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.
Standard Mileage Rate Change
Effective July 1, 2011, the standard mileage rate for businesses has been increased to 55.5 cents/mile. The rate is good from 7/1/11 to 12/31/11. The rate is a 4.5 cent increase from the previous amount of 51 cents per mile that was effective 1/1/11 to 6/30/11.
Substantiation for Business Travel, Meals and Entertainment Expenses
Many businesses incur travel, meals and entertainment expenses as an ordinary course of business. However, these same businesses risk disallowance of these expenses as tax deductions due to poor recordkeeping. The IRS requires documentation in order to substantiate that the expense has a legitimate business purpose. Absent the substantiation, the IRS may completely disallow the expense. Here is a brief overview of the substantiation rules relating to business travel, meals and entertainment expenses.
The IRS requires that each expense involving travel, meals and entertainment be accompanied by the following documentation in order to meet the substantiation requirements.
- The amount of expense,
- The time and place of the expense,
- The business purpose of the expense, and
- The business relationship to the taxpayer of the individuals being entertained.
In addition to the requirements shown above, a business is also required to keep documentary evidence, such as a receipt, for any travel, meal or entertainment expense that is $75 or greater.
- Ex: A hotel receipt containing the name, location, dates of travel, purpose of the travel and breakdowns of amounts incurred for lodging, meals, and telephone should satisfy the substantiation requirements.
- Ex: For meals, a receipt from a restaurant containing the name and location of the restaurant, the date, amount, number of people, business purpose of the meal and the business relationship of the individuals served should satisfy the substantiation requirements.
Please be aware that the IRS and state revenue agents are being very aggressive during tax return audits and are strictly enforcing these substantiation requirements. Consider keeping a log or account book to substantiate these expenses. Be sure to update the log or account book on a timely basis to ensure adequate records are kept.
If you have additional questions about the substantiation requirements, please contact our office at 952.979.3100. We would be happy to discuss these with your further.
Repeal of Expanded 1099 Requirements Signed Into Law
On Thursday, April 14, 2011, President Barack Obama signed H.R.4, the “Comprehensive 1099 Taxpayer Protection of Exchange Subsidy Overpayments Act of 2011″. This new law repeals both the expanded Form 1099 information reporting requirements mandated by last year’s health care legislation and also the 1099 reporting requirements imposed on taxpayers who receive rental income which was enacted as part of last year’s Small Business Jobs Act.
Click here for a full text article on the new law.
