August 16, 2010

Patient Protection and Affordable Care Act of 2010 and Health Care and Education Reconciliation Act of 2010

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act of 2010, the core piece of legislation that overhauls the health care system in this country. On March 30, the President signed the Health Care and Education Reconciliation Act of 2010, a shorter piece of legislation that amends several provisions in the Patient Protection Act.

Taken together, these two pieces of legislation provide for massive health care reform and include an estimated $437 billion in new taxes and fees. The laws contain over 2,500 pages. They are estimated to cost $940 billion over ten years and to cut the federal deficit by $143 billion over the same period. The expanded health care coverage provided by the legislation is expected to reduce the number of uninsured by 32 million.

Provisions in the health care reform laws will gradually go into effect over the coming years. The following timeline highlights some of the key tax provisions in the legislation.

• 2010

TANNING SERVICES

Effective July 1, 2010, a 10% tax will be imposed on indoor tanning services.

ADOPTION CREDIT

The 2010 tax credit for adoption expenses is increased to $13,170 and is made refundable. Also, the credit is extended through 2011.

BUSINESS TAX CREDIT

Small businesses with up to 25 employees may qualify for a tax credit for the cost of purchasing health insurance for their employees.

OTHER 2010 CHANGES

Children can remain on parents' insurance policies through age 26.

Insurance companies cannot deny coverage to children with pre-existing conditions.

Medicare recipients in the drug coverage "donut hole" will receive a one-time $250 rebate check to offset their costs. ("Donut hole" refers to the gap in drug coverage for Medicare patients.)

Included in the Reconciliation Act are provisions ending private lending for student loans. Starting July 1, 2010, those who take out student loans will borrow directly from the federal government instead of from a bank or other private lender. This change eliminates fees paid to banks to originate student loans.

• 2011

MEDICARE DRUG COVERAGE

For those with Medicare drug coverage in the "donut hole," the law provides a 50% discount on brand-name drugs. Additional discounts are phased in over the coming years, and the donut hole is eliminated by 2020.

LONG TERM CARE

A long-term care insurance program is created, financed by voluntary payroll deductions.

NEW REPORTING REQUIREMENT

Employers must report the value of each employee's health insurance coverage on the employee's annual Form W-2.

MEDICAL SAVINGS ACCOUNTS

Over-the-counter medications can no longer be paid for with funds in health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement accounts (HRAs). They remain qualified if they are prescribed by a medical professional.

The additional tax on nonqualified distributions from HSAs increases from 10% to 20%. For nonqualified distributions from an Archer Medical Savings Account (MSA), the additional tax increases from 15% to 20%.

DRUG INDUSTRY FEE

An annual fee is assessed on drug manufacturers, starting at $2.5 billion in 2011 and increasing over the following years.

• 2012

NEW REPORTING REQUIREMENT

A new reporting requirement is imposed on businesses. Generally, a Form 1099 must be filed with the IRS for payments over $600 made to a corporation. Previous law required such reporting only for amounts over $600 paid to unincorporated businesses.

• 2013

FSA LIMITS

The amount that can be contributed to a health FSA is limited to $2,500 per year, indexed annually for inflation.

MEDICAL EXPENSE DEDUCTION

The 7.5% income threshold for deducting unreimbursed medical expenses increases to 10% for those under age 65. Those 65 and older may continue to take an itemized deduction for medical expenses exceeding 7.5% of adjusted gross income through the year 2016.

EXECUTIVE PAY LIMIT

The executive compensation deduction for certain health insurance companies is limited to $500,000 per year.

MEDICARE TAX INCREASE

The payroll Medicare tax will increase from 1.45% of wages to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. The income threshold levels are not indexed for inflation.

A new 3.8% Medicare tax will be imposed on unearned income for single taxpayers with income over $200,000 and married couples with income over $250,000. Examples of unearned income: interest, dividends, royalties, rental income.

MEDICAL DEVICE TAX

A 2.3% excise tax is imposed on the sale of certain medical devices.

• 2014

COVERAGE REQUIRED

Starting in 2014, individuals who are not covered by Medicare, Medicaid, or other government health insurance are generally required to maintain health insurance coverage or pay a penalty. Penalties are calculated using a percentage of the taxpayer's income or a flat dollar amount. Subsidies and tax credits are available to help lower-income taxpayers pay for coverage.

Health insurance exchanges are established by states to enable people to comparison shop for coverage.

Large employers generally must provide coverage for employees or face penalties.

Tax credits increase for small businesses to provide coverage for their workers.

HEALTH INDUSTRY FEE

An annual fee is assessed on the health insurance industry, starting at $8 billion in 2014 and increasing over the following years.

• 2018

TAX ON "CADILLAC" PLANS

Insurance companies will be assessed a 40% excise tax on health insurance plans with annual premiums exceeding $10,200 for individual coverage and $27,500 for family coverage. An increase in the threshold amount is allowed for retired persons who are age 55 or older (an additional $1,650 for single coverage and $3,450 for family coverage). These increased thresholds also apply for plans that cover those engaged in high-risk occupations.

This massive package of legislation is certain to affect every taxpayer. For guidance in your individual and business tax planning under the often-complicated provisions in these two laws, contact our office.

H.R. 2847 — Hiring Incentives to Restore Employment Act of 2010

The Hiring Incentives to Restore Employment Act (HIRE Act) was signed into law by President Obama on March 18, 2010. The law includes temporary tax breaks for businesses that hire workers who have been unemployed for at least 60 days, and it extends for one year the higher expensing limit for business equipment purchases.

Hiring incentives. The HIRE Act provides $13 billion in tax incentives to private businesses that hire unemployed workers. Employers can receive an exemption from social security payroll taxes for every qualified worker hired after February 3, 2010, and before January 1, 2011. For new hires kept on the payroll for at least 52 weeks, employers may qualify for a tax credit for each retained worker of the lesser of $1,000 or 6.2% of wages paid during the 52-week period.

The payroll tax forgiveness provided in the law does not apply to the Medicare portion of the tax. Also the new employee cannot displace a current employee unless that employee quit or was fired for cause. Relatives of the employer are not considered qualified employees for these tax breaks.

Increased expensing limits. The 2009 maximum amount that could be expensed for the purchase of new or used business equipment was $250,000, with a dollar for dollar reduction once total equipment purchases for the year exceeded $800,000. The expensing limit fell to $134,000 for 2010, with phase-out set at $530,000. The HIRE Act retroactively reinstates the higher 2009 expensing limits for 2010. This is a one-year extension only, and it does not include an extension of bonus depreciation allowed last year. Off-the-shelf computer software will continue to qualify for expensing for 2010 purchases.

The HIRE Act does not extend the business and individual tax breaks that expired at the end of 2009; nor does it extend COBRA premium assistance. These provisions are addressed in other bills under consideration by Congress.

August 9, 2010

DB(k) retirement plans are new

Have you heard about Plan X?

A 2006 tax law added section 414(x) to the Internal Revenue Code, creating a retirement plan you can establish for the first time this year. The IRS calls this new option an "eligible combined plan" because it has aspects of a defined benefit (DB) retirement plan and a 401(k), which is a type of defined contribution plan. For the same reason, the new plan is also called a DB(k).
An overview.
The DB(k) combines two types of retirement plans into one.
The rules for the defined benefit portion require your company to make contributions on behalf of eligible employees and to pay specified benefits after retirement.
Under the rules for the 401(k) defined contribution portion, you and/or your employees contribute specified amounts before retirement. After retirement, the amount received by each employee depends on how the contributions were invested and how well those investments did.
Some details.
You can offer a DB(k) when you employ at least two but no more than 500 workers.
You can set up the plan using a single document and you'll file one Form 5500, Annual Return/Report of Employee Benefit Plan, each year.
The DB(k) is exempt from rules that generally apply to retirement plans when most of the benefits go to highly paid employees.
Your plan must follow certain vesting, contribution, and nondiscrimination rules.
Retirement plans offer benefits to your business and employees. Give us a call to discuss whether this new option will work for your company.

August 2, 2010

Pay yourself reasonable wages

What rule do you follow if there are no rules to follow?
As the owner of an S corporation trying to determine a reasonable salary to pay yourself, the question is important — and difficult to answer. The reason: At present, there are no specific regulations, safe-harbor provisions, or minimum wage requirements defining what amount of compensation is "reasonable" for S corporation shareholder-employees.
As a result, when times are tough, the lack of hard and fast rules could tempt you to forego paying yourself a salary and instead take money from your corporation in other ways, such as distributions or loans. Yet that approach might be costly.
Why? While these methods can be legitimate, without the presence of a reasonable salary, it's possible for distributions and loans that you pay yourself from your S corporation to be reclassified as wages. If that happens, you could end up owing interest and penalties in addition to payroll taxes.
Here are two general guidelines for setting your salary.
How much you pay key employees. Wages and other amounts you pay unrelated, non-owner staff can indicate a starting point for your own compensation.
The average salary for your profession or industry. Information from government wage surveys and online benchmarking tools offer compensation trends and information.
Congress is considering new rules concerning certain professional services and the salary paid by S corporations. Give us a call to review your situation.

July 12, 2010

Homebuyer tax credit extension

If you signed a contract before May 1 to buy a home, but have been unable to close the deal, you still have time to apply for the homebuyer tax credit. The deadline for finalizing the paperwork on your new home has been extended through September 30, 2010.

Here's what you need to know:

The extension applies only if you already had a contract in place by April 30, 2010. The new deadline is available for first-time homebuyers and long-time residents.
The maximum credit remains unchanged ($8,000 for first-time homebuyers and $6,500 for long-time residents), as do other rules for qualifying.
You can claim the credit on your 2009 or 2010 federal income tax return. You'll have to complete Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and attach proof that you meet the requirements.
Not sure if you qualify? We can help. Please call for more information

June 21, 2010

Payroll tax update

As the second calendar quarter of the year winds down, a business owner's thoughts turn to... payroll tax.
Here are three changes to keep in mind as you complete this summer's payroll reports.
COBRA credit. The COBRA credit, which began last year, was extended into 2010. If you provided health insurance premium assistance to eligible former employees, you can claim a credit on your payroll tax return for the portion you paid.

What if you overlooked the credit in the first quarter? Report it on your second quarter payroll return. Alternatively, you can file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to correct the previous quarter.

Be sure to keep back-up to support your claim, including documentation of premiums received from your former employees.
Form W-11. Did you recently hire employees who qualify for the two payroll tax breaks signed into law this year? Use this new form as support for claiming both the 6.2% payroll tax deduction and the year-end federal tax credit for workers who stay with you at least 52 weeks.

Have your new employees sign a Form W-11; then keep them with your tax records.
Electronic deposits. Beginning in 2011, the IRS intends to eliminate Form 8109, the paper tax deposit coupons. In most cases you'll be required to deposit payroll taxes electronically.

Enrolling in the electronic tax payment system is free. Consider setting up an account now to give yourself time to get used to how it works.
For details or assistance, contact our office.

Contact us now to find out how we can help