ANDERSON & OLSZEWSKI CPAs, P.A. CERTIFIED PUBLIC ACCOUNTANTS

NC Sales Tax rate to decrease effective July 1, 2011

The North Carolina Sales Tax rate will decrease by 1% starting July 1, 2011. In most counties this will reduce the overall rate from 7.75% to 6.75%. This change affects the state portion of the rate so when you complete the sales tax coupon for July and future months the state portion of the rate will now be 4.75%. The county rate will remain at the current percentage based on the county in which you collect tax:

Mecklenburg (Charlotte) county rate is 2.5% for a new combined rate of 7.25%

Alexander, Catawba, Cumberland, Duplin, Haywood, Hertford, Lee, Martin, New Hanover, Onslow, Pitt, Randolph, Robeson, Rowan, Sampson, Surry and Wilkes county rates are 2.25% for a new combined rate of 7%

All other counties (including Durham, Wake, Orange and Alamance) remain at 2% for a new combined rate of 6.75%

If you have any questions about this rate change, please contact our office.

Expanded 1099 Reporting Requirements Repealed

On April 14, 2011, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act was signed into law.  This Act repeals both the expanded Form 1099 information reporting requirements mandated by the 2010 health care legislation and also the Form 1099 reporting requirements imposed on taxpayers who receive rental income enacted as part of the 2010 Small Business Jobs Act.  Basically businesses and taxpayers who receive rental income from real estate revert back to the Form 1099 reporting requirements prior to the passage of the 2010 Patient Protection and Affordable Care Act and 2010 Small Business Jobs Act, as if either Act had never occurred.

The 2011 legislation did not however repeal the increase in the information reporting penalties that were also mandated in the Small Business Jobs Act of 2010. The minimum and tiered penalties under IRC 6721 remain the same as enacted by the 2010 Act.

Change in Social Security Withholding

Under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (H.R. 4853), as of January 1, 2011 the amount of Social Security withheld from an employee’s paycheck has changed. For 2011, 4.2% is withheld from the employee’s paycheck (down from 6.2%). The employer share of Social Security remains at 6.2%. Please see the illustration below.

Jan’s Paycheck:
Gross:                    $ 1000.00
SS:                        ($     42.00)
Medicare:              ($     14.50)
Federal                 ($   100.00)
State:                    ($     75.00)

The paycheck to Jan should be $768.50.

The Federal Payroll Deposit (which must now be done over the phone or online as Form 8109 deposits through banks will no longer be accepted) should be as follows:

Employer Social Security (6.2%)           $  62.00
Employee Social Security (4.2%)          $  42.00
Employer Medicare (1.45%)                  $  14.50
Employee Medicare (1.45%)                 $  14.50
Federal Withholding                              $100.00

Total Deposit                  $233.00

If you have already paid your employees before updating the Social Security withholding, you are required to make up for any underpayments. The new rate must be in place by January 31, 2011 and all underpayments must be reimbursed to employees through paychecks by March 31, 2011. If you use payroll software (such as Quickbooks), it may make the changes automatically, but we recommend that you verify that the correct amounts of Social Security are being withheld.

If you have any questions regarding any of these changes, please contact our office.

Self Employment Income

For tax years beginning after December 31, 2009, self-employed individuals may now use the deduction for the cost of health insurance in calculating net earnings from self-employment for purposes of determining self-employment taxes. In prior years self-employed individuals were able to take a deduction for health insurance costs paid for the individual and his/her immediate family, for income tax purposes. However, in determining the self-employed income subject to self-employment taxes, the self-employed individuals were not allowed to deduct any health insurance costs.

The Small Business Jobs Act of 2010 signed into law on September 27, 2010 contains the provision that enables self-employed individuals to now have similar tax savings benefits for health insurance premium costs as allowed to employees. Please contact our office if you have any questions.

North Carolina State Unemployment Insurance Tax Credit

North Carolina G.S 105-129.16J was added to allow a tax credit for small businesses that make contributions to the State Unemployment Insurance Fund (SUIF) for wages paid for employment in North Carolina. A small business is defined as one whose cumulative gross receipts from the business activity do not exceed one million dollars for the tax year. The tax credit allowed is 25% of the qualified contributions to the SUIF and applies for tax years 2010 and 2011 only.

This tax credit may be claimed only against corporate and individual (pass-through) income tax. If the credit exceeds the entire tax liability for the tax year, reduced by the sum of all allowable credits, the excess is refundable. Please contact our office so we can help determine if your business qualifies for this temporary tax credit.

Small Employer Health Insurance Credit

Under the Patient Protection and Affordable Care Act as amended by the Health Care and Reconciliation Act of 2010, eligible small employers may claim a tax credit for nonelective health insurance contributions that it pays for coverage of its participating employees, providing that the small employer pays at least 50% of the health insurance cost. A maximum credit of 35% of the health insurance expenses is available beginning in tax year 2010 through tax year 2013. Tax-exempt organizations that meet the small employer criteria are eligible for a maximum credit of 25%.

An eligible small employer is defined as one with 25 or fewer full-time equivalent employees; the average salary of these employees is $50,000 or less and the employer has a qualified health care arrangement in effect. Small employers that have 10 or fewer full-time equivalent employees with average salaries of $25,000 or less could receive the maximum credit. The credit would be reduced through a series of calculations for small employers that have 11 to 25 full-time equivalent employees and/or average salaries from $25,001 to $50,000.

Please contact our office so that we can help you determine if your business qualifies for this health insurance credit.

Rental Property Owners must issue 1099’s for certain 2011 expenses

Part of the recently passed Health Care Act contains a provision which will require rental property owners to start issuing 1099 forms for certain goods and services claimed as rental expenses. Starting in 2011, if an owner pays more than $ 600 per year to a single contractor or service provider the recipient (and the IRS) must be sent a properly completed 1099 form or the deduction may be disallowed.

The $ 600 threshold is the total paid to a recipient during the year for all properties, not single payments or individual properties. For example, if you own four properties and pay someone $ 400 to paint each one you must issue a 1099 for $ 1,600 or each of the $ 400 deductions may be disallowed. Property managers, plumbers, electricians, roofers, exterminators and yes, even accountants are among those who must be issued a form if you pay them more than $ 600 a year and claim the expense on Schedule E.

To properly complete a 1099 form you must have the recipient’s legal name (not just their “doing business as” name), a valid address and their tax ID number (either Federal ID number if they are a business or Social Security Number if they are a proprietor). Up until now businesses only had to issue 1099’s to recipients who are not incorporated but the law which now applies to rental property owners pertains to all recipients.

1099 forms must be issued in January 2012 for payments made during 2011. The time to gather the necessary information is before you make payments in excess of $ 600 to a recipient. The best way to ensure that you get the proper information is to have the recipient complete Form W-9 (available free at www.irs.gov) and return it to you before you start paying them. If the recipient is unwilling to provide the required information you may legitimately withhold a percentage of their payment as “backup withholding” and report it on Form 1099 with as much other information as you have. They must then file that form to get credit for the money you withheld.

If the IRS determines that 1099’s were not filed as required not only could your expenses be disallowed but you may also be subject to penalties for missing forms or forms with incorrect information.

Our office can assist you with Form 1099 preparation and filing. It is in your best interest to have all the necessary information available to save us time and save you money.

If you have questions or concerns about this new law, please contact us.

SPAM Email

BEWARE of phony e-mail messages from the IRS, banks, EFTPS or other entities:

A client recently forwarded an e-mail message they received stating that there was a problem with a payroll tax payment they had made and asking them to log on to a website to correct the error.  This message appeared to have come from EFTPS but was, in fact, “SPAM” intended to collect banking and other information from the client in a practice known as phishing.  Had the client logged on to the website link provided in the e-mail they would have been taken to a site which looks very much like the official EFTPS website but which was actually designed to request private information which could lead to identity theft, unauthorized withdrawals from the client’s bank account or worse.  Some people have reported getting computer viruses from these illegal phishing sites.

Last year many people (including our firm) received very real looking e-mail messages, supposedly from IRS, telling us we were due a refund and had we responded, we would have been asked to provide passwords, bank information, etc.  We have also received messages “from” various banks, eBay and PayPal which stated there was some type of problem with our account which we had to log on to correct.

The IRS, banks and other entities you deal with will NOT send you unsolicited e-mails seeking such information.  You should ALWAYS be suspicious and check with our office, or call the entity by phone directly, before responding to any e-mail message or going to a website mentioned in a message (especially if a link is conveniently provided).  We discourage you from even going to a suspicious website out of curiosity as that act alone could have undesirable consequences.

If you receive a suspicious e-mail message please contact us before responding.

Expense And Deduction Documentation

The importance of documentation for expenses and deductions claimed on your tax return (business or personal) is becoming more and more apparent as both formal (audit) and informal (discrepancy) notices are increasing.  We are hearing that the IRS and state agencies are ramping up for increased examination and enforcement of several areas of taxation which are frequently abused.

By now many of you have heard our horror story of a taxpayer who was audited by the IRS.  She had prepared her own return but hired us to represent her during the examination.  The IRS reduced or totally disallowed many of her deductions because she lacked appropriate documentation showing the amount and/or business purpose for the items claimed.  In particular, $ 1,700 was claimed as non-cash contributions.  The taxpayer had 2 receipts but did not have an itemization of the items donated.  The IRS allowed a deduction of only $ 2!

While being able to document all of your expenses is important we want to focus on a few areas which are under additional scrutiny:

  Donations:

• Cash (monetary) donations which are made by cash, check, debit or credit card are only  deductible if you have a receipt or acknowledgement from the organization or have a bank record of the payment. If you put a $ 20 bill in the donation plate at church each week you will NOT be able to deduct it on your tax return.
• For non-cash contributions we suggest you keep a description of the items given (i.e. 6 men’s shirts, 4 pairs of shoes, etc., not just “2 bags of clothes”).  You must also be able to justify how you arrived at the item’s value (i.e. what they would sell for at a thrift shop, not what they cost originally).  It is usually up to the taxpayer to assign the value to donated goods.  Goodwill Industry and the Salvation Army have lists of dollar values typically allowed for commonly donated clothing, household and furniture items.  It will save us time (and you money) if you compute the exact value you intend to claim for each such donation.

  Mileage/Auto Expenses:

• Many of our clients use a personal vehicle for business purposes. Any time expenses for a vehicle are deducted you must be able to substantiate how the amount was determined.  You should keep a log book detailing the business mileage and total mileage of the vehicle.  This is true whether you use the mileage rate or a percentage of actual operating costs (you must document how you arrived at the percentage).  Records must also be kept if you claim Medical mileage, Charity mileage or include mileage as part of Moving expenses.

  Meals and Entertainment:

• Companies and individuals are entitled to a partial deduction for business-related meals and entertainment expenses.  There are very specific rules for documenting the date, place and nature of the expense as well as who the participants were.  This is a common area of abuse and is often the first thing an agent may examine.  If you incur such expenses it is very important to keep contemporaneous records and receipts to support the deduction.

  Travel Expenses:

• There are a variety of ways travel expenses may be deducted but all require documentation to support where and when the expenses were incurred and how they relate to your business.

It is up to the taxpayer to keep records to support all expenses and deductions claimed on their tax return.   “Same as last year” and “As much as we are allowed” are NOT acceptable answers if asked to provide specific details for deductions.  Records must be created at the time the expenses are incurred, not when it is time to prepare your tax return or respond to a notice.

If you have questions or would like more information about free IRS publications which explain many types of deductions in more detail please contact our office.