Business Issues Chapter 12 pp. 421-476 2012 National Income Tax Workbook™

Business Issues pp. 421-476 Small business health insurance credit Fringe benefits Simple cafeteria plans Nonemployee compensation Repairs and capital expenditures Alternative tax net operating loss

Learning Objectives p. 421 Calculate health insurance credit Identify nontaxable fringe benefits Explain cafeteria plan advantages Prepare Form 1099-MISC Distinguish between repair and capital expenditure Calculate ATNOL deduction

Health Insurance Credit p. 422 Businesses, tax-exempt organizations, and household employers (through 2013) Small = equivalent of < 25 full-time employees (FTEs) Average wages < $50,000 per FTE Employer pays > 50% of premium

Uniformity Requirement pp. 423-424 Employer must pay same percentage of self-only premium for all employees Each plan stands alone for testing Insurer may use list billing (separate premium for each employee) or composite billing (same premium for all employees with same coverage) Examples 12.2 through 12.6

Counting FTEs pp. 425-426 Full-time = 2,080 hours per year All paid time is counted (including vacation and sick days) Count actual hours or 8-hour day Owners and family members are not counted Seasonal workers ( < 120 days) are not counted

Examples p. 427 12.7─Count actual hours 12.8─Count 40 hours per week 12.9─Total all hours (2,080 maximum per employee) and divide by 2,080; then round down to whole number 12.10─Total all wages paid to counted employees and divide by FTE; then round down to nearest $1,000

Credit Calculation pp. 427-428 Maximum credit at < 10 FTEs and $25,000 average annual wage Excess of either reduces 35% credit rate (25% rate if tax-exempt) Eligible premium limited to state average for small group market Examples 12.11 through 12.14

Example 12.15 p. 429 Calculation Amount Initial credit $31,200 × 35% $10,920) FTEs (13)* $10,920 × (3 ÷ 15) ( 2,184) Reduced credit $ 8,736) Wages ($32,500)** $10,920 × (7 ÷ 25) ( 3,058) $ 5,678) * 3 excess divided by 15 (25 – 10) phaseout range ** 7 excess divided by 25 (50 – 25) phaseout range

Example 12.16 p. 431 Calculation Amount Initial credit $43,000 × 35% $15,120) FTEs (18)* $15,120 × (8 ÷ 15) ( 8,064) Reduced credit $ 7,056) Wages ($37,000)** $15,120 × (12 ÷ 25) ( 7,258) $ ( 202) * 8 excess divided by 15 (25 – 10) phaseout range ** 12 excess divided by 25 (50 – 25) phaseout range

State Subsidies and Credits pp. 431-432 State payments are treated as paid by employer for 50% rule and credit computation Final credit limited to actual payment Examples 12.17, 12.18, and 12.19 Tax liability limits current-year benefit Credit reduces deduction for premium

Fringe Benefits pp. 432-434 Benefits may be direct or indirect Benefits may be taxable or excludable Some are limited to employees Everyone should keep records Figure 12.7 summarizes treatment for employees

Accident and Health Benefits pp. 435-436 Health insurance is nontaxable benefit only for employees Group coverage not required, but plan must be nondiscriminatory Self-employed can deduct eligible costs as adjustment to gross income (includes partners and 2% owner-employees of S corporations)

Medical Reimbursements pp. 437-438 HRA, FSA may reimburse employees for out-of-pocket costs Plans must be nondiscriminatory Self-employed are not eligible employees, but owner’s spouse who is bona fide employee may qualify Cafeteria plan allows choices

Dependent Care p. 439 Owners cannot receive more than 25% of benefits Rank-and-file employees’ average benefit must be at least 55% of highly paid employees’ average benefit Benefits included on Form W-2 reduce expense limit for child care credit

Group-term Life Insurance pp. 439-441 Formula must be used to determine amount of insurance Exclusion limited to $50,000 coverage Income inclusion requires use of IRS table based on age (Example 12.20) Plan must be nondiscriminatory

Survivor Benefits pp. 441-442 Government annuities paid to survivors of public safety officers killed in line of duty Special payments to survivors of victims killed in 1995 Oklahoma City bombing, 2001 9/11 terrorist attacks, and 2001 anthrax attacks

I.R.C. § 132 Fringe Benefits p. 442 No additional cost services Qualified employee discounts Working condition fringe benefits De minimis fringe benefits Qualified transportation fringe benefits Qualified moving expense reimbursements Qualified retirement planning services Qualified military base closure benefits

Education Benefits pp. 447-448 Educational assistance programs (expiring at end of 2012) Qualified scholarships (charitable class must be identified) Qualified tuition reduction (family members can receive undergraduate aid; graduate aid limited to student who is also paid for teaching or research)

Meals and Lodging pp. 448-449 Meals: furnished on employer’s premises for employer’s benefit Lodging: furnished on employer’s premises for employer’s benefit and necessary to perform job properly [not available to partners or 2% S.corporation shareholders (Rev. Rul. 80, 1953-1 C.B. 62)]

Simple Cafeteria Plans p. 450 Safe harbor for nondiscrimination rules Eligible to adopt if < 100 employees in prior 2 years Eligible to keep until > 200 employees in prior year All eligible employees must be able to select any benefit that plan offers

Employer Contributions pp. 451-452 2% of compensation for all qualified employees, or 2 times employee’s salary reduction, limited to 6% of compensation Additional contributions are permitted, but rate can’t be more for highly paid employees

Testing for Other Plans p. 452 Key employee concentration test prevents small C corporation from offering plan to owner-employees (Example 12.30 and Figure 12.9) Simple cafeteria plan bypasses the test, so owner can benefit and FICA taxes are reduced (Figures 12.10 and 12.11)

Nonemployee Compensation pp. 453-456 $600 payment: File Form 1099-MISC Form W-9 requests TIN for reporting Single-member LLC uses owner’s TIN (Example 12.32) Backup withholding is required if payee does not provide TIN; BWH may be required after the IRS sends a B notice

Form 1099-MISC p. 457 Income more likely to be reported if information return is filed, so the IRS is focusing on these requirements Other payments are also reportable Exception: Form 1099-MISC is not required if payment is made by credit care (Form 1099-K will be filed by third party payment network)

Box 3 p. 458 Payments that are not self-employment income or wages paid to worker Prizes and awards Taxable damages Participant in medical study Deceased employee’s wages paid to survivor (at any date after death) H-2A workers without valid TIN

Box 7 pp. 458-459 Compensation subject to SE tax Taxable fringe benefits Expense reimbursements outside of an accountable plan Value of bartered services Fees for professional services Directors’ fees Example 12.33 and Figure 12.13

Due Dates and Penalties pp. 459-460 January 31 to payee February 28 to IRS (paper returns) March 31 to IRS (electronic returns, required if 250 or more returns) Time-sensitive penalties (Figure 12.14)

Repairs and Capital Expenditures pp. 460-461 New regulations provide some bright lines for distinguishing repairs from improvements Capitalization is the norm (Indopco) Repairs keep property in ordinarily efficient operating condition Courts applied “put or keep” test

2004–2011 Efforts p. 461 What is a unit of property? What is starting point for comparison? What is material increase in value? What is substantially longer useful life? What is new or different use?

Temporary Regulations for Capitaliztion p. 462 General rules for capital expenditures [Temp. Treas. Reg. § 1.263(a)-1T] Amounts paid to acquire or produce tangible property [Temp. Treas. Reg. § 1.263(a)-2T] Amounts paid to improve tangible property [Temp. Treas. Reg. §.1.263(a)-3T]

De Minimis Rule pp. 462-463 Does taxpayer have applicable financial statement? Does taxpayer have written accounting procedures for expensing low-cost property acquisitions? Are the total payments less than or equal to 2% of financial statement depreciation, or 1/10 of 1% of gross receipts on tax return?

Example 12.34 p. 462 Travel agency has audited financial statement and policy to expense assets that cost less than $500 10 printers cost $200 each ($2,000) If gross receipts are > $2,000,000, or financial statement depreciation > $100,000, agency meets de minimis criteria for tax return deduction

Other rules p. 463 If property’s cost is deducted as de minimis, any later gain is ordinary Unicap rules override de minimis provision Property is not a material or supply Inventory and land are not eligible

Applicable Financial Statement p. 463 Report required to be filed with SEC Certified audited financial statement accompanied by independent CPA’s report for substantial nontax purpose Other financial statement (not tax return) required to be provided to federal or state government agency

No AFS? p. 463 No de minimis rule Materials and supplies rules provide some relief ($100 or short useful life) Example 12.35: At $200 cost, choices are depreciation or I.R.C. § 179, unless printers will last < 12 months; if $100 cost, treat as a supply

Improvements to Property p. 464 Three categories of expenditures: Betterment to unit of property Restoration of unit of property Adaptation to new or different use Functional interdependence test determines “unit of property” Separate buildings and other property

Unit of Property pp. 464-465 Building and structural components are generally a unit of property Other property: Each component that performs a discrete and major function is treated as a unit of property All parts of a unit must have the same useful life on financial statements and tax return depreciation schedule

Buildings p. 465 Status of work as an improvement is determined separately for structure and eight building systems Retirement of a component is treated as a disposition Example 12.37: Improvement to HVAC system is capital expenditure

Appropriate Comparison pp. 465-466 Correction of normal wear and tear: Compare to condition after last time wear and tear was corrected If no prior correction, compare to placed-in-service condition Needed after identifiable event: Compare to condition before event

Betterment p. 466 Betterment means asset’s condition is improved, even if FMV doesn’t rise Amelioration of asset’s condition at acquisition or during production Material addition to unit of property Material increase in capacity, productivity, efficiency, strength, or quality Example 12.38: Defects at time of purchase

Restoration (Bright-Line Rules for Capitalization) pp. 466-467 Loss is deducted for replaced part Basis of replaced part is used to determine gain or loss Basis was adjusted for casualty loss Property was no longer functional Property is rebuilt at end of class life Major component is replaced

Examples p. 467 12.39: Casualty loss deduction reduced basis, so restoration cost must be capitalized 12.40: Roof replacement must be capitalized; remaining basis of old roof is deductible as a loss on disposition

New or Different Use pp. 467-468 Use is different from intended use when property placed in service Example 12.41: Manufacturing facility and showroom are different Example 12.42: Realignment of retail tenant space is not new use

Routine Maintenance Safe Harbor p. 468 Recurring nature Industry practice Manufacturer’s recommendations Taxpayer’s experience Applicable financial statement handling Example 12.43: No longer routine Deduct rotable parts when discarded

General Asset Accounts pp. 469-470 GAA allows several assets to be treated as one for depreciation and disposition purposes New regulations allow one or more assets to be removed from GAA after a qualifying disposition Example 12.44: Equipment in facility sold to unrelated party

Materials and Supplies (Bright-Line Criteria) p. 470 Non-inventory property that is: Acquired to maintain, repair, or improve unit of tangible property Fuel, lubricant, water, etc., expected to be consumed within 12 months Unit of property with 12-month or less economic useful life Unit of property that costs < $100 (Example 12.45)

Rotable and Temporary Spare Parts pp. 470-471 Deduct basis in year installed Include FMV in income each time it is removed (FMV added to basis) Add repair costs to part’s basis Deduct basis again when reinstalled Deduct remaining basis in year of disposition

De Minimis Deduction p. 471 Eligible taxpayers may apply the de minimis capitalization rules to cost of de minimis materials and supplies Same ceilings apply (2% of financial statement depreciation or 1/10 of 1% of gross receipts) Allows deduction in year paid instead of year used or consumed in business

Election to Capitalize p. 471 Taxpayers may elect to capitalize costs that qualify for deduction under new regulations Example 12.46 Rev. Procs. 2012-19 and 2012-20 provide automatic consent procedures for accounting method changes

ATNOL pp. 472-473 ATNOL calculation requires both AMT adjustments and NOL adjustments Elections for regular NOL also apply to ATNOL Example 12.47: Start with regular taxable income for both calculations; this ATNOL is smaller than regular NOL

ATNOL Deduction pp. 474-475 90% of AMTI limit applies to ATNOL use, except for qualified losses incurred in 2005–2009 Example 12.48: 90% limit applies

ATNOL Absorption pp. 476-476 Carryover is ATNOLD not used to reduce AMTI in intervening year Example 12.49

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