Recent Changes to the Tax Law

According to a BNA Tax Management and Weekly Report by Brett Ferguson, the House passed a bill (H.R. 5297) that includes $12 billion in tax cuts for small businesses. The White House said President Obama will sign the bill into law.

Democrats have argued that the bill will create as many as 500,000 jobs, while Republicans argue that the bill provides unnecessary reporting requirements that will burden small business owners.

The bill will extend the 50 percent bonus depreciation provision for one year and increase the dollar limitation of the Section 179 deduction to $500,000 for depreciable property not exceeding $2,000,000. The bill will allow business owners to deduct the cost of health insurance for the purpose of computing 2010 self-employment taxes. In addition, investors in small businesses would be allowed a 100 percent exclusion for capital gains from the sale of certain small business stock. Furthermore, the bill provides an increase in the allowable deduction for startup business expenses.

The tax cuts are offset by a provision that allows individuals with 401(k), 403(b), and 457(b) plans to roll the pretax balances into Roth IRAs. If the rollover is made in 2010, then the taxpayer can pay the tax over two years in 2011 and 2012. Additional revenues would come from a provision that requires individuals who receive rental income from real propety to file 1099 informational returns to the IRS and to service providers if payments have totaled $600 or more during the year for rental property expenses.

We should see more dramatic changes to the tax laws in the coming months. Be sure to stop by for more updates.

Source: House Votes to Send $12 Billion In Small Business Tax Cuts to Obama, 29 TMWR 1283, Brett Ferguson.

You Mean I have to 1099 Office Depot?

Starting in 2010, a provision in the new health care reform law requires self-employed workers, small businesses, charities and government agencies to issue Form 1099s to every vendor that they purchase more than $600 in goods from during the year.

So if your are a small business that buys $700 worth of office supplies from Office Depot then you will be required to send a Form 1099 to the store and the IRS.

This provision in the health care legislations is meant to give the IRS more information about small businesses with the hope that it will reduce the total amount of underreported income in this county.

But this provision will be more of a burden to small business owners than a benefit. Businesses that make qualified purchases from at least 250 vendors during a year will be required to file their 1099s electronically, which means that business owners have to purchase expensive software to comply. Overall you'll find more business owners receiving computer generated nastygrams from the IRS wanting additional taxes and penalties.

Let's hope this law is repealed before 2012.


Source: Small businesses, charities face more reporting rules, Sandra Block, USA Today

What to Expect in 2011? Who knows?

I recently read a good article in the Wall Street Journal about many of the tax changes to come in 2011. The article addresses what's ahead regarding dividend rates, individual income tax rates, capital gains rates, estate taxes, gift taxes, charitable giving, the alternative minimum tax, and various other issues. It provides some good insight as to what readers can expect. It goes without saying that the Obama administration is keeping their sights set on individuals making more than $250,000 a year. Please keep in mind that all of these issues should be considered with a tax professional before making a move.

Non-Profit Filing Deadline

Nearly all tax-exempt organizations must file an annual return with the IRS. As a general rule, tax-exempt organizations must file a Form 990 unless they qualify to file a 990-EZ or 990-N. For several years, the smallest tax-exempt organizations (gross receipts of $25k or less) had no filing requirement. However, the IRS now requires the smallest tax-exempt organizations to electronically file Form 990-N (also called the e-Postcard).


Also any tax-exempt organization that fails to file required returns for three consecutive years, whether it be the Form 990-N, 990-EZ, or 990, automatically loses its federal tax-exempt status. If an organization loses its tax-exempt status, then it must reapply with the IRS to regain its tax exemption. Any income received between the revocation date and renewed exemption may be taxable.


If you are part of a small tax exempt organization, which has failed to file required returns for 2007, 2008, and 2009, then you are in luck. Small tax exempt organizations can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program provided by the IRS. The smallest tax-exempt organizations required to file Form 990-N can go to the IRS website and submit a simple form to bring itself back into compliance. While small tax-exempt organizations eligible for file a Form 990-EZ may participate in a voluntary compliance program (VCP), file delinquent annual returns, and pay a compliance fee.


If you don't know whehter your organizations has filed to file returns for the last three years, the IRS has posted on the following page the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance.


As always, we generally recommend that you contact a tax professional before doing anything.

Irrevocable Life Insurance Trust (The ILIT)

Let's set up a hypothetical. Married couple age 40. Two children ages 10 and 12. Total value of their combined estate is $2.5 million.

Equity in home = $200k

Qualified Retirement Plan (i.e. IRA) = $200k

Stocks and Bonds = $100k

Term Life Insurance = $2 million

If we take the advice of the previous article and include a credit shelter trust into the couple's Wills, then all but $500k will be exempt from estate taxes (assuming both husband and wife die with a $1 million exemption amount).

The $500k could be subject to estate taxes at a top rate of 55% in 2011. But we can avoid all estate taxes if a life insurance policy is owned by an Irrevocable Life Insurance Trust ("ILIT"). An ILIT is one of a few techniques available to estate planning attorney to enable clients to transfer property to family members without having the property included in their estates at death.

Let's assume the life insurance policy is a ("Survivor Policy"), which insures both husband and wife and pays the proceeds on death of the second spouse to die. Now let's assume the couple establishes an ILIT, then transfers the existing insurance policy to the ILIT. The couple then transfers liquid assets sufficient to pay the first year's premium to the ILIT. Each year, the donor makes a gift to the ILIT sufficient to pay the premiums due. The children, as named beneficiaries, are given a 30 day "Crummy" right to withdraw the contributions (which they never exercise) so that each contribution is exempt from gift taxes.

At death, the life insurance proceeds are paid to the ILIT and distributed to beneficiaries under the terms of the ILIT. If the couple lives for three years after the transfer of the existing policy to the ILIT, then at death, the policy is totally excluded from their estates, which means the last spouse to die will only have a $500k estate and the children won't have to pay any federal estate taxes.

The trustee of the ILIT should be a third party (i.e. a trusted sibling or friend). Upon the death of the both spouses, the trustee will manage the property for any minor children until a certain age or ages at which point the trust proceeds may be distributed to the children outright.

In sum, the ILIT is a great way to transfer wealth to the next generation while avoiding estate taxes. As 2011 draws near, it is becoming more and more likely that we might be looking at a $1 million exemption per person. The lower the exemption the more ILITs will be used to transfer wealth.