Tax Breaks Every Small Business Needs to Know About

Bonnie Less for Fox Business writes: Small businesses often get touted as the backbone of our economy—they create jobs, spur growth and lead to innovation. When the financial crisis hit in 2007 and led to the Great Recession, small businesses took a hit-consumer spending dropped and they stopped hiring. Many small businesses were forced to shutter.

To help reignited small businesses, the Obama Administration launched a series of tax cuts and credits to help shore up balance sheets and entice more spending and hiring.

Some of the tax breaks Obama provided have expired but here is a listing of the remainder:

1. Health care tax credit (part of the 2010 Affordable Care Act): gives owners with 25 or fewer employees and pay average salaries of $50,000 or less and pay for half of their health insurance premiums a tax credit.

2. Start up costs:  since 2004, small business owners were allowed to currently deduct $5,000 in business start up expenses. President Barack Obama permanently raised the amount to $10,000 when he initiated the Small Business Jobs Act.

3. Section 179 expensing:  these numbers shift from year to year. Back in the 1980s the amount a small business could expense for new equipment, machinery,furniture, fixtures and vehicles currently rather than depreciate was $25,000. President George W. Bush raised the limit to $250,000 and Obama extended that to $500,000 with the Small Business Jobs Act. It was set to return to $139,000 for 2013 but last minute legislation kept the level at $500,000

4. Bonus Depreciation: over the years, this little tidbit has been shelled out to businesses allowing the write off of up to 50% of the cost of vehicles, machinery, furniture, fixtures and equipment. The 2008 Economic Stimulus Act, signed into law by Bush set it at 50%. Obama increased it to 100%, but it’s currently at a rate of 50%.

5. Breaks for angel investors: since 1993, angel investors were allowed to exclude 50% of capital gains on investments into small, risky companies. With the Recovery Act, that was pushed up to 75%. Then it was raised to 100% by the Small Business Jobs Act and the Tax Relief Act kept it at 100% for investments made during 2011. For 2013, it’s back to 50%.

6. Cell phone deductions:  cell phones were once considered “listed property” which had a recordkeeping requirement in order to allow the deduction.  The Small Business Jobs Act simplified this provision permanently.

7. Limited penalties on tax errors: in the past a small business could pay anywhere from $50,000 to $200,000 depending on the mistake made, in penalties for tax errors. The Small Business Jobs Act permanently changed that to cap penalties at 75% of the mistake.

There were other tax breaks such as the loss carryback period extended to five years, the Work opportunity tax credit, the payroll exemption, alternative minimum tax credits to name a few but those breaks are long gone.

Biggest ETF at Steepest Discount Signals July Rally: Muni Credit / That may be a sign that tax-exempt securities are getting cheap enough to rekindle buying.

Michael Kaske for Bloomberg writes: The biggest exchange-traded fund tracking the $3.7 trillion U.S. municipal-bond market is selling at the deepest discount to the value of its assets in more than two years. That may be a sign that tax-exempt securities are getting cheap enough to rekindle buying.

The $3.5 billion iShares S&P National AMT-Free Municipal Bond Fund, known as MUB, fell to$102.29 (MUB) last week, the lowest since May 2011, data compiled by Bloomberg show. The move reflects yields on benchmark 10-year state and local debt climbing to 2.46 percent last week, the most since November 2011.

MUB’s losses echo those in the market for U.S. Treasuries, where yields on securities maturing in 10 years jumped to 2.54 percent (USGG10YR), the highest since August 2011, after Federal Reserve Chairman Ben S. Bernanke said the central bank may moderate purchases of government and mortgage debt in 2013 and end them around mid-2014 if the economy performs as forecast. Yet demand for munis may rebound in July as investors deploy cash from principal and interest payments, said Matt Dalton of Belle Haven Investments Inc. inWhite Plains, New York.

“Once we get past the Fourth of July holiday, we’ve got a chance of seeing some stability come into this market because of the reinvestment needs,” Dalton, who manages $1.6 billion of local debt, said in a telephone interview.

Dumping Debt

Investors have been dumping munis even though they have gained in 21 of the past 24 years in July, according to Bank of America Merrill Lynch data. The selling has helped push MUB to a discount of 2.18 percent to its net asset value, the steepest since Dec. 14, 2010, Bloomberg data show. While ETFs are similar to mutual funds that track an index of equities, bonds or commodities, they are bought and sold on stock exchanges and their prices may rise or fall more than the value of the assets they hold.

“The move down in price has been so fast that the net asset values haven’t yet been able to catch up with it,” said Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors.

Investors are rejecting state and local debt as they see the value of those securities decline, said Dalton. The S&P National AMT-Free Municipal Bond Index, a measure of the broader market, fell 1.07 percent June 20, the biggest one-day drop since December 2010, according to Standard & Poor’s data.

The plunge follows investors pulling $1.86 billion of assets out of U.S. muni mutual funds from Jan. 1 through June 19, Lipper US fund Flows data show. That was the first time since 2011 that holder withdrew money from the funds for the first 24 weeks of a year.

Buying Signal

This year’s outflows will push yields high enough to bring investors back to munis, Fabian and Dalton said. Even an increase of 0.2 to 0.3 percentage points could renew buying, Dalton said.

“When investors take a step back and the panic comes out of their emotions, and you apply a 39.6 percent federal tax rate to some of the yields on munis right now, you forget how attractive they are,” Dalton said.

For investors in the highest tax bracket, 39.6 percent, the benchmark 10-year muni yield is equivalent to a taxable return of 4.07 percent. That’s almost double the 2.2 percent dividend investors earn on the Standard & Poor’s 500-stock index, Bloomberg data show.

Reinvesting Cash

Demand for tax-exempts may increase after Independence Day because investors will need to redeploy, Dalton said. Muni holders are set to receive $128 billion of principal and interest payments in June, July and August, $16 billion more than last year, according to Bank of America.

In the meantime, Dalton and Ebby Gerry, who helps oversee $15 billion of munis at UBS Global Asset Management in New York, say they’re taking advantage of rising yields to buy at cheaper prices as the supply of debt in the secondary market has increased.

Mutual funds and other institutions offered about $1.27 billion of state and local debt for sale last week, more than double the one-year average of $551 million, Bloomberg data show.

“It’s like a buffet, there’s so much,” Dalton said. His firm is concentrating on buying higher-grade municipals because that’s what mutual funds tend to sell when yields rise, he said.

While the muni market has been “brutal,” it will turn around in the next few weeks, Dalton said.

Finding Legs

“No market trades in one direction forever,” Dalton said. “At some point, this bond market will get its legs underneath it. The opportunities that are presenting themselves today will be quickly snapped up.”

Illinois, the lowest-rated state, will get a chance to test investor demand June 26 when it offers $1.3 billion in general-obligation bonds, its biggest sale since May 2012, after lawmakers were unable to agree on a plan to reduce an unfunded pension obligation of almost $100 billion.

The issue leads $8.4 billion in state and local issuance next week with yields on 30-year tax-exempt securities about 107 percent of similar federal debt, Bloomberg data show. The gap compares with an average of 101 percent for the past year.

The American Taxpayer Relief Act Of 2012 Extends The Research And Experiment Credit: Can Your Company Benefit?

 Diane Giordano for Marcum, LLP writes: After intense negotiations, the President and Congress agreed to the passage of the American Taxpayer Relief Act of 2012. One of the key business provisions within this long awaited Act is the assurance that the Federal Research and Experimental Credit, originally set to expire in 2011, will be extended for years 2012 and 2013.

This credit, which is in addition to the tax deduction for research expenses and results in a dollar-for-dollar reduction of income tax liability, is often misunderstood and as a result, many businesses may be overlooking significant tax benefits. Because of confusion on what research is qualified and how the credit is computed, many small and medium size companies have not considered the credit and are missing out on benefits.

The two year window is a lengthy period of time for business to plan for this program. The Tax Credit and Incentive Group at Marcum would like to provide a summary of the rules and to assure you that many businesses are eligible for this benefit.

What is the research tax credit?

The credit, originally enacted during 1981, offers a financial incentive to U.S. companies that are engaged in certain types of product development and process engineering activities. Research qualifying for this credit program must:

1. Be aimed at the development of a new or improved product or process. (Includes all technical activities such as analysis, design, developing, coding, testing, etc.)
2. Be technical in nature.
3. Rely upon some sort of process of experimentation which can involve the evaluation of alternatives and trial and error.

What expenses are eligible for the credit?

The credit is based primarily on wages and compensation and can include in-house salaries and wages of employees engaged in qualified research, as well as the costs of materials and supplies and 65% of amounts paid to third-party contractors for conducting qualified research. These expenses are known as qualified research expenses or QREs.

How is the research credit computed?

Companies may elect one of the two formulas used to compute the research credit:

1) the traditional credit and

2) the alternative simplified credit ("ASC").

Each alternative has specific computations and limitations and benefit specific types of taxpayers. The actual credit is based on various percentages of total qualifying expenditures.

How should the credit be documented?

Documentation is key for supporting the research credit. It is imperative for businesses to clearly and completely demonstrate to the Internal Revenue Service that the project expenses were indeed qualified research. Without proper documentation, upon examination, the credit claim will not be sustained. Proper documentation can include:

• Materials explaining the research activities,
• Project summaries,
• Progress reports,
• Minutes of meetings,  
• Contracts for research performed,
• Time sheets for those employees involved in research,
• Schedule of job descriptions.

Do the states offer a research credit?

In addition to the federal research credit, many states offer some form of research credit or other related incentives.

More information on state credit programs can be found on the Marcum LLP website.

Is your company a candidate for the research credit?

Since the credit has been extended for two years, many Marcum clients have been encouraged to implement multi-year Federal and State tax credit programs.

Many manufacturing companies, and entities operating in chemical, electronics, manufacturing, medical technology, pharmaceutical, and software industry sectors or technology firms are examples of businesses likely to have qualified research and eligible costs.

Some recent samples of successful Marcum engagements include:

1. Product manufacturers, 
2. Software companies, 
3. Multiple contract manufacturers, 
4. Multiple medical product, software application and device companies, and 
5. Service companies with new application and analytics activities.

The Energy Credit is Still Here For 2013

Robert D Flach for Main Street writes: You can claim a tax credit for a qualified energy-efficient purchase made this year on your 2013 Form 1040.

The American Taxpayer Relief Act of 2012 extended the lifetime $500 "Nonbusiness Energy Property Credit" for qualified energy efficiency improvements or residential energy property costs for your primary principal residence through 2013.

The credit is 10% of the cost, up to a maximum of $500. Some items are limited to a credit of from $50 to $300. The qualifying purchase must be for an existing home that is your principal residence.

As I stated above, the $500 is a "lifetime" limit. If you claimed at least $500 in energy tax credits on your 2006 through 2012 returns, you are not eligible for a credit for 2013. If you claimed $300 in energy credits over the years, the most you can take in 2013 is $200.

The credit is available for -

• Biomass Stoves
• Heating Ventilating, Air Conditioning (Advanced Main Air Circulating Fan, Air Source Heat Pumps, Central Air Conditioning, Gas, Propane, or Oil Hot Water Boiler, and Natural Gas, Propane or Oil Furnace)
• Insulation
• Roofs (Metal and Asphalt)
• Water Heaters (Gas, Propane or Oil Water Heater, and Electric Heat Pump Water Heater)
• Windows and Doors

Not every new window, door, boiler, heater or furnace you buy in 2013 will qualify. There are very specific "energy efficiency" requirements for each of the qualifying items.

For example, to qualify for the credit an advanced main air circulating fan - a fan, or blower motor which blows the air that your furnace heats up through the duct system - must use no more than 2% of the furnace's total energy. The maximum credit allowed for an advanced main air circulating fan is $50, regardless of the cost.

Only "split system" air source heat pumps with a Heating Seasonal Performance Factor (HSPF) greater than or equal to 8.5, Energy Efficiency Ratio (EER) greater than or equal to 12.5, and Seasonal Energy Efficiency Ratio (SEER) greater than or equal to 15 qualify for the credit. For a "package system" the requirements are HSPF greater than or equal to 8, EER greater than or equal to 12, and SEER greater than or equal to 14.

And a gas, oil, propane water heater must have an Energy Factor greater than or equal to 0.82 or a thermal efficiency of at least 90% if you want a tax credit.

You can go to the Energy Star website to find out what the specific qualifications are for individual items.

You should be aware of the specific requirements before you make your purchase. And ssk the salesman for a Manufacturer's Certification Statement - a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit.

If you have already purchased an item you thought would qualify for the credit, you should verify that it actually does before you give your "stuff" to your tax professional next year. Don't just include a copy of the bill for a purchase or a note that you spent $800 for a new hot water heater and expect your taxpro to waste his or her valuable time attempting to determine if the purchase qualifies for the credit.

QuickBooks Pro is 40% off for 24 hours only. Ends today at midnight. Tick, Tock...

Seems Intuit is having one of their promotional sales.....CLICK this link to see the single user QuickBooks Pro 2013 is on sale for $149.97, one day only, today June 24.    Interestingly Dell has it onsale today for $139.99 with tax bringing it up to $149 or thereabouts.    These are downloads.  

Using E-Signatures in the Tax and Accounting Profession

Steve Dusablon for AccountingToday writes: Electronic signatures became effective in the United States on October 1, 2000 when Congress passed the Electronic Signatures in Global and National Commerce Act.

The ESIGN Act was enacted specifically to ensure that any agreement signed electronically will not be denied legal force, effect, validity, or enforceability solely because an E-Signature was used in its formation. As a result, online E-Signatures, in both personal and commercial transactions, have been granted the same legal status as a written signature, so they are now the legal equivalent of hand written signatures.

Most accounting firms have clients that have recently purchased a home using E-Signature technology. That’s because we are seeing a rapid acceleration of E-Signature usage in the real estate, mortgage, health care, insurance, communications, recruiting and other industries through broad based E-Signature solutions such as Adobe EchoSign and DocuSign. These solutions were designed for mass markets and do not meet the needs, demands and workflow requirements of the tax and accounting industry. However, with the recent release of at least one tax and accounting-specific E-Signature solution, they can now be used across a wide range of both client facing and internal firm documents.

For firms that are embracing E-Signatures, they typically start by sending annual engagement letters or Section 7216 consent forms to clients, or annual independence surveys to their staff. 
These documents are ideal candidates for E-Signature technology because they are often standardized forms, need annual signatures, can be batch processed with mail merge functionality for a higher efficiency gain, and the signers can sign remotely from any PC, laptop, tablet or smart phone.

Firms are reporting that they can process these documents at a fraction of the cost of mailing hard copies. They are receiving E-Signed documents back from their clients and staff in less than seven minutes, and the overall workflow process is significantly improved.

As for other client-facing documents, firms are also sending management representation letters, audit representation letters, A/R and A/P confirmations, new client acceptance forms, payroll processing forms, and Forms W-9 and 4506-T for E-Signature. They are also sending credit card authorization forms to accelerate cash collections. As for other internal documents, firms are also sending IT policy forms, partnership agreements, internal routing sheets, and a wide variety of human resource related documents including offers of employment, Forms W-4 and I-9, employee handbooks, medical, dental, insurance and 401k forms for E-Signature.

The IRS and Form 8879
The biggest demand for using E-Signatures in the tax and accounting profession is on Form 8879. The IRS currently does not accept E-Signatures on Form 8879, even though they are rarely, if ever, submitted to the IRS. They are simply retained on file by the taxpayer and the electronic return originator for a period of three years. The instructions in Form 8879 do not specifically address the use of E-Signatures, but there is a single sentence in Publication 1345 that states,

“This does not alter the requirement that taxpayers must sign Form 8879 and Form 8878 by handwritten signature.” This is actually quite ironic since the entire premise of e-filing tax returns is to reduce paper-based tax return filings. The only step to e-filing a tax return that requires paper is the requirement for the taxpayer to print, sign and send back Form 8879.

On Jan. 23, 2013, the IRS issued Internal Revenue Bulletin 2013-4, Announcement No. 2013-8, seeking recommendations for appropriate E-Signature standards in the tax and accounting profession. They stated, “E-signature standards will promote efficiency, reduce burden and improve identity proofing methods to confirm the identity of the signer.” Unfortunately, we do not know when the IRS will provide formal approval or the specific requirements for using E-Signatures on Form 8879. Many industry thought leaders feel it will be at least two more years before we get the final approval.

So are firms using E-Signatures on Form 8879 anyway? Yes, and with tremendous success. I’m not saying that you should do it, but for the firms that are, they are basing their decision on the following points:

• The ESIGN Act of 2000 makes E-Signatures legal and valid.
• Effective January 2013, the IRS is allowing E-Signatures on Form 4506-T and Section 7216 consent forms. 
• At least one large tax vendor is currently in an E-Signature pilot program with the IRS on Form 8879. 
• The purpose of e-filing tax returns is to reduce paper-based processes and create efficiency for the taxpayer, tax preparers and the IRS. Requiring a handwritten signature from the taxpayer on Form 8879 is the only part of the e-filing process that requires anyone to print a piece of paper. 
• Most tax and accounting firms spend countless hours and thousands of dollars tracking and managing manually signed Form(s) 8879. 
• Form 8879 is rarely, if ever, submitted to the IRS. It is required to be maintained on file by the taxpayer and ERO for three years. 
• The benefits outweigh the risks. 
• The IRS solicited industry feedback with Announcement 2013-8.

Top Considerations When Choosing an E-Signature Solution
Every industry vertical has its own set of document types and workflow requirements surrounding the E-Signature process. Your firm should look for a solution that is tax and accounting specific. For example, your staff should be able to quickly send documents for E-Signature while classifying each document with accounting-specific workflow and reporting data such as document type, engagement type, tax year and partner.

Your solution should provide firm-wide reports that are accessible by all members of your firm and provide for centralized management of the E-Signature process. For example, firm administrators and partners should have complete visibility over every document sent for E-Signature within their firm. They should be able to quickly sort, filter and search to send reminders, view documents and download final signed documents of other users.

Accounting firms often need to mail merge and batch process documents requiring signatures. Examples include annual engagement letters and Section 7216 consent forms for clients, and annual independence surveys for staff. Your solution should provide the tools necessary to mail merge and batch process hundreds of documents for E-Signature with the click of a button. To effectively accomplish this, your solution should provide for text tags in documents to automate the signature placement process. Otherwise, your staff will need to manually drag and drop the signature location into each document.

Finally, be careful of monthly subscription fees. Most providers have “reasonable use clauses” restricting the number of documents that can be sent monthly per licensed user. Accounting firms tend to have seasonal demands and can quickly surpass the reasonable use clauses, resulting in higher monthly fees.

To obtain the full benefits of your E-Signature solution, you should license all members of your firm so they have access to the real-time reporting, tracking and management features. As a result, we recommend solutions that allow free licenses to all members of your firm, and then bill based on the actual number of documents sent for E-Signature.

Steve Dusablon is the president and CEO of cPaperless, LLC, a software company that develops paperless solutions for tax and accounting firms.

Does Pre-K Registration Count Toward Tax Deductions?

Tom Streissguth, Demand Media writes:   Tax laws offer some valuable deductions for education, as well as a credit for child-care expenses. The IRS puts some conditions on the latter, while requires any deduction for education expenses to be for post-secondary schools. You may be able to claim pre-K tuition and fees for the child-care credit.

Child-Care Credit

The IRS does not allow you to deduct pre-K fees, but provides an alternative with the credit for child-care and dependent-care expenses. If you paid for child care for someone 12 years old or younger to work or to look for work, then you may claim part of the cost as a credit. If you are married filing a joint return, then both you and your spouse must be working or looking for work. The IRS will accept a pre-K program, either public or private, that charges a fee as a qualified child care provider.

Conditions and Limits

There are some important conditions on the child-care credit. You may not claim it for payments to your spouse or to the other parent, or if you are filing as "married, separate." You must identify who received your payment. In addition, the IRS limits the credit to a percentage of your expenses, from 20 to 35 percent depending on your adjusted gross income. The dollar limit is $3,000 paid for one child or $6,000 paid for two or more; you may not claim expenses that exceed your earned income. You must reduce the expenses by any amount you received from an employee benefit plan used for child care.

Identifying Providers

You claim the credit by filing Form 2441 along with your 1040 or 1040A ( you can't claim the credit with a 1040EZ). You must identify the school, church, day-care facility, YMCA or wherever your child is enrolled. The IRS requires the name, address and taxpayer identification number, which in the case of a school or church would be the employer identification number. If the organization is tax exempt, you simply enter "tax exempt" in the space calling for a taxpayer identification number.

Educational Expense Deduction

The deduction for educational expenses, which you list along with other itemized deductions on Schedule A of Form 1040, applies only to post-secondary tuition and fees. Fees you paid for a college, junior college, university, or vocational or technical school would qualify, as long as you (or the student/dependent) attended classes at least half-time. Pre-K tuition or fees would not qualify for the deduction, nor can you claim tuition or fees paid for kindergarten, elementary or secondary education for the child care credit.

15 transformational events: The rise of the Roth IRA

Darla Mercado for InvestmentNews writes: The Roth IRA was just one of the provisions created in the Taxpayer Relief Act of 1997, but today it is an emerging part of retirement planning as financial advisers scour for savings on taxes.

The late Sen. William V. Roth, R-Del., was the legislative sponsor of the provision in the Taxpayer Relief Act that permits individuals to save up to a certain amount each year ($5,500 in 2013) that isn’t tax-deductible, such as a traditional individual retirement account, but that allows the income that flows out of the Roth IRA to be tax-free. His concept also paved way for the Roth 401(k) and Roth 403(b).

Conversions from a traditional IRA to a Roth IRA also were a natural byproduct of the law.  From a policy point of view, the Roth provision was a gift for retirement savers and probably not the best way to solve longer-term budget issues.

Legislation that encourages Roth conversions, for instance, harvests revenue from individuals who are paying income taxes upfront so that they can collect tax-free withdrawals later. But that just means that the government scores a windfall in the immediate term and then misses out on revenue via income taxes that would have been paid over a longer term.

“In my personal opinion, it’s bad tax policy,” said Natalie Choate, who is of counsel at Nutter McClennen & Fish LLP. “Today, government and Congress are saying, ‘We’ll take your tax now, and you’ll be exempt forever,’ but they’re just kicking the can down the road.”

Nevertheless, the Roth IRA is gathering steam among advisers who are searching for tax-efficient withdrawal strategies for retirees, especially now that the American Taxpayer Relief Act of 2012 has raised the highest income tax bracket to 39.6%.

The taxability of Social Security benefits, as well as the amount of Medicare premiums a client will pay, depends on a client’s level of adjusted gross income, Ms. Choate said.

“The highest tax bracket is even higher than before, so it’s more critical,” she said. “This kind of planning is just starting.”

Thomas Rowley, director of retirement business strategies at Invesco Ltd., agrees.

“From the financial adviser’s point of view, a lot of their practice over the next decade will be managing the tax liability of your retirement savings,” he said.

“A client will walk in and say, ‘Here’s my taxable money, my tax-deferred and tax-free accounts. When and how should I take out money?’” Mr. Rowley said.

“That’s a layer of planning that didn’t exist prior to the Roth IRA,” he said.

Further, Roth IRAs help protect against longevity. Although the money has to be pulled from the account once the original owner dies, the account owner isn’t forced to take required minimum distributions.

Withdrawals from that pot of money can wait until the client reaches old age, Mr. Rowley said.

Prior to the creation of the Roth IRA, advisers had fewer options when it came to creating a stream of income for clients.

“People would address tax-efficient withdrawals with permanent life insurance,” said Gavin Morrissey, vice president of wealth management at Commonwealth Financial Network. “You would look to life insurance as a tax-deferred vehicle.”

Considering the underlying cost of the insurance policy, the Roth can provide those same benefits at a lower cost, Mr. Morrissey said.

Before the Roth came along as an avenue for tax-free income, municipal bonds were a staple in the portfolios of retirees hoping to create a tax-free income stream.

These days, however, bonds are looking less attractive because interest rates are so low, Ms. Choate said.

Mr. Rowley noted that in the past, life insurance was viewed as a method of estate planning for the wealthier set.

Roth IRAs, however, were a tool for the middle class.

Beneficiaries other than the spouse have to take their distributions within five years of the death of the account holder, but they collect the money free of income taxes. Estate taxes, however, could still hit beneficiaries.

“It went from something Sen. Roth was pushing because he believed in building wealth to opportunities for financial planning that are for more than just the wealthy,” Mr. Rowley said.

“It added the spark of tax planning and self-insurance against longevity. Basically, it continued to move financial planning to the ownership society where you are responsible for your own financial planning,” Mr. Rowley said.