Post by Wade Christensen
Online Retailers & Sales Tax
There is a continuing debate about what to do with online retailers and collecting sales tax. Many of the top “e”-tailers do not collect sales tax in states in which they have no physical presence. For consumers, it is becoming more and more popular to shop online to save money and avoid paying any sales tax.
Should online retailers be collecting sales tax? Do online retailers have a built in advantage over local stores? Click here for an article discussing these questions and items to keep in mind related to sales tax if your company buys or sells over the internet.
Long-term Care Insurance & Your Business
Owner-Employees of S Corporations vs. Owner-Employees of C Corporations
Providing fringe benefits such as long-term care insurance to owner-employees can be an effective way to add value to your company. In general, the Internal Revenue Code allows employees to exclude certain fringe benefits from gross income and deduct the fringe benefit as a business expense. However, there is a difference in the treatment to owner-employees depending upon what type of entity structure your business is operating under.
Below is a comparison of the tax impact to owners of C corporations vs. owners of S corporations when providing long-term care insurance as a fringe benefit:
Rules for C Corporation Owner-Employee
- Nondiscrimination rules do not apply to LT care insurance plans that are in separate plans from other health benefits. (The insurance company may require the employer to define the classes of employees eligible. If the employer intends to provide coverage to key employees, it may be beneficial to buy individual policies rather than having a group plan).
- Individual contracts purchased for key employees are fully deductible by the business and no income is reported to the employee.
- They are not subject to ERISA since individual policies are not group plans.
- Language in employment contract stating that LT care insurance is being provided may be a good idea.
- No limitations apply in the amount of LTC insurance that can be provided for tax free to an employee.
Rules for S Corporation Owner-Employee
- Greater than 2% shareholders must include the premiums paid on their W-2.
- Income is not subject to FICA tax and are excluded from boxes 3 and 5 of the W-2.
- An above-the-line deduction is allowed on the shareholder’s Form 1040.
- The amount that is deductible on Form 1040 is limited based upon the age of the shareholder.
- Under age 40, the limit is $340
- 41-50 it is $640,
- 51-60 it is $1,270
- 61-70 it is $3,390
- over 70 it is $4,240.
President Obama’s Proposed Deficit Reduction Plan
On September 19, 2011, President Obama proposed a $3 trillion federal budget Deficit Reduction plan, including $1.5 trillion in tax increases. Although this is just a proposal and not yet law, it is important to stay informed of the items included in the proposed Deficit Reduction Plan.
Click here to view the White House Tax and Deficit Reduction Proposals Special Report
The Special Report highlights the following proposals:
- Repeal of Bush-Era Tax Cuts for Higher Income Taxpayers
- The Warren Buffet Rule
- Estate Tax Reform
- Elimination of Oil, Gas and Coal Preferences
- LIFO Repeal
- Permanent FUTA Surtax Extension
- International Tax Reforms
Feel free to contact Froehling Anderson at 952.979.3100 with any questions you may have on the proposed Deficit Reduction Plan.
Don’t Delay: The September 15th Tax Deadline Is Right Around the Corner…
September 15th has come quickly upon us, which means the income tax filing deadline for all calendar year-end business returns that were extended. Some businesses choose to file their tax return after this “final” due date. For the procrastinators out there, below is a quick reminder of the federal penalties associated with filing a tax return late:
C Corporations:
- The IRS has the ability to assess a penalty equal to 5% of the net tax due for each month or part of a month the return is filed late, to a maximum penalty of 25%.
Subchapter S Corporations:
- The IRS has the ability to assess a penalty equal to $195 per shareholder for each month the return is filed late(maximum of 12 months). Therefore, the maximum penalty per shareholder is $2,340 if a tax return is filed more than 12 months late.
Partnerships, including multi-member LLCs:
- The IRS has the ability to assess a penalty equal to $195 per partner/LLC member for each month the return is filed late(maximum of 12 months).
Remember, the penalties are paid at the business level and are nondeductilbe expenses for tax purposes. To avoid any issues, be sure to file your return prior to the September 15th deadline!
Energy Efficient Commercial Building Property Deduction – IRC Section 179D
Most likely you are aware of Section 179 that allows businesses to expense certain capital purchase made during the year. But did you know that Section 179D allows a business to write off a portion of the cost of certain energy efficient commercial building property placed in service during the year instead of having to depreciate the entire cost over 39 years? The maximum deduction is $1.80/square footage of the building. The deduction is for property placed in service before 2014.
What property qualifies?
The definition of energy efficient property is:
1. Property installed on or in a building located in the United States
2. Property installed as part of the interior lighting systems, the heating, cooling, ventilation, and hot water systems, or the building envelope, and
3. Reduces the total annual energy usage(interior lighting, heating, cooling, ventilation and hot water systems) by 50% or more as certified by a qualifying individual*. A reference building is used to find a comparison to determine if the project reduces energy usage in the building by 50%.
*The certification must include certain information to ensure the deduction claimed on the tax return in valid.
What is the benefit?
In general, property installed as part of a commercial building and its structure is depreciated over 39 years. However, under Section 179D, a portion of the cost can be expensed in the current year.
Below is an example of how the deduction would look:
Assume a business builds a new 50,000 square foot building that costs a total of $1,000,000. The new building includes property that has been certified to reduce the energy usage by over 50% when compared to a similar building. Under normal depreciation rules, the building would be depreciated over 39 years, resulting in an annual deduction of around $25,641.
However, under Section 179D, the business would be allowed to immediately expense $1.80/square foot, or $1.80 X 50,000 = $90,000. The write off would reduce the basis of the property, allowing a depreciation in the current year of ($1,000,000 – $90,000/39 years = $23,333). The maximum deduction for the building in the current year increases to the sum of $90,000 and $23,333, or $113,333.
It is important to note that the 179D deduction does not count against the annual Section 179 deduction limitation. Also, for contractors that work on the government entities, the IRS has stated that they will allow the business that is primarily responsible for designing the property to take a portion of the deduction under Section 179D if energy efficient commercial building property is installed on or in property owned by a federal, state or local government.
If you have questions about the Section 179D deduction or want to discuss it further, please do not hesitate to contact our office at (952) 979-3100.
