you have any questions relating to LLCs, their benefits, drawbacks, or their treatment under the Tax Code, please contact our Fort Wayne or Marion office.

1.       Determine mission and purpose. It is the board's responsibility to create and review a statement of mission and purpose that articulates the organization's goals, means, and primary constituents served.
2.       Select the chief executive. Boards must reach consensus on the chief executive's responsibilities and undertake a careful search to find the most qualified individual for the position.
3.       Support and evaluate the chief executive. The board should ensure that the chief executive has the moral and professional support he or she needs to further the goals of the organization.
4.       Ensure effective planning. Boards must actively participate in an overall planning process and assist in implementing and monitoring the plan's goals.
5.       Monitor and strengthen programs and services. The board's responsibility is to determine which programs are consistent with the organization's mission and monitor their effectiveness.
6.       Ensure adequate financial resources. One of the board's foremost responsibilities is to secure adequate resources for the organization to fulfill its mission.
7.       Protect assets and provide proper financial oversight. The board must assist in developing the annual budget and ensuring that proper financial controls are in place.
8.       Build a competent board. All boards have a responsibility to articulate prerequisites for candidates, orient new members, and periodically and comprehensively evaluate their own performance.
9.       Ensure legal and ethical integrity. The board is ultimately responsible for adherence to legal standards and ethical norms.
10.   Enhance the organization's public standing. The board should clearly articulate the organization's mission, accomplishments, and goals to the public and garner support from the community.

Posted by: Carrie Minnich

It's hard to argue with the theory. After all, if your tax refund goes directly to a retirement account, it's not available to spend on that new leather sofa or Hawaiian vacation. (Of course, a big tax refund also may indicate that you're withholding too much from each paycheck and giving the government an interest-free loan. But that's another issue.)

Still, things sometimes go awry. Following are four potential obstacles that can derail your tax refund on its way through the direct deposit process:

* Wrong account number. Let's say you transpose a couple of digits on your tax return, and those digits happen to indicate which financial institution or which account will receive your refund. If this wrong account number belongs to another customer, that mistake could take weeks or even months to correct. By the way, don't expect the IRS to come to your rescue. They've made it abundantly clear that correct input of financial information on the tax return is the taxpayer's responsibility -- not the government's.

* Correction fluid and cross-outs. If the IRS gets your tax return and finds that the routing numbers have been manually revised, your direct deposit request will likely be rejected. You may get an old-fashioned refund check in the mail.

* Wrong type of account. It's up to you to verify that your financial institution will accept direct deposits into an IRA. Some banks, for example, will reject direct deposits to anything other than a savings account.

* Refund adjustments. Sometimes the IRS corrects a taxpayer's math or makes other adjustments that can affect the refund amount. In some cases, these adjustments may result in a direct deposit that exceeds the allowable IRA contribution amount. If so, you could be stuck with a penalty for excess contributions.

Direct deposit of your tax refund can be a hassle-free way to make an annual IRA contribution. But proceed with caution. Double check your return and verify that your bank or credit union will accept direct deposits to an IRA.

Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provided temporary unlimited deposit insurance coverage for non interest bearing transaction accounts at FDIC (Federal Deposit Insurance Corporation) institutions from December 31, 2010 through December 31, 2012.  During this time period, checking and savings accounts that did not earn interest were fully insured, and those that did earn interest were insured up to $250,000 per bank.  Beginning January 1, 2013 this changed.  Now non interest and interest bearing accounts must be added together and are only insured up to $250,000 per depositor, per bank.

You should be aware of the risk of having cash in excess of the $250,000 FDIC limit.  If your bank fails, you may only be able to recover your cash up to the $250,000 insured amount.  In order to limit your risk, consider spreading your cash between multiple banks to avoid having more than $250,000 at one bank.

Posted by: Carrie Minnich

The LLC combines several favorable characteristics of a traditional partnership, in which all members are entitled to participate in the management and operation of the business, with those of a corporation, in which the owners, directors, and shareholders are generally shielded from liability for the corporation's debts. The means that in an LLC, just as in a corporation, the personal assets of the business owners' would generally be protected if the business failed, lost a lawsuit, or faced some other catastrophe. Members are only liable to the extent of their capital contribution to the business. In addition, members can fully participate in the management of the business without endangering their limited liability status.

When filing season begins, the profits (or losses) from the LLC pass through to its members, who pay tax on any income when filing their individual returns. In other words, income from the LLC is taxed at the individual tax rates. Income from corporations, on the other hand is taxed twice, once at the corporate entity level and again when distributed to shareholders. Because of this, more tax savings often results if a business formed as an LLC rather than a corporation.

Taxpayers should note, however, that Congress recently increased the top marginal individual income tax rate to 39.6 percent, has placed a .09 percent additional Medicare tax on wages over $200,000 (single taxpayers), and has imposed a 3.8 percent net investment income tax on higher-income taxpayers. At the same time, there is strong talk among members of both political parties of lowering the corporate rate from the current 35 percent to something around 28 or 25 percent to make the United States more competitive with foreign nations. If this happens, many highly profitable LLC businesses may need to rethink their situation and consider switching to a corporate form.

Forming an LLC involves many requirements, but the benefits can be substantial. Please call our offices if you have any questions.

If you violate the Tax Code, the IRS may impose civil and/or criminal penalties, depending on the type of infraction committed. Civil penalties are commonly imposed for a failure to pay taxes when due, failure to report the correct amount of tax owed, a failure to deposit federal tax deposits, filing late, or even failing to pay because of a bounced check. There are more than 100 kinds of civil penalties in the Tax Code, ranging in severity. For example, a penalty for failure to file (separate and apart from a failure to pay) carries a minimum $100 fine, while a penalty for valuation overstatement can result in a 30 percent penalty on the amount of tax owed as a result. Criminal penalties can be even more severe, and may include terms of imprisonment as well as fines.

Taxpayers, return preparers, and third parties with some connection to the tax return in question may all become subject to penalties. Common civil penalties include failure to file tax returns, failure to pay taxes due, underpaying tax due to negligence, and valuation misstatements that result in inaccurate reporting of income (and therefore an incorrect amount of tax owed).

Criminal penalties are imposed for violations of federal Tax Code and Criminal Code, which include the willful (or intentional) attempt to evade or defeat any federal tax, the failure to collect or truthfully account for and pay any federal tax as required, or the failure to keep required records, supply required information or make required returns. Generally the IRS Criminal Investigations Division will conduct investigations into allegations of criminal tax violations, and if it recommends that the government prosecuted, the case could be referred to the IRS Office of Chief Counsel, the Department of Justice, the U.S. Attorney's Office, or some combination of the three.

Hopefully you will never receive a letter from the IRS about either civil or criminal penalties. But if you do, please call our offices with any questions.

The top tax rate is 40 percent, the maximum exclusion for both estate and gift taxes is a unified amount of $5 million (indexed at $5.12 million for 2012 and $5.25 million for 2013), the tax basis of property acquired from a decedent is stepped up, and the portability of a deceased spouse's unused exclusion (DSUE) amount is preserved. The generation-skipping transfer (GST) tax exemption, which is tied to the estate tax rate, is also set at $5 million, adjusted for inflation. However, taxpayers should realize that inheritance taxes imposed by a state may apply to a lower amount, so some estate tax planning for state taxes may be appropriate.

If Congress had not acted on the sunsetting provisions, the maximum estate tax rate would have been 55 percent effective January 1, 2013, and the maximum exclusion would have been only $1 million. However, even though these changes are permanent and do not have an expiration date, one never knows whether Congress may change the law in the future.

Stepped-up basis

Stepped-up basis is preserved for assets passing through the estate. This is particularly important for people whose estates are not large enough to owe estate taxes (under $5 million, as indexed for inflation). In 2010, when there was no estate tax, the Tax Code applied a modified carryover basis regime with $1.3 million worth of assets subject to a basis step-up (plus $3 million for property passing to the spouse). All other properties would have a carryover basis and thus could have significant built-in gains when acquired by the estate tax beneficiary.

Now, all properties passing through the estate for tax purposes are entitled to a step-up in basis, whether or not they are subject to estate tax. This will have a significant impact on income taxes for taxpayers receiving assets from the estate, insulating built-in gains from taxes, and allowing taxpayers to sell assets and invest them in other arrangements.

Unified estate and gift tax

Even though the lifetime exemption under the unified estate and gift tax ($5 million, adjusted for inflation) may never be used up, filing gift tax returns for annual gifts above the exclusion is still necessary. The annual gift tax exclusions ($13,000 for 2012; $14,000 for 2013) are much lower than the lifetime exclusion. However, thanks to the lifetime exclusion, taxpayers often will not owe any gift taxes on a gift, even one that exceeds the annual exclusion.

Portability

The portability of the DSUE amount was enacted in 2010 and originally applied where the first decedent in a married couple died in 2011 or 2012. In ATRA, Congress made portability permanent.

In the absence of portability, the first spouse to die could transfer property to the surviving spouse tax-free, by claiming the marital deduction. But the second spouse, as sole owner of the assets, was in danger of exceeding the applicable estate tax exclusion and owing more estate tax.

For example, a husband owns $7 million in property and the wife owns $5 million in property. Upon A's death, the husband's estate passes $2 million of property to his children, and $5 million in property to his wife, using the marital deduction. When the wife dies, she has $10 million in property (assuming that the wife's earnings and expenses offset each other), but only has an exclusion of $5 million. Thus, $5 million of assets are taxable.

Portability eliminates or substantially lessens this problem. If the husband passes $2 million to his children, and $5 million to his wife, he has a DSUE amount of $3 million. The wife, when she dies with an estate of $10 million, has an estate tax exclusion of $8 million ($3 million from the husband, plus her own $5 million exclusion), and will owe estate tax on $2 million, instead of $5 million. At a 40 percent maximum rate, this is a potential savings of $1.2 million to the wife (and to the husband and wife collectively). Portability lessens the need for complex estate planning when the husband and wife together have assets in the $10 million range (more or less).

Other tax provisions

ATRA provides additional certainty for other estate, gift, and generation-skipping transfer (GST) tax provisions. More liberal rules for using installment payments for estate taxes will continue to apply. The five percent surtax on estates and gifts between $10 million and $17,184,000, which is designed to offset the benefits of graduated rates, will no long apply.

Modifications to the exclusion for qualified conservation easements are permanently extended, again facilitating planning in this area. The repeal of certain distance requirements is permanently extended; accordingly, the exclusion is available to any qualified real property, located in the U.S. or a U.S. possession, that was owned during the three-year period ending on the date of the decedent's death.

ATRA also extended a number of GST tax provisions set to expire at the end of 2012. These included the GST deemed allocation and retroactive allocation provisions; clarification of valuation rules for determining the inclusion ratio; provisions allowing the qualified severance of a trust; and relief from late GST allocations and elections.

Finally, ATRA extended the IRA charitable deduction for two years, through 2013. Taxpayers age 70 ½ and older can make a maximum distribution of $100,000 directly from their IRA (traditional or Roth) to a charity, without including any of the distribution in income.

Not all of ATRA's provisions are beneficial to taxpayers. ATRA permanently extended the deduction for estate taxes imposed by a state, rather than a tax credit. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) first repealed the state death tax credit for decedents dying after 2004 and replaced the credit with a deduction. ATRA also extended repeal of the deduction for qualified family-owned business interests, a provision that has been in effect since 2004.

If you would like more specific information on how the American Taxpayer Relief Act affects your estate plans, please contact this office.

Late legislation

Whenever Congress passes tax legislation late in the year, the IRS has to scramble to reprogram its processing systems to reflect changes to the tax laws. This year was no different. Congress passed the American Taxpayer Relief Act of 2012 on January 1, 2013 and President Obama signed it into law on January 2, 2013. ATRA made changes to numerous portions of the Tax Code.

Fortunately, the IRS had anticipated some of the changes, such as a permanent extension of the alternative minimum tax (AMT) relief and an extension of the $1,000 child tax credit, so the agency left its core processing systems unchanged for these provisions. As a result, the IRS reported that 80 percent of individuals were able to file when the 2013 filing season officially opened on January 30. However, that left 20 percent of individuals unable to file on January 30 because the IRS needed more time to reprogram its processing systems for many ATRA-affected forms.

For business taxpayers, the filing season generally opened on February 4. The February 4 opening covered non-1040 series business returns for calendar year 2012, including Form 1120 filed by corporations, Form 1120S filed by S corporations, Form 1065 filed by partnerships, Form 990 filed by exempt organizations and most users of Form 720, Quarterly Excise Tax Return. Business taxpayers filing many ATRA-affected forms have experienced delays similar to individual taxpayers.

Delayed forms

Since January 30, the IRS has been making progress in reprogramming its processing systems for the remaining ATRA-affected forms. In mid-February, the IRS began accepting returns from taxpayers filing Form 8863, Education Credits, (including the popular American Opportunity Tax Credit and Lifetime Learning credit) and taxpayers filing Form 4562, Depreciation and Amortization. Taxpayers claiming the student loan interest deduction or the higher education tuition deduction did not experience a delay.

The IRS anticipates that it will begin accepting the remaining forms in early March. Included in this group are taxpayers filing Forms 3800, General Business Credits: Form 5695, Residential Energy Credit; and Form 5884, Work Opportunity Tax Credit. If there is any further delay, our office will alert you.

Penalty relief

The IRS gave special penalty relief to farmers and fishermen because of late legislation. The IRS will waive the estimated tax penalty for farmers and fishermen who did not meet the March 1 deadline for filing and paying taxes. Some tax professional associations have asked the IRS to consider penalty relief for other groups of taxpayers because of the delay in filing the ATRA-affected forms. The IRS has not announced any additional penalty relief but it could. Our office will keep you posted of developments.

Refunds

The IRS's popular online Where's My Refund? tool has been overwhelmed by a large number of requests, the agency reported. To avoid service disruptions, the IRS asked taxpayers to only check on the status of their refunds once a day, preferably weekday evenings or on weekends. The IRS is currently predicting that nine out of 10 taxpayers who file their returns electronically and who opt for direct deposit should receive their refunds within 21 days. That timeframe could change depending on the IRS's workload and the possible impact of across-the-board budget cuts scheduled to take effect after February 28.

Sequestration

Sequestration is the official term for mandatory budget cuts to most federal government operations, including the IRS. Very generally, the spending reductions are to be made equally from defense spending and from all other federal spending (with some programs, such as Medicare excluded). The reductions required in each of these categories are then divided proportionally between discretionary spending and mandatory spending.

ATRA delayed the start of sequestration until March 1. President Obama and Senate Democrats have proposed a package of spending cuts and revenue raisers. The House GOP has rejected previous proposals for revenue raisers, insisting that deficit reduction be accomplished through spending cuts. At press time, negotiations continue.

The IRS will remain open after February 28. However, some of its operations could be impacted if a deal is not reached. The IRS is expected to concentrate its resources on tax administration, including the processing of returns, and tax enforcement. The IRS has released very few details about its plans for sequestration. Our office will keep you posted.

Identity theft

Along with processing returns, the IRS is combating the growing problem of identity theft. Criminals use stolen identities to file fraudulent returns and claim refunds. Typically, this occurs early in the filing season. An unsuspecting taxpayer is often unaware that his or her identity had been stolen until he or she files a legitimate return and it is rejected. In fiscal year (FY) 2012, the IRS reported that it prevented the issuance of more than $20 billion in fraudulent refunds.

The IRS has designed new identity theft filters to flag false returns before they are processed. The IRS has also issued more than 700,000 identity protection personal identification numbers (IP PINs) to taxpayers who have been victims of identity theft. In January, the IRS launched a nationwide crackdown on identity theft suspects. The IRS reported that the coast-to-coast effort against 389 identity theft suspects led to 734 enforcement actions, including indictments, informations, complaints and arrests.

If you have any questions about the 2013 filing season, please contact our office.

While one answer doesn't fit all cases, certain strategies have proven effective for many small firms.

* Compete on your own terms. As a small business, it's unlikely you'll be able to compete with larger competitors on the basis of price alone. Give your customers something other than bargain prices.

* Capitalize on your advantages. Establish close bonds with customers and provide services tailored to their individual needs. If you own a hardware store, for example, you might provide free delivery and assembly for some items. The key is to develop innovative ways to satisfy your customers' needs and retain their loyalty.

* Hire (and keep) the best employees. Small businesses can be great places to work. By providing in-depth training and an enjoyable work environment, your employees will generally return the favor by treating customers well. On the flip side, we've all met staff at nationwide chains who were inattentive or just plain rude. Small businesses can't afford to ignore complaints or allow poor customer service. Don't let one obnoxious employee create a bad reputation for your business.

* Expand your sources of revenue. Maybe you own a coffee shop and Starbucks is moving in. Don't throw in the towel. Add catering to the services you offer. If a larger competitor comes to town, you may lose some market share, but new sources of revenue can offset those losses.

* Differentiate your product or service. Maybe you provide fresher produce because it's grown locally. Or perhaps you offer specialty items that the other guys don't carry. Let your customers know about these differences, and they'll come to you when something special is needed.

Remember, there will always be room in the marketplace for firms -- whether big or small -- that provide quality products at a reasonable price and friendly knowledgeable service.

Some tax deductions have a maximum amount that you can use in any one year. In these situations, the rules generally allow you to apply the unused tax deduction to a past or future tax return. One of the most popular examples of this is the "net operating loss" or NOL. Business owners whose qualified expenses exceed their income are allowed to apply the NOL to taxable income earned in the second prior year, and if there is still loss available, to apply it to last year's income. Any further unapplied NOL can be used to offset future taxable income.

But there are a few twists to the NOL rules. If your NOL is the result of a theft or disaster, you may be able to carry it back three years. An NOL from farming can be carried back five years. And you may opt to apply all your NOL to future years only, which might not be a bad strategy if you expect to be taxed at higher rates in future years.

Net capital losses, such as from the sale of stocks, can be carried forward (but not back) to offset future capital gains and up to $3,000 of ordinary income. You can also carry forward charitable contributions that exceed 50% of taxable income for up to five years.

It's important to save all records related to carryback and carryforward deductions for at least three years after the year they are applied. If you have any questions about your potential for tax carryback and carryforward deductions, contact our office. We'll help you keep an eye on your tax situation, past, present, and future.

The "charitable IRA rollover" rule was extended through 2013, permitting taxpayers who are 70½ or older to use their IRA to donate up to $100,000 to charity. The donation must be made directly from the IRA to the charity, and it counts as part of the taxpayer's required minimum distribution for the year.

If you turned 70½ in 2013, remember that you're now required to take a minimum distribution from your IRA (and, unless you're still working, from other retirement plans also) every year. If you delayed taking your first distribution last year, you have only until April 1, 2013, to take it or you'll be subject to a 50% penalty on the amount you should have taken.

Converting a traditional IRA to a Roth IRA is still an available option for all taxpayers. Although a conversion will generate taxable income in the year you do it, later qualifying withdrawals from the Roth will be tax-free. Your conversion opportunities are not limited to just traditional IRAs. You can also convert your 401(k), 403(b), or 457 plan to a Roth.

For details or assistance on IRA matters, contact our office.

Budgets are usually divided between income that is earned, called revenue, and income that is contributed, called support.  Expenses are normally divided between those relating to personnel, overhead expenses, fund raising expenses and program specific expenses.   Budget line items should be matched with the organization’s chart of accounts to allow easier matching of actual income and expenses against budgeted amounts.  Noncash items such as depreciation and in-kind contributions should also be included in the budget; however, not all nonprofits include these.  Budgeting for depreciation allows the organization to provide cash needed to replace depleted assets.  Including in-kind contributions and offsetting expenses gives a more realistic picture of the total resources needed to operate the organization.

Often times the budget is created by looking at what has happened in the previous year and adjusting those balances for what is expected to happen in the future.  Are there any programs that will be cut in the coming year?  Are there new programs that the organization is going to take on?  Has the organization lost any of its funding sources or are there new funding sources?  How many individuals are expected to be served during the year?  Management needs to ask itself what will be different in the upcoming year from the previous year and adjust the budget accordingly for these changes.  In order to remember what assumptions were made during the budgeting process, any notes in regard to estimates should be kept by management for future reference.

Most organizations try to prepare a balanced budget where income equals expenses.  Sometimes a balanced budget is not appropriate.  Healthy organizations require cash reserves.  Sometimes an organization will need to increase its cash reserves or need additional cash to pay down debt.  In these instances, the organization may plan to generate more income than expenses, creating a surplus.  Other times, the organization may feel that its reserves are more than sufficient and decide to invest extra funding in new programming or give out one-time pay raises to employees.  In instances of a deficit budget, when expenses exceed income, it is important to make sure that the deficit was expected and not just an error in budgeting.

Once the budget is prepared, it should be approved by the board of directors prior to the start of the fiscal year.  When a board approves a budget, it is really approving the use of resources for specific purposes.  After the budget is approved, the board should continue to make use of the budget by comparing actual results to budgeted amounts on a regular basis to ensure spending is in line with the approved plan. 

A budget is much more than a list of income and expenses.  It’s a financial tool that should be utilized throughout the year as a guide for ensuring that an organization’s mission is accomplished.

Posted by: Carrie Minnich

FIRST, the payroll Medicare tax will increase from 1.45% of wages to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. The tax increase will also apply to self-employment income exceeding the threshold amounts.

Employers are required to withhold the additional tax from wages exceeding $200,000, regardless of the individual's filing status. They are not required to inform the employee when they begin the additional withholding, nor are they required to match the additional withholding.

SECOND, there is a new 3.8% Medicare tax on unearned income for single taxpayers with adjusted gross income over $200,000 and married couples with income over $250,000. The tax will apply to the lesser of (a) net investment income, or (b) the amount by which modified adjusted gross income exceeds the $200,000 / $250,000 thresholds. The tax may require adjustments to the estimated taxes paid by an individual, but it does not have to be withheld from wages.

Examples of unearned income include interest, dividends, capital gains, royalties, and rental income. Social security benefits, alimony, tax-exempt interest, and distributions from most retirement plans are examples of unearned income not subject to this new tax.

This simplified option is available starting with the 2013 tax return which will be filed in 2014.

Normally, farmers and fishermen are not required to make quarterly estimated tax payments if they file their tax return and pay taxes due by March 1 of the following year. The filing delay created by the new law meant that several tax forms needed by these taxpayers would not be ready on time.

As a result, the IRS has announced an extension of the March 1 filing deadline for farmers and fishermen to April 15.

The filing extension will apply to all farmers and fishermen, not just to those who use late-released IRS forms.

To qualify as a farmer or fisherman for 2012, at least two-thirds of the taxpayer's gross income for 2011 or 2012 must have come from farming or fishing.

COMPLETE ARTICLE:
Most taxpayers believe that a "dependent" is a minor child that lives with them. While that is essentially correct, dependents can include parents, other relatives and nonrelatives, and even children who don't live with you. There is really much more to the dependent deduction than you might at first imagine.

* Exemptions and your taxable income. For 2012, each dependent deduction is worth $3,800, reducing your taxable income by this amount. In 2013, the deduction increases to $3,900 and is phased out for high-income taxpayers.

* Dependents defined. It's impossible to present all of the rules relative to dependents here, since they are so complicated. Generally speaking, if somebody lives with you and you provide more than half of that individual's support for the entire year, there is a good chance that person is a dependent. There are many exceptions. For example, parents don't have to live with you if they otherwise qualify, but some other relatives do. A child of divorced parents doesn't necessarily have to live with the noncustodial spouse for the dependent deduction to apply.

* People who can't be claimed. Generally, you may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.

* One dependent deduction per individual. If you claim yourself as your own dependent, anybody else who can truly meet the tests and claim you as a dependent will lose out. This is common for college students who file their own tax returns for their part-time jobs, while mom and dad really meet all of the qualifications to claim the dependent exemption.

While the dependent deduction might seem relatively minor, it can lead to other deductions on the tax return. In order to claim the child tax credit, the education credits, the dependent care credit, for example, you must claim the dependent deduction for the child that qualifies for the deduction or credit.

Finally dependent deductions can be negotiated, which is especially important for divorced taxpayers. In the past, the IRS would accept the language of the divorce decree to allow the noncustodial parent the dependent deduction. However, under the current rules, the IRS will no longer accept a divorce decree in lieu of IRS Form 8332 (Release of Exemption).

FOR INDIVIDUALS. The law restored for 2012 through 2013 the following tax breaks:

* The optional deduction for state and local sales taxes instead of deducting state and local income taxes.

* The above-the-line deduction for up to $4,000 for qualified tuition and related expenses.

* The deduction for mortgage insurance premiums.

* The above-the-line deduction for up to $250 for classroom supplies purchased by teachers.

* The exclusion from income for cancellation of mortgage debt of up to $2 million on a principal residence.

FOR BUSINESSES. Included in the law's provisions were the following items that could affect your business:

* The Section 179 first-year expensing option was increased retroactively for 2012 and extended through 2013 at $500,000 for the purchase of new and used equipment. The investment limit is set at $2,000,000.

* 50% bonus depreciation, which applies only to new equipment purchases, was extended through 2013.

* Both the research tax credit and the Work Opportunity Tax Credit were extended through 2013.

For assistance in identifying and utilizing all the tax deductions, both new and old, to which you are entitled, please give us a call.

So which federal return does your organization need to file?

Form 990-N, e-Postcard

Organizations with gross receipts that are normally less than or equal to $50,000 are required to file Form 990-N.  Gross receipts are considered to be $50,000 or less if the organization

a.       Has been in existence for 1 year or less and has $75,000 or less of gross receipts during the first tax year;

b.      Has been in existence 1 to 3 years and averaged $60,000 or less of gross receipts during each of the first 2 tax years;

c.       Has been in existence at least 3 years and averaged $50,000 or less of gross receipts for the immediately preceding 3 tax years (including the current year).

IRC section 527 (political) organizations and section 509(a)(3) supporting organizations are not eligible to file form 990-N.  These organizations must file either Form 990-EZ or 990, depending on their revenue and assets.

Form 990-N must be filed electronically.  The IRS provides a link to the Urban Institute’s website where Form 990-N can be filed - http://epostcard.form990.org/.  This is the simplest form that nonprofits can file, as it only asks for 8 pieces of basic information.

1.       Annual tax year

2.       Check the box for:

a.       Has your organization terminated or gone out of business?

b.      Are your gross receipts normally $50,000 or less?

3.       Name and d/b/a (if applicable)

4.       Address

5.       Employer identification number

6.       Website

7.       Name and address of principal officer

Form 990-EZ, Short Form Return of Organization Exempt from Income Tax

Organization’s with gross receipts that are less than $200,000 and total assets that are less than $500,000 are required to file Form 990-EZ.  These organizations may choose to file Form 990; however, many chose to file Form 990-EZ as it is easier to file and less comprehensive than Form 990.

Form 990-EZ asks for information on the organization’s exempt and other activities, finances, compliance with certain federal tax filings and requirements, and compensation paid to certain persons.  Additional schedules are required to be completed depending on the organization’s activities.  The most common schedules required are Schedule A, Public Charity Status and Public Support and Schedule B, Schedule of Contributors.  Schedule A is used to determine the sources of the organization’s support and to determine if it meets the public charity requirements.  Schedule B provides a listing of the organization’s larger contributions.

Form 990, Return of Organization Exempt from Income Tax

Organizations with gross receipts that are greater than or equal to $200,000 or total assets that are greater than or equal to $500,000 must file Form 990.  Similar to Form 990-EZ, Form 990 requests information on the organization’s mission, programs and finances.  However, Form 990 also asks additional questions on the board’s activities, compliance and legal requirements and ethics.  When Form 990 was revised in 2008, the IRS wanted to enhance transparency and encourage compliance which resulted in additional questions on governance.

Form 990 consists of an 11 page core return and 16 potential schedules that may need completed depending on the organization’s activities.  As with Form 990-EZ, Schedule A and Schedule B are two of the most common schedules required with Form 990.  Schedule D, Supplemental Financial Statements, which provides additional detail on financial information and Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities, which provides additional detail on special events are also commonly required by most nonprofit organizations.

Due Date

No matter which form your organization is required to file, it is due by the 15th day of the 5th month after your organization’s accounting period ends.  For example, if your organization follows the calendar year, the filing deadline is May 15th.  You may request an automatic 90 day extension of time to file Form 990 and 990-EZ by filing Form 8868, Application for Extension of Time to File and Exempt Organization Return, by the filing deadline (i.e. May 15th).   An additional 90 day extension may also be granted by the IRS for reasonable cause, extending a calendar year nonprofit’s due date to November 15th. 

Failure to file the return by the required due date results in penalties of $20 per day, up to $10,000 or 5% of the organization’s gross receipts for the tax year.  If your annual gross receipts exceed $1 million, the penalty is $100 per day, up to $50,000 per return.

Posted by: Carrie Minnich

Above-the-line deductions are more desirable than itemized deductions because:

they are more available (for example, they are not phased out or subject to a floor like many itemized deductions);
they can be claimed even if the taxpayer does not itemize deductions; and
they lower the taxpayer's AGI, which can allow the taxpayer to qualify for more and/or larger deductions.
The above-the-line deductions include:

Trade or business expenses
Net operating loss deduction
Loss from sales and exchanges
Depreciation and depletion
Deductions tied to rents and royalties
Teacher's classroom expenses
Jury pay turned over to employer
Overnight travel expenses of Reserve or National Guard
Supplemental unemployment compensation repayments
Business expenses of qualifying performing artists
Contributions to individual retirement accounts
Student loan interest deduction
Tuition and fees deduction
Health savings account deduction
Moving expenses
½ of self-employment tax
Health insurance costs of the self-employed
Contributions to SIMPLE or SEP plans
Penalty for early withdrawal of funds from a savings account
Alimony payments
Legal fees and costs paid in certain actions involving civil rights violations or whistleblower awards
Domestic production activities deduction

A capital gains rate of 0 percent applies to the adjusted net capital gains if the gain would otherwise be subject to the 10 or 15 percent ordinary income tax rate.
A capital gains rate of 15 percent applies to adjusted net capital gains if the gain would otherwise be subject to the 25, 28, 33, or 35 percent ordinary income tax rate.
A capital gains rate of 20 percent applies to adjusted net capital gains if the gain would otherwise be subject to the 39.6 percent ordinary income tax rate beginning after December 31, 2012.
Individuals are subject to the 39.6 percent ordinary income tax rate beginning in 2013 to the extent their taxable income exceeds the applicable threshold amount of $450,000 for married individuals filing joint returns and surviving spouses, $425,000 for heads of households, $400,000 for single individuals, and $225,000 for married individuals filing separate returns.

Comment:  The only change from 2012 rates is the 20 percent rate, applied as described, above.  Prior to 2013, the highest tax rate on net capital gain was 15 percent.

Comment: Adjusted net capital gain is net capital gain from capital assets held for more than one year other than unrecaptured Code Sec. 1250 gain (25 percent); collectibles gain (28 percent) or gain from qualified small business stock (varying rates).

Examples

Following the rules outlined above, computations for higher-income taxpayers (those whose taxable income together with net capital gains exceed the 39.6 percent tax bracket threshold amounts, which are also the threshold amounts for the 20 percent capital gain rate) are illustrated under three scenarios:

Example 1: Assume in 2013, joint filers with $475K in net capital gain and $200K in ordinary income:
$200K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $43,465.50 tax.
$475K capital gain is taxed:
$250K of $475 net capital gain at 15 percent ($450K threshold less $200K ordinary income) = $37,500
The remainder of the net capital gain $225K ($475K less $250K that was taxed at 15 percent) is taxed at 20 percent = $45,000
Total tax liability: $43,465.50 on $200K ordinary income and $82,500 on $475K net capital gain.

Example 2: Assume in 2013, joint filers with $200K in net capital gain and $475K in ordinary income:
$475K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $135,746 tax.
$200K capital gain is taxed:
All of $200K net capital gain at 20 percent ($450K threshold already exceeded by $475K in ordinary income) = $40,000.
Total tax liability: $135,746 on $475K ordinary income and $40,000 on $200K net capital gain.

Example 3: Assume in 2013, joint filers with $50K ordinary income and $425K in net capital gain:
$50K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $4,845
$425K net capital gain is taxed:
$20,700 at zero percent ($70,700, which is the top of the 15 percent bracket less $50K ordinary income) = $0
$379,300 at 15 percent ($450,000 less $70,700) = $56,895
$25,000 at 20 percent (balance of ordinary income plus capital gain over $450K threshold) = $5,000.
Total tax liability: $4,845 on $50K ordinary income and $40,000 on $200K net capital gain.

Above-the-line deductions are more desirable than itemized deductions because:

• they are more available (for example, they are not phased out or subject to a floor like many itemized deductions);
• they can be claimed even if the taxpayer does not itemize deductions; and
• they lower the taxpayer's AGI, which can allow the taxpayer to qualify for more and/or larger deductions.

The above-the-line deductions include:

• Trade or business expenses
• Net operating loss deduction
• Loss from sales and exchanges
• Depreciation and depletion
• Deductions tied to rents and royalties
• Teacher's classroom expenses
• Jury pay turned over to employer
• Overnight travel expenses of Reserve or National Guard
• Supplemental unemployment compensation repayments
• Business expenses of qualifying performing artists
• Contributions to individual retirement accounts
• Student loan interest deduction
• Tuition and fees deduction
• Health savings account deduction
• Moving expenses
• ½ of self-employment tax
• Health insurance costs of the self-employed
• Contributions to SIMPLE or SEP plans
• Penalty for early withdrawal of funds from a savings account
• Alimony payments
• Legal fees and costs paid in certain actions involving civil rights violations or whistleblower awards
• Domestic production activities deduction