Several recent tax developments may impact you or your organization as you prepare to file your 2011 income tax returns. Many of these changes extend to future filings as well, and require action to ensure proper documentation. Please take a moment to review the following developments applicable to individuals and entities, as well as general information that may affect you. Should you wish to discuss any topic in more detail, or address how these updates may impact your unique situation, please contact your PBMares tax advisor who will be glad to assist you.
Information of General Interest
Standard mileage rates flat or lower. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 55.5Â¢ per business mile traveled after 2011. For 2011, it was 55.5Â¢ for miles driven after June 30 and 51Â¢ per mile for miles driven before July 1. Further, the 2012 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 23Â¢ per mile. For 2011, it was 23.5Â¢ for miles driven after June 30 and 19Â¢ per mile for miles driven before July 1.
Recent Tax Developments Affecting Individuals
New foreign asset reporting guidance and form. The IRS issued detailed guidance on the new law requiring individuals with an interest in a â€œspecified foreign financial assetâ€ during the tax year to attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000 as the IRS may prescribe). In addition, the IRS issued Form 8938 (Statement of Specified Foreign Financial Assets), which individual taxpayers will use starting in the 2012 tax filing season to report specified foreign financial assets for tax year 2011. The temporary regulations detail which assets are covered, when the form must be filed and describes penalties for non-compliance.
New Form 8949 replaces Form 1040, Schedule D-1. The IRS is requiring more detail in reporting capital gain transactions. Many transactions that, in previous years, would have been reported on Form 1040, Schedule D or D-1 must be reported on Form 8949 if they occurred in 2011.
Recent Tax Developments Affecting Businesses
Reporting credit card transactions and third party payments. Beginning in 2011, banks and credit card companies are required to file an information return with the IRS, reporting the gross amount of credit card and debit card payments a merchant received during the year, along with the merchantâ€™s name, address and taxpayer identification number. A parallel IRS requirement for businesses and rental property owners to segregate such receipts on their tax returns has been postponed until 2012, even though 2011 tax forms provide a space for the breakdown. The IRS has instructed taxpayers to report nothing on the line labeled â€œmerchant and third party paymentsâ€.
Beginning with tax year 2012, segregating these receipts will be mandatory. If you have not begun to plan for this new requirement, you may consider setting up an income account for payments received by you or your business from customers, clients or tenants made by credit card or through a third party settlement organization, such as PayPal.
Withholding requirement for government contractors repealed. A law enacted in 2005 required the Federal government and the government of every state, political subdivision of a state, and instrumentality of a state or state subdivision (including multi-state agencies) making certain payments to a person providing any property or services (e.g., payments to a government contractor) to deduct and withhold 3% from that payment. Although the withholding requirement was originally set to apply to payments made after 2010, it was subsequently deferred to apply to payments made after 2012. A law enacted in November 2011 repealed the government contractor withholding requirement altogether.
Payroll tax cut temporarily extended. The Temporary Payroll Tax Cut Continuation Act of 2011 was enacted late last year. It temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2% to 4.2% of wages paid through Feb. 29, 2012. Shortly after its passage, the IRS instructed employers to implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. However, note that employees receiving more than $18,350 in wages during the two-month period will be taxed an extra 2% on wages over the $18,350, effectively negating the tax cut on the excess wages. Self-employed individuals also benefit from the cut as the social security tax rate for a self-employed individual remains at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower rate for 2012). If Congress can negotiate a deal to extend the payroll tax cut for all of 2012, the recapture provision for employees would not apply.
Credit for hiring veterans extended and enhanced. A law enacted late in 2011 extended and enhanced the portion of the work opportunity credit that is allowed for hiring qualified veterans. Before the law was passed, the credit would have been available only if the qualified veteran were hired before Jan. 1, 2012. The new law extends the credit for hiring qualified veterans, adds two new classes of veterans who are considered qualified veterans, increases the credit for hiring certain qualified veterans, â€œfast-tracksâ€ the process for certifying that an individual is a qualified veteran, and provides tax-exempt employers with a credit against payroll tax for hiring qualified veterans. The credit amount varies depending on a number of factors. It can be as high as $9,600 for hiring certain qualified disabled veterans. For an employer to qualify for the credit, the qualified veteran must begin work for the employer before Jan. 1, 2013 and other requirements must be met.
New rules for deducting or capitalizing tangible property costs. The IRS has issued new regulations for determining whether amounts paid to acquire, produce, or improve tangible property may be currently deducted as business expenses or must be capitalized. The regulations will affect virtually all taxpayers that acquire, produce, or improve tangible property. They are comprehensive, voluminous and virtually rewrite the rules in this area. For example, they provide detailed definitions of â€œmaterials and suppliesâ€ and â€œrotable and temporary spare partsâ€ and prescribe new rules and elective de minimis and optional methods for handling their cost. They also have rules for differentiating between deductible repairs and capitalizable improvements, among many other items. The regulations generally are effective in tax years beginning after Dec. 31, 2011.