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Winter 2011 Newsletter

Winter 2011

 

Dear Client and Friend,

 

  As we approach the end of the year, I hope that you can focus on some positive aspects of the past year and look forward to a new year and new possibilities!

 

   This issue is about “Planning” for the end of this year and beyond.  Knowing how the tax laws work can help you acquire the best plan for both your practice’s and personal financial success.  

 

Let's get started...

 

 

Successful Tips For Year End Tax Planning

 

1. Increase your 401(k) contributions to the maximum allowed ($16,500 or $22,000 for age 50 plus).  Also consider converting to a Roth IRA.  Although the tax is due April 15, 2012 there will be no tax on the appreciation after 2011.  

2. Pay January mortgage prior to 12/31/11 to deduct that interest in 2011.  Make sure your bank includes this interest on your Form 1098.

3. Make donations by credit card prior to 12/31/11 and you can deduct this year even if you don’t pay the credit card until 2012.  Donating appreciated stock allows you to avoid capital gains taxes on the appreciation and get a deduction for the full market value of the stock.  If you are required to take distributions and you do not need the income you can have your distribution transferred to a charity.  You do not report the income or the charitable contribution. This can keep your income lower and avoid increase in Medicare costs.

4. If you itemize, pre-pay your medical bills if the total will exceed 7.5% of your income.

5. Take advantage of the energy efficient home improvement credit.  You can claim 10% (up to $500) of all qualified expenditures during 2011 for such improvements as insulation, windows, doors, roofs, heating and air conditioning systems and water heaters.  Any credits taken in 2009-2010 will reduce your $500.  Check out www.energystar.gov to see if your purchases qualify.

6. The Residential Energy Efficient Property Credit is another energy credit for such things as solar electric systems, solar hot water heaters, geothermal pumps, wind turbines and fuel cell property.  The credit is 30 percent of the entire cost, generally labor included, with no cap except for fuel cells.  These are credits and reduce tax owed dollar for dollar.  You do not have to itemize deductions.  These have to be in placed into service before Jan. 1, 2012.

7. Clean out your closets and donate clothing and household items to charity.  Be sure to keep records of all items donated.  A donation guide can be found on Salvation Army website at www.satruck.org/donation with estimates for non-cash donation values.  

8. Look at your year-end tax situation.  This may be the year to accelerate income, defer deductions.

9. Estate and Gift Taxes are both at a $5 million lifetime allowance.  This is above the annual $13,000 gift allowance.  Review your estate plan and annual gifting provisions. This may not be around after 2012.

10. Maximize “above-the-line” deductions.  Above-the-line deductions are deductions on page 1 of your personal tax return and are especially valuable because they reduce your adjusted gross income (AGI) on page 1. Common above-the-line deductions include contributions to traditional Individual Retirement Account (IRA) and Health Savings Account (HSA), self-employed health insurance costs, and alimony payments.

11. Be prepared to substantiate any business gift with the following information:  Amount, time, description of gift, business purpose, business relationship.  Maximum deduction is $25.00 per gift to clients, customers or contacts.

12. Brokerage firms now must submit 1099’s to the IRS that report the price of any sale and your cost.  Be sure, especially on inherited funds, that the broker has the correct information.  If you do not, the broker may report your cost at N/A or Unknown.  The IRS will interpret a $0.  If your records are not in good order you will be fighting with the IRS to support what you think is your cost.

13. Prepay your practice’s expenses by December 31, in advance for next year for vehicle leases, rent payments on office and/or equipment and even your business and malpractice insurance.   

14. Plan on making any capital expenses for property purchases now under Section 179.  The limit for 2011 is $500,000 and going down to $125,000 in 2012!  In 2013 it may completely go away.  You must purchase and put into service by the end of the year.

 

 

The “Tax Relief Act” of December 17, 2010

 

As we have discussed in our last issue, President Obama’s “Tax Relief Act” passed on December 17, 2010.  Here are some additional items that may be of assistance to you in planning for this year’s tax preparation and beyond.

 

Personal Deductions and Credits:

 

• High income earners have a break (as some may call it) through 2012, with the highest bracket staying at 35% instead of increasing to 39%.  After 2012, anyone’s guess is good!  
• Deductions and personal exemptions will not be reduced based upon income over $150,000 through 2012
• Student Loan Interest deduction: Obama’s bill approved to increase the debt ceiling severely limits this deduction.
• Sales Tax deduction, Tuition and Fees deduction, and Teacher’s Classroom deduction: extended through 2011 only.
• Exclusion of 100% of gains on the sale of small business stock acquired after September 27, 2010 and before January 1, 2012, held for more than five years. Stock must meet certain conditions.
• Although the American Opportunity credit for undergraduate education is extended through 2012, if your income is at or over $190,000, married, this becomes $0.
• Dependent and Child Care tax credit amounts of $3,000/one and $6,000/two or more, extended through 2012, also applies for parents living with you and attending adult day care.  No overnight care is included.
• “Kiddie Tax” on earnings from interest, dividends and capital gains applies at $1,900 or over in 2011.
• “Nanny Tax” for household employees, such as live-in nannies and healthcare helpers, applies to wages over $1,700 in 2011.

 

Business Deductions and Credits:

 

• Small Business Tax Credit, for providing health insurance to employees, is available for up to 35% of your health care costs to employers with less than 25 full-time employees, with annual wages averaging no more than $50,000 and your practice pays at least 50% of the premiums.
• Bonus Depreciation of 100% allowed for investments in qualified business property acquired and placed in service after Sept. 8, 2010 through Dec. 31, 2011.  This bonus depreciation is reduced to 50% for the 2012 tax year. Certain restrictions as to “eligible” property apply, one of which is that it is “new”.
• Section 179 for deducting capital expenses continues.  This is for business purchases that are put into service in the same year.  Unlike the bonus depreciation this can be “used" property, just new to you.  For 2011, the maximum limit for deduction is $500,000, going down to $125,000 in 2012. 2013 is uncertain. Remember, you can only expense the item that tax year, if it is put in use in the same year.
• Mileage deduction for qualified vehicle business increased on July 1 – December 31, 2011 to 55.5 cents/mile. First half of the year is 51 cents/mile.

 

 

 

THE 1099 PANIC STOPS!

 

No 1099 will have to be sent on corporations providing your practice with goods and services over $600 as previously written to start in 2012.  This part of the Health Reform Act has been repealed!  

 

Also repealed, was the legislation that required Real Estate investment owners to send 1099’s on service providers paid over $600.

 

 

Estate and Gift Taxes:

 

With the Estate and Gift taxes continuing with high exclusions through 2012, this may be a good time to examine transferring business and investment assets to your children and grandchildren tax free.

 

• First $5 million of your estate is not taxable, and amounts over will be taxed up to 35% at the highest rate.  This is effective through 2012.
• Starting January 1, 2011, the unused portion of the $5 million estate tax exemption can be transferred to the spouse.  It is uncertain whether this will continue after Dec. 31, 2012.
• Gift Tax exemptions, as of January 1, 2011 and through December 31, 2012, is now unified with the Estate Tax exemption.  This means that instead of a lifetime allowance of $1 million, you can now gift up to $5 million per lifetime. This is a per person limit, so for a married couple this limit is $10 million.
• You can still gift up to the $13,000/year tax-free to any one person and that will not count against your lifetime $5 million allowance, but any gift over that amount will go against the $5 million estate tax exclusion or be subject to gift tax.  Therefore, the aggregate exclusion for both Estate and Gift is $5 million.
• Executors of estates for those who died in 2010, that filed an extension by Sept.19, have until March 19, 2012 to file the estate tax Form 706 for 2010 and pay any tax with no penalties, but with interest on tax paid after Sept. 19.  Additionally, executors now have until Jan. 17, 2012 to file Form 8939 to report basis allocation for inherited assets in 2010.

 

 

 

Consultant Chats

 

Workers Compensation Insurance Carrier - New Process and Clarification

 

I often reach out to other professionals to assist my clients in many ways.  Recently, I had a call and e-mail from one client regarding concerns of an upcoming Workers Compensation audit by their insurance carrier.  I sat down with State Farm agent, Ron Esparza, whom I have worked with for years, to address my client’s concerns.  Ron clarified the new audit process being taken by Workers Compensation Insurance Carriers.  I would like to share this with you.  

 

The reason for these audits, Ron explained, is that certain employers are paying people as independent contractors when the individuals are really employees for purposes of Workers Compensation.  Just because you issue a Form 1099 does not automatically mean there will be an adjustment to your Workers Compensation policy.  The following is the criteria of the Workers Compensation Insurers for paying as employees versus independent contractors:

 

1. The employee needs to report directly to you as their supervisor

2. The employee needs to work for 52 or more hours in a 90 day period

3. The employee needs to be paid over $100 in a 90-day period

 

According to Ron, the audit process is usually a very short review.  The insurers are asking to check your financials, including payroll records, check registers, and tax returns.  This should not be a problem if you are keeping good financial records or if we handle your accounting needs.

 

Remember, if you are audited, relax.  You most likely don’t have anything to worry about.  If you have any further questions regarding this topic, Ron Esparza has been kind enough to welcome my clients’ calls at (714) 505-3400.

 

 

How Are Others Continuing to Prosper?

 

I am asked this question often by my dental clients.  I called and asked my clients who continue to prosper what they are doing and what seems to be working.  Here are some points they made.

1.  Get ready with the new advertising trends.   Yellow pages and direct mail advertising are yesterday’s charms.  Today new patients find you when they “Google” a dentist in their area.  My successful clients are making sure patients that had a good experience are writing reviews for the doctor as they check out.  Post the reviews immediately.  A constant stream of positive , current reviews will keep you at the top of Google when people use it to find a dentist in your area.

2.  Keep overhead expenses down.   A well run dental practice should have overhead at below 60%.  You must win the overhead war.  

 

Do You Have Back-up Dentist(s) To Step In – In Case?

 

I have written before about Dr. Phil Potter.  Dr. Potter is successfully retired, but continues to assist fellow dentists.  Recently, Dr. Potter was called in to help a dentist, in South Orange County, put together a team of dentists who will step into each other’s practice and keep production going when one of them was ill.  Are you prepared?  If not, call me for further assistance.

 

 

 

 

AVOID THE IRS MONSTER: AUDITS!

 

As many have heard reported, the IRS is looking to increase their revenue by monitoring tax returns with an eagle eye!  Here are some ways you can avoid falling into the traps.

 

1) Are you a corporation?  

• a) S or C corps that made officer loans, must have correct documentation.  Loans over $25,000 require a separate loan document with interest and repayment schedule.
• b) S-corps that pay little or no salaries to their owners are BIG targets!

 

2) Do you generate Form 1099s?

• a) Be sure to file this form for any unincorporated service provider that you pay over $600/yr.  
• b) Use a Form W-9 to get the correct identification information to send with the 1099. The information must match what the IRS has with exact name, address, social security number.  If you are notified of an error, follow up with the service provider or you may be required to withhold $28% on every payment and send it to the IRS.  
• c) The IRS is targeting types of businesses who are likely issuing 1099s vs. W-2s to workers.

 

3) Are you using a Schedule C or Schedule E?

• a) Documentation is crucial if you are deducting business expenses or rental property losses.  The IRS has a priority on reviewing these schedules on your personal return.  

 

4) Are you making charitable donations?

• a) Don’t overvalue your donations.  Keep documentation and pictures of items donated.  You can find a nice listing of values for items donated at the Salvation Army website.
• b) Choose the organizations that you donate to wisely.  Those that over value or allow donors to buy back items are being scrutinized carefully by the IRS.

 

5) Do you have offshore investments?  

• a) IRS and Department of Justice are looking for U.S. citizens’ bank account, credit cards, wire transfers and all other financial activities outside the U.S. borders.  The amnesty program ended this past August.

 

6) Do you have a retirement plan?

• a) IRS is targeting retirement plans or IRAs that have loans to owners, self-directed investments or highly appreciated assets.   Choose your plan advisors carefully and stay clear of those promoting this activity.

 

 

 

 

DOCUMENT, DOCUMENT, DOCUMENT AND MORE !

 

I can’t say it enough, even though you may tire of it, but documentation of expenses is extremely important and vital to, avoidance of or being successful in, an IRS audit! Here are some how-to tips.

 

• Make detailed lists of items and their value for any donation of personal goods (non-cash charitable donations)and they must be in “good” condition. Take pictures.  Written appraisals are necessary on any item $5,000 or over. Cars donated require the organization’s paperwork with the price they sold the car for as your deduction amount.  Also, donating the right to use a timeshare unit does not allow any charitable deduction.
• Keep track of business expenses as you go. Use an appointment book to keep a record of the 5Ws (who, what, where, when, why) of every appointment.  Transfer anything from your electronic devises.  You will then have a full written accounting at the end of the year.
• Itemize your out-of-pocket, business expenses with a monthly expense report that the practice will reimburse you for monthly instead of annually. Keep track of your cash spent daily. Mark cash spent on tips, parking meters, valets, etc. in your appointment book and get receipts if possible. Cash expenses for your practice can be over $2,000 per year.
• Reduce your compensation by having the practice pay for items such as PDA’s, mobile phone, computers, etc. and include the amount as reimbursed expense in your salary. You won’t need to pay additional taxes for this.
• Credit card statements are not proof enough for deductions.  The IRS wants details, logs, receipts to support expenses especially on auto, meals, travel and entertainment. Provide the 5W’s!

 

For those with “Smart” phones, check out the following applications you can use:

1. www.expensify.com – links your credit card account and imports your purchase history.  Generates IRS ready receipts for expenses under $75.

2. www.lemon.com – takes photos of your receipts, digitized and creates a master list online.

3. www.proongo.com – Allows exportation of receipts and details to QuickBooks or Excel.  Can fill out an expense report based o photo of receipts.

Check out Google for more applications available.

 

 

 

SPEAKING OF HEALTHCARE

 

The Supreme Court has decided it will be taking up the issue of the 2010 Healthcare Legislation next year.  Things may change!

 

Some additional information going into the future, as we know it now, is:

 

a) You may no longer deduct over-the-counter medication  and drug costs on your medical reimbursement plans including Flexible Spending Accounts, Health Savings Account, and Archer Medical Savings Accounts.

b) Beginning in 2011, Employers may voluntarily include the costs of Health Care Benefits on employees Form W-2, but it becomes mandatory in 2012

c) Sole-proprietors can opt for a Health Reimbursement Arrangement for a tax savings advantage.  Through this program, your family’s out of pocket medical expenses that exceed the FSA or Cafeteria Plan limits of $5,000 can become a business deduction. However, your business must offer this program to all employees with the exclusion of those that are less than age 25; work less than 25 hours/week; work less than 7 months/year or less than 3 years for you.  Furthermore, the benefits may be reduced for single employees to as much as 20% of married employee’s benefits.  This is an excellent way for those who have high medical costs, due to ongoing medical conditions or planned surgeries to recover those expenses.

d) S-Corporation owners must show costs for health insurance on your W-2 form as either taxable wages (if you do not pay for your employees’ insurance) or wages exempt from FICA and Medicare (if you do pay for your employees’ insurance).

 

 

 

It Still May Be a Good Time for an IRA Conversion

 

Regardless of your AGI, it is still possible for your traditional IRA to be converted to a Roth IRA.  If the valuation of the IRA is low you may want to convert now to a Roth IRA for the lower income tax liability.  You will have the opportunity to reconvert back to the traditional IRA up until October 15, 2012.  You may want to do this depending on the value of the assets or the increase in tax rates.

 

 

 

THE MANY BENEFITS OF HIRING YOUR CHILDREN!

 

Besides the benefits of establishing a sense of responsibility, accomplishment and good work ethics, hiring your children can also save your practice in taxes and start building a college fund for your child.

Here are reasons for consideration:

• 1. If you are a sole-proprietor or a husband and wife partnership, consider hiring your children for a tax break.  Child labor laws, with some exceptions of dangerous tasks, do not apply here.  There is no minimum age and as long as you follow the guidelines (appropriate tasks and pay level i.e. minimum wage or skill level wage), you can pay your children, under 18 yrs. old, as employees without the payroll taxes. (Single member LLC or corporations must pay these taxes.) You must keep documentation as to the tasks performed and hours.  Timesheets are best to keep this information on.  They must be paid with a payroll check.
• 2. Consider opening an IRA account for your child.  Have them put their earnings up to the maximum of $5,000/year (becomes tax deduction from their earnings) and use it for college tuition, penalty free.  Extra bonus - many private colleges do not consider this as an asset when deciding on financial aid.  You may also consider a Roth IRA.  Although there is no tax deduction for the Roth IRA contribution, up to $5,000 a year of your earned income can grow tax free.

 

Steps to build your audit-proof support:

1. Get an employer ID

2. Require a time sheet from the child

3. Document the pay scale

4. Pay with a payroll check

5. Complete the federal and state payroll forms; W-4, W-2, 941, 940

 

While on this topic, there was recently a court case that allowed a wife to be paid to paint her husband’s office with no payroll taxes and no self-employment tax charged.  The court decided that there was no employee/employer relationship and since this was one time only and not her vocation, they allowed it. This can work for your spouse and children also.

 

 

 

PURCHASING A NEW VEHICLE?  THINK BIG!  QUALIFY FOR HUGE DEPRECIATION!

 

Did you know that you can get 100% first year depreciation on your practice’s vehicle?  It’s true for the crossover vehicle (SUV) classified with “truck” status that has an over 6,000 pounds Gross Vehicle Weight Rating (GVWR).  

 

The vehicle qualifies as truck status by being able to create flat, floor-level surface from front to rear using simple tools (screwdrivers and wrenches).   If this does not apply, then if it has (a) four-wheel drive or (b) a GVWR of 6,000 pounds, 4 or more of the following it qualifies:

1. Approach angle of not less than 28 degrees

2. Breakover angle of not less than 14 degrees

3. Departure angle of not less than 20 degrees

4. Running clearance of not less than 20 centimeters

5. Front and rear axle clearances of not less than 18 centimeters

 

Also, if the manufacturer classifies the vehicle as a truck, it is usually so.  You might find this information on a website.  Remember, you must prove the “truck” status.

 

What is the GVWR?  It means the “loaded weight of the vehicle” and it includes the actual weight of the crossover vehicle, government-declared weight for passengers, and the government-declared weight for the cargo.  You can find the GVWR on the driver-side door or door frame or on the manufacturer’s website.  

 

If your vehicle meets these standards and is new, for 2011 you can take a full 100% depreciation, or take a 179 expense up to $25,000 and depreciate the rest in the first year!!  Something to think about prior to making your next vehicle purchase.  In 2012 this goes down to 50% depreciation.

 

 

I hope you have found this information useful to you for planning out your year end strategies for your dental practice and/or personal life. I am always available to assist you further in your tax or financial needs.  

 

Please feel free to call the office at 714-619-0667 or visit my website at www.mydentalcpa.com where you will find additional information and many tools for you to use for your tax needs.  

 

Remember, your success is our business!

 

Sincerely,

 

Monica Rebella, CPA

 

Successful Tips For Year End Tax Planning | The “Tax Relief Act” of December 17, 2010 | Personal Deductions and Credits | Business Deductions and Credits | Estate and Gift Taxes | Workers Compensation Insurance Carrier | How Are Other Dentists Continuing to Prosper? | Do You Have Back-up Dentist(s) To Step In – In Case | Avoid The IRS Monster: Audits! | Document, Document And More! | Speaking Of Healthcare | It Still May Be A Good Time For An Ira Conversion | The Many Benefits Of Hiring Your Children! | Purchasing A New Vehicle?