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

2. 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

3. 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

4. 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

5. 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

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

7. 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

8. 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 through 12.14

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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

15. 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

16. 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

17. Survivor Benefits pp
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, /11 terrorist attacks, and 2001 anthrax attacks

18. 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

19. 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)

20. Meals and Lodging pp
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, C.B. 62)]

21. 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

22. 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

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

24. 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

25. 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)

26. 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

27. 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 and Figure 12.13

28. 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)

29. 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

30. 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?

31. 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]

32. De Minimis Rule pp
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?

33. Example 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

34. 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

35. 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

36. 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

37. 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

38. Unit of Property pp
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

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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)

48. 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

49. 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

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

51. ATNOL pp
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

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

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

54. Questions?