Self-employment tax primer

The tax court has affirmed that a net operating loss carry forward or carry back cannot offset self-employment income in the year in which it is utilized even though the loss may have been produced from an activity that would have resulted in self-employment tax if there had been income instead of a loss.

I have found that many people don't know what self-employment tax is - even those who pay it! Employers pay half of the social security and Medicare taxes for W-2 employees and 1/2 is withheld from wages. Self-employed individuals must pay in all the tax themselves. In 2012 this amounts to a 13.3% SE tax on business/farm profits. So self-employment tax is a simply social security and Medicare for those who do not receive a W-2 for earned income. Note: Self-employment income can be reported on a business or a farm tax form as well as passed through from a partnership. (Rental income, interest, dividends, pensions = not 'earned' from a tax perspective, not subject to SE tax.) 

This tax is assessed on the individual tax return against the profits from self-employment (in other words after business expenses have offset business income). Itemized deductions and AGI adjustments do not offset self-employment income - only the expenses directly related to the business. Half of the SE tax does reduce AGI. Self-employment income is then also subject to federal and state income taxes at the same rate as your other household income. With all taxes combined, profits from an unincorporated business can be taxed at over 50% depending on your federal tax bracket and state's tax rate.

TE entities must make application & other info public once status is granted

The IRS has reiterated that applications/supporting documents submitted to obtain tax exempt status as well as the determination letter and any subsequent letters or documents related to the tax exempt status must be made available for public inspection as soon as the status has been granted. This remains the case even after tax exempt status has been rescinded, when such circumstance applies.

2012 first year depreciation for non heavy duty vehicles

First year depreciation for passenger automobiles, light truck, and vans (over 6000# plus misc. other requirements = not considered light) is more strictly limited than that of other vehicles. For automobiles placed in service during 2012 the maximum for new vehicles is $11,160, used $3160. For light trucks and vans $11,360 if new and $3360 if used. The IRS requires a small inclusion in income for leased vehicles. The 2012 lease inclusion tables may be found here:

http://www.irs.gov/pub/irs-drop/rp-12-23.pdf

CPA did not take a reasonable salary

Appeals upheld a circuit court ruling that s corp dividend distributions were additional wages subject to social security and Medicare taxes for a CPA that brought home $24k in wages and $200k+ in dividends. The IRS determined that a reasonable salary would have been $91k per year. This case provides some insight that should be heeded by many taxpayers. In this instance, the CPA worked full time and was the primary revenue producer in the firm.

Don't forget to file your FBAR by 6/30

A US person who has signature authority over any foreign financial account must file a form called an FBAR by June 30 if the value of such account is $10k at any time during the previous year.

A “foreign country” includes all geographical areas outside the United States, the commonwealth of Puerto Rico, the commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).

“United States person” includes a citizen or resident of the United States, a domestic partnership, a domestic corporation, and a domestic estate or trust. the tax rules concerning disregarded entities do not apply with respect to the FBAR reporting requirement so single member LLCs are not disregarded for this purpose.

A person has signature authority over an account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained. Other authority exists in a person who can exercise power that is comparable to signature authority over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.

Failure to file an FBAR when required to do so may potentially result in civil penalties, criminal penalties or both.

FBAR forms are available:


Online via IRS.gov in PDF.

Online via Department of the Treasury’s Financial Crimes Enforcement Network Web site in PDF.

By calling the IRS at 800-829-3676.

New audit technigue guide for artists

The IRS must make available to teh general public all guides they give to their examiners for use while conducting audits. Audit technique guides which have been around for awhile include:construction industry, cash intensive businesses, wine industry, retail industry, business consultants, attorney, veterinary, minister, new vehicle dealership - nd many more! Now at long last we have an ATG for Artists and Art Galleries.

http://www.irs.gov/businesses/small/article/0,,id=254019,00.html

Tax change proposals still focus in pass through entities

The Congressional Research Service reports that most recent proposals for tax change focus on increasing taxes on high income recipients of pass-through income. Taxpayers with AGI over $250k receive 62% of pass-through income.

A recent Joint Committee on Taxation report focuses on pass through entities. They recommended a uniform pass-through entity utilizing a combination of partnership and S corp rules and doing away with both entities as they are now. Businesses would simply elect pass through or not pass through. Something to keep an eye on!