Jump to an article:
Are You Ready for the 2011 Tax Hikes?
by Dennis V. King, CPA, Managing Partner
Tax hikes scheduled to take effect on January 1, 2011 will affect both businesses and individuals. Some of the changes are due to the expiration of the tax cuts enacted in 2001 and 2003 for investors, small businesses and individuals, others are intended to help pay for healthcare reform. Likened to a tsunami, the waves of change are likely to take countless taxpayers by surprise.
Here are the basics:
Personal income tax rates will rise.
The rates for all income tax brackets will be increased. The highest income tax rate will increase from 35 to 39.6 percent, which is also the rate at which two thirds of small business profits are taxed.
Higher taxes on marriage and family.
The child tax credit will decrease by 50 percent, from $1,000 to $500; dependent care and adoption tax credits will be cut; and the “marriage penalty” (narrower tax brackets for married couples) will come back.
AMT affects six times as many taxpayers.
Because Congress did not index the Alternative Minimum Tax, the number of families paying the AMT will rise from 4 million to over 28 million.
Education and teaching benefits reduced.
Various tax benefits for teaching, education and employer-provided educational assistance will be cut or eliminated. Student loan interest will no longer be deductible in many cases.
Higher tax rates on dividends and capital gains.
The capital gains tax will rise from 15 to 20 percent, dividends will be treated as ordinary income and will be taxed at rates up to 39.6 percent.
Return of the Death Tax.
If you die on or after January 1, 2011 and your estate is over $1 million, your estate will be assessed a tax of up to 55 percent tax of the value of all the assets in your estate.
Brand Name Drug Tax.
A multi-billion-dollar tax assessed on name-brand pharmaceutical manufacturers may be passed along to consumers.
Goodbye small business expensing.
Small businesses will no longer be able to expense, rather than depreciate, equipment purchases up to $250,000, but only up to $25,000. Larger businesses will have to depreciate all of their equipment purchases (rather than expensing half).
Elimination of charitable contributions from IRAs.
Charitable contributions made directly from IRAs will no longer be allowed.
Health insurance cost reporting on W-2s.
In addition to these tax increases, a new, burdensome rule requires employers to report health insurance costs on W-2s beginning with the 2011 tax year. This amount is for information only and not included as income.
And the unkindest zinger of all—
The Tanning Tax.
If you get a tan at a tanning salon, you’ll pay a 10 percent excise tax.
Whether you’re an individual tax payer or a business, one or more of these changes will certainly affect you, but they need not be devastating. KKAJ’s team of experienced advisors can help you navigate the complex new tax laws. We welcome the opportunity to meet with you to review your situation and take proactive planning steps to minimize your tax burden. To schedule an appointment, or to obtain further details on how new taxes may affect you or your business, please contact us at 818-848-5585.
Dennis King is Managing Partner of King, King, Alleman & Jensen Accountancy Corporation.
He can be reached at 818.848.5585 or dennis@kkajcpa.com. Visit www.kkajcpa.com.
Leaving GAAP Behind?
by Tom Engman, CPA, Partner
Generally Accepted Accounting Principles (GAAP) are a standard framework of rules for financial accounting and reporting. GAAP includes the standards, conventions and rules followed by accountants as they record transactions and prepare financial statements. Standards are necessary so that third parties can be sure the information is accurately and objectively reported.
The problem with the over 17,000 pages of GAAP is that they take a one-size-fits-all approach. What works for a large, multinational publicly owned corporation doesn’t necessarily apply to a small or medium-size privately held company. In fact, many private companies find it difficult to comply strictly with GAAP and are commonly issuing statements with exceptions to the standards. Furthermore, the costs associated with financial reporting in accordance with GAAP are often prohibitive for small businesses. As a result, “generally accepted” is no longer standard.
In May of this year, the American Institute of Certified Public Accountants, the Financial Accounting Foundation and the National Association of State Boards of Accountancy convened a blue ribbon panel to look into the relevance of GAAP for private companies. While the panel’s efforts to improve GAAP are underway, several alternatives already exist.
Many countries are using the International Financial Reporting Standards (IFRS), created by the International Accounting Standards Board (IASB), an independent accounting standard-setting organization based in London. Much simpler than GAAP at only 230 pages, IFRS for Small and Medium Size Enterprises (SME) are principles-based standards that establish broad rules and dictate specific treatments. They are potentially much easier to apply to private companies, can produce more usable information and even save money on financial statement preparation.
Another financial reporting alternative growing in popularity is financial statements prepared using other comprehensive bases of accounting (OCBOA). Among the most popular of these are financial statements prepared on the income tax basis. The income tax basis of accounting is based on the principles and rules of accounting for transactions pursuant to the federal income tax laws and regulations. Tax basis financial statements can result in cost savings because the tax returns and the financial statements are prepared using the same information. Additionally, tax basis financial statements do not include all of the accounting principles and reporting requirements of GAAP.
Though OCBOA financial statements generally are a cost-effective alternative, it is important to determine whether OCBOA statements are appropriate given the nature of the entity. Care must be given to the impact that such a presentation may have on the various critical measures that a company’s financial statement users may scrutinize, and the willingness of the users to accept such a presentation.
Whichever alternative is selected, converting from GAAP is no simple feat. Among the challenges are:
• Financial statement users, such as banks, credit rating agencies, actuaries and valuation experts, may not be knowledgeable about GAAP alternatives.
• Finance, bookkeeping and accounting personnel at small and medium-sized companies may not be trained on GAAP alternatives. The learning curve may be significant and the cost of training high.
• Because the IFRS for SME document is so short, it may not provide sufficient guidance for specific transactions.
• Management may need to make more financial disclosures than under GAAP.
• Because OCBOA financial statements can sometimes contain less information than financial statements prepared under GAAP, users may
require additional information, such as supplementary schedules, to accompany the basic financial statements.
Converting to IFRS or OCBOA-based financial statement reporting will affect every aspect of your company and require substantial planning and training. However, the savings may make the effort worthwhile. Your advisors at KKAJ are knowledgeable about IFRS and OCBOA and can discuss the advantages and challenges of a conversion. If you’d like to learn more, contact us at 818-848-5585.
Tom Engman is a Partner of King, King, Alleman & Jensen Accountancy Corporation. He was voted “Burbank’s Best Accountant” in 2010 by readers of the Burbank Leader.
He can be contacted at 818.848.5585 or tom@kkajcpa.com. Visit www.kkajcpa.com for more
Client Service Defines KKAJ Culture
Inspiration comes from both expected and unexpected places. Partner Bob Jensen attended the 2010 Enterprise Network Worldwide Symposium themed “Building Your Brand” held June 16 – 18 in Miami, Florida, and came away with a renewed focus on the firm’s culture as it relates to the three Cs: communicating, connecting, and focusing on clients.
“The challenges associated with the current economy propelled me to write a personal business mission statement, which is my creed or code of conduct that guides me in my professional life,” said Bob, who spent months before and after the conference honing his statement. “I’ve encouraged others in the firm to consider doing the same.”
One theme that emerged from the conference was that some of the best firms in the accounting world are those that have struggled. Experiencing challenges and obstacles gave those firms the opportunity to restructure, retool and reinvent their firms to become stronger, better and more successful.
The quality of accounting work is often assumed and can be indistinguishable from firm to firm. The end goal is to have a firm culture of great service, getting employees to think and behave in ways that distinguishes KKAJ from other firms based on impeccable service and the timeliness of the work produced.
Five Star Client Service has been the bedrock of the firm for years. Inspiring a sense of enthusiasm and excitement takes existing concepts and expands them to new levels. The concept behind the approach is to always look for new ways to concentrate the firm’s efforts on exceeding client expectations, which KKAJ has done for more than 50 years.
“Communication is a component to being a true professional,” relayed Bob, and connecting through open discussions – both internally with employees and externally with clients – is key to delivering great service.
Healthcare Reform Brings Burdensome 1099 Reporting Changes
By Charles R. “Bud” Alleman, Jr., CPA, Partner
The recently enacted healthcare reform legislation will mean significant changes in 1099 reporting requirements for both businesses and nonprofit organizations. Until now, Form 1099 has been used to document payments made to non-salaried individuals, such as independent contractors and freelancers, of $600 or more per calendar year. Beginning in 2012, you will have to issue 1099s not just to contract workers, but to individuals and corporations from which you buy more than $600 in goods or services per calendar year.
You might wonder what healthcare reform has to do with Form 1099. According to IRS estimates, the federal government loses over $300 billion a year in tax revenue on unreported income. The hope is that the new reporting requirements will close the gap and generate more revenue to help offset the cost of healthcare.
Although the new rules won’t apply to payments made before 2012, it’s a good idea to familiarize yourself with them now so you can begin to gather the necessary documentation. Here are the three changes in a nutshell:
1. Under current rules, 1099 reporting is not required for payments you make to corporations. For example, if you rent office space from a corporation, you currently don’t need to report those rental payments. Also, current rules do not require reporting the purchase of goods or products. Under the new rule you will need to report payments to corporations and non-corporate entities and individuals of $600 or more per calendar year for goods and products, as well as services. At this time, it’s not clear whether 1099-MISC will be used for this purpose, or if the IRS will develop a new form.
2. Current rules require that you list the following information on Form 1099: Total amount paid for the calendar year; name and address of payee; payee’s tax ID number (TIN); payer’s contact information; payer’s TIN. If you do not have the payee’s TIN, you can institute backup withholding at a 28 percent rate. The new rule will require you to obtain a TIN from every payee to avoid the need for backup withholding. Or, if you’re the one selling property or operating a corporation, you will be required to provide your TIN to your customers so they do not have to institute backup
withholding on payments they make to you.
3. A third new rule requires the reporting of “gross proceeds” of $600 or more per calendar year. Unfortunately, the meaning of “gross proceeds” is not clear at this time. It may possibly refer to payments made to non-corporate payees, such as small businesses, but we will have to wait for IRS clarification.
The bottom line is that things will get complicated, but if you begin organizing your records and obtaining TINs from payees now, you won’t be overwhelmed with paperwork as 2012 draws closer. As always, KKAJ’s dedicated advisors are here for you. We will keep you up to date on new developments, help you modify your record-keeping procedures as necessary, and guide you through the labyrinth of the new requirements.
There have already been some attempts in Congress to change or repeal this new 1099 reporting requirement. These changes have not been passed as of this writing. For further details on how the changes may affect your business, please contact us at 818-848-5585.
Bud Alleman is a Partner of King, King, Alleman & Jensen Accountancy Corporation.
He can be contacted at 818.848.5585 or bud@kkajcpa.com.
Visit www.kkajcpa.com for more information.
KKAJ Ranked as a Best Place to Work
For the second year in a row, KKAJ has been named one of the Best Places to Work by the San Fernando Valley Business Journal. “We are proud to receive this prestigious award,” said Partner Louis Hamel. “Being named a ‘Best Places to Work’ reflects on our firm’s culture and the rewarding relationship we have with employees and clients.” The award was based on an extensive series of employee surveys and interviews. KKAJ ranked 6th in the small company category, defined as a minimum of 15 employees but less than 50, up from 13th the year before.
