Overview – New Rules extended Bush-era tax rates for two years

Here’s an overview of the key provisions in the law.

* Tax rates. The existing tax rates established in the 2001 and 2003 tax laws will continue for all taxpayers through 2012. This means the top tax rate for 2011 and 2012 will remain at 35% instead of reverting to 39.6% as it would have done had the “2010 Tax Relief Act” not passed.

* Capital gains and dividends. The top rate for long-term capital gains will remain at 15% for taxpayers in all but the two lowest ordinary income brackets; those taxpayers will continue to have a 0% rate on capital gains. Dividends will continue to be taxed at the 15% and 0% rates instead of reverting to ordinary income rates as high as 39.6%.

* Itemized deductions and personal exemptions. Higher-income taxpayers will not have their itemized deductions limited and their personal exemptions phased out.

* Education tax breaks. The law extends the American Opportunity Tax Credit through 2012. The income exclusion for up to $5,250 of employer-provided education assistance to employees is continued for two years. The higher contribution limit of $2,000 and other enhancements to Coverdell Education Savings Accounts were extended for two years.

* Alternative minimum tax (AMT). The AMT was given another “patch” for 2010 and 2011, a move that will keep the tax from hitting millions more taxpayers. For 2010, the exemption amount is $47,450 for individuals and $72,450 for married couples filing joint returns. For 2011, the exemption is $48,450 for singles and $74,450 for couples. Without this adjustment, the exemption amounts for 2010 and 2011 would have been $33,750 for singles and $45,000 for couples.

* Payroll tax. A new tax break is created for workers who pay social security taxes. For 2011, the employee rate for social security tax is cut from 6.2% to 4.2% on wages up to $106,800. Self-employed individuals will pay 10.4% on self-employment income up to $106,800. Employers will continue to pay 6.2% on employee wages. This payroll tax rate cut does not affect the Medicare portion of payroll taxes for either employees or employers.

* Extenders. Tax breaks that have come to be called “extenders” because they’re typically extended retroactively every year, but just for a year, are again extended by the new law.

Effective for 2010 and 2011 returns, taxpayers have the option of deducting state and local sales taxes instead of state and local income taxes. The deduction for up to $4,000 of higher education expenses and the deduction for teachers who buy classroom supplies are extended. Those age 70½ or older may again contribute up to $100,000 tax-free from an IRA to charity. Note that the deduction for real estate taxes paid by nonitemizers was not extended.

* Business provisions. The law extends the research tax credit for 2010 and 2011, and it extends the work opportunity tax credit through 2011. Bonus depreciation is increased from 50% to 100% for qualified business purchases made from September 9, 2010, through December 31, 2011. 50% bonus depreciation will be available in 2012.

* Estate tax. The estate tax was perhaps the most contentious issue in the law, and it came close to unraveling the deal. The compromise that was agreed upon restores the estate tax retroactive to January 1, 2010, and continues it through December 31, 2012. It establishes a top rate of 35% and an exclusion amount of $5 million ($10 million for married couples). Estates of persons who died in 2010 have the option of applying the estate tax and receiving a step-up in basis on property passing to heirs or having no estate tax but using a carryover of the decedent’s basis in property.

The “Tax Relief Act of 2010” also provides an additional 13 months of benefits to the unemployed.

Most of the provisions in the new law will probably go unnoticed by the majority of taxpayers since the law basically keeps things as they were for another two years. However, there are several significant changes that are likely to affect you or your business. For more information and planning guidance as you begin sorting out your tax situation for 2011, contact our office.

You can still make charitable donations from your IRA

The option to make a qualified charitable distribution from your Roth or traditional IRA is once again available for 2010 and 2011. And even though 2010 is officially over, you can take advantage of a special rule that treats a distribution taken in January 2011 as if you made it in 2010.

Here’s a refresher on how the IRA charitable distribution works.

* You must be age 70½ or older at the time of the distribution.

* The distribution can come from your traditional and Roth IRAs, but not from SEP or SIMPLE retirement plans.

* The distribution must be made directly from your IRA to an eligible charity. Donor advised funds are not eligible recipients.

* The distribution will count as part of your required minimum distribution. You can elect to have a distribution made in January 2011 applied to your 2010 RMD.

* You can exclude the contribution from your taxable income, though you won’t be able to take an itemized deduction for it.

* The maximum amount you can exclude from income as a qualified charitable distribution is $100,000. When you’re married filing jointly, the limit applies to each of you separately.

Please call if you’re thinking of donating money from your IRA to charity. We’ll be happy to help you make sure the transfer stays within the rules.

New reporting rules may apply to your stock sales

Effective this year, new reporting rules could make it easier for you to report the tax consequences of selling a stock. Thanks to a 2008 law, responsibility for establishing your “basis” is being shifted to brokers and other financial institutions. But don’t discard your records just yet; the new rules are being phased in gradually and don’t apply to any securities acquired before 2011.

Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) will be expanded to include the cost or other basis of stock sold during 2011. The form must also report whether the gain or loss on the stock sale is short-term or long-term. The expanded Form 1099-B will be used to report calendar-year 2011 sales and must be filed with the IRS and furnished to investors in early 2012.

The new reporting rules were passed by Congress not only to make it easier for investors to calculate capital gains taxes, but also to make it harder for investors to underreport capital gains.

For details or assistance with the new reporting rules, contact our office.

New law includes a payroll tax cut

There’s a new tax break this year, and you’ll want to update your budget to accommodate it. The compromise tax legislation passed in December included a payroll tax cut for 2011.

* How it works when you’re an employee: Your employer will deduct less social security tax from your wages during 2011. Prior to the change, your employer was required to withhold social security tax from your paycheck at a rate of 6.2% of the first $106,800 of your wages. That rate was reduced to 4.2% for 2011, meaning your take-home pay will go up – with no impact on your eventual social security benefits and no payback required.

The Medicare tax rate remains unchanged at 1.45%, which your employer will continue to deduct from your check.

* How it works when you’re self-employed: You’ll pay less self-employment tax. In the past, you calculated self-employment tax using a 12.4% rate for the social security portion. For 2011, the rate you’ll use is 10.4%. Your income tax deduction – that is, the amount of self-employment tax you subtract from ordinary income – will not be affected.

* How it works when you’re an employer: The reduced rate only applies to the social security tax you deduct from employee wages in 2011. To calculate your expense, you’ll continue to use the 6.2% rate for social security tax, plus Medicare tax of 1.45%, for a total of 7.65%.

You have until January 31 to implement the change, and until March 31 to refund any overwithheld social security tax to employees.

Tax Checklist and Worksheets available on our website

Did you know that we have a checklist of items needed for tax preparation as well as many helpful worksheets to make sure you get the biggest deductions possible?  Worksheets include:  auto expense, self-employment, home office expenses, rental worksheets, and many more.  Download the worksheets that are applicable to you today.

Woman-Owned Small Businesses are BIG Business

If you are a woman-owned enterprise, take heart that you are not alone! There are nearly 6.5 million women-owned businesses generating a reported $940 billion in revenue, according to the 2009 U.S. Census report. For many women entering the small business ownership ranks, the reasons are as varied as the women themselves. Small business ventures like Mary Kay Cosmetics which recently posted a $2.5 billion in lipstick, eyeshadow and other beauty sales in 2010 even in this two-and-a-half year long recession. Large corporate businesses like Jill Blashack’s Tastefully Simple are also making a significant mark on the business world. One way to further highlight your small business enterprise is to undergo a woman-owned certification process. There are pros and cons to certification and depending on your business type and commitment level, you may want to weigh your options before you decide to certify.

What is certification?

Certifying a business as woman- or minority-owned can provide additional opportunities for growth that may not otherwise be available through more traditional business channels. If your business would benefit from access to large national suppliers or government contracts certification may be in your future.

With the signing of Executive Order 13360, an increase in federal contracting and subcontracting opportunities were made available for both veteran service-disabled and woman-owned businesses. Many government contracts have a portion of their work earmarked for this population of business owners and even give preference to this smaller subset when contracted dollars are allocated. That means that there are many government contract dollars just waiting for your small business to fill a need. In order to qualify for these contracts, a woman-owned enterprise must complete several steps including an application and government contract training course. These steps help to ensure that you and your business are ready to manage the work required including the substantial paperwork that comes with a government contract.

Mounds of Paperwork

With any government contract also comes the ‘bureaucratic red tape’ associated with government work. The process can be intimidating at first, so collect your resources, attend the government sponsored courses and then evaluate if government contract work is a good fit for your small business.

Steps to Certification

Like any reward, the process to achieving success is often a difficult one. Obtaining woman-owned certification is also a lengthy process, but can be highly rewarding in the end. Here’s a brief list of what is required:


  • · Business must be woman-owned and led. The owner must be female and hold at least 51 percent interest in the company.
  • · The woman-owner must be active in the daily operation of the business. This ensures that a man doesn’t put his wife on the masthead only to be left to running the company himself. You can demonstrate involvement by providing documentation with regard to the daily operation, hiring, firing and community duties of the business.
  • · The woman-owner must be a U.S. citizen and in business for a minimum of six months. The longer the business is in operation the better for consideration (usually several years with a solid track record).

It’s a marathon, not a sprint.

If your business can clear the first three bullet points, you’re in a good position to start the certification process. The entire application from start to approval can take several months to up to a year to complete and receive approval. Stay organized and keep a duplicate set of all records so that you know where you are in the process and can readily work on open issues and documentation. As a safety precaution, store your second set of documents off-site, so you’re covered in the event of a workplace catastrophe.

What are the types of certification?

Women Business Enterprise Certification (WBE) – A national certification awarded by the Woman’s Business Enterprise National Council (WBENC). This is a lengthy application process requiring the woman business owner to not only demonstrate 51 percent or greater ownership in the business, but also a full set of business financial statements (prepared by a third party accountant), copies of rental agreements, equipment rental or purchases, real estate holdings and even records like bank signature cards. There is a $300 application fee.

HUB Zone – The SBA’s Historically Underutilized Business 8(a) program called the HUB Zone program, is based on the geographic location of the business’ primary site. The mission of the program is to serve economically disadvantaged and challenged communities. Each state has a hand in running the program, so check with your state’s Minority Business Development center through the SBA to find details.

State and Local Programs

Again, each state runs their own version of the national woman-owned program. Details for application and levels of certification can be found on the individual states’ web sites. Using the state-level application can be cost-effective and far less time consuming if you’re only looking to expand your business opportunities within your state. For businesses in large states like New York, Texas and California, this is often a great option and way for a small business to explore contracting on a more limited scale.

Additional resources:

WomenBiz.gov – The hub for learning the ins and outs of navigating government contracting. Start here to learn the basics and see if certification is right for you.

NAICS – Obtain the North American Industry Classification System (NAICS) for your small business’ industry or service type. Once you have these numbers, you can then apply to Dun & Bradstreet for a DUNS number.

Central Contractor Registration – Primary database for becoming a registered U.S. Federal Contractor and for government contractors to search for qualified subcontractors like you. Note: You can also obtain your DUNS number here.

Defense Contractor – If your small business is seeking work with U.S. Department of Defense contracts, you’ll need to register ith the On-line Representations and Certifications Agency (ORCA). This new online registry will gain your business access to contracts and awards from the DOD. Data can be entered here once for eligibility to all government contracts.

Federal Business Opportunities (FBO) – This site gives you access to the Procurement Technical Assistance Program, which is a resource at no or low cost that provides assistance to businesses in marketing products and services to federal, state and local governments.

There are many ways a woman or minority-owned small business can expand their markets and explore government contracts. First and foremost on the list is to have well organized, accurate and timely small business finances so you can prove your business is a good risk that is ready and capable of the work. Talk with a us to see if your small business is ready for the challenge.

Copyright Information 2011 Professional Association of Small Business Accountants
Presented By: David Bradsher, CPA , a PASBA member accountant, located in Falls Church, VA