Current Tax UpdateTony Perricelli

I. It’s 2012—can you still reduce your 2011 taxes?a. Traditional IRA contribution

i. Contributions made through April 17, 2012 can be designated to 2011 tax year (no extensions)

ii. Limited to the lesser of:1. $5,000 ($6,000 if over age 50 at the end of 2011) or2. 100% of individual’s taxable compensation

b. SEP IRA contributioni. Contributions made through October 15, 2012 can be designated to 2011

(September 15, 2012 for corporate plans)ii. Limited to lesser of:

1. $49,000 or2. 25% of compensation or3. 20% of self-employment income

iii. Don’t forget to calculate contribution requirements for non-owner employeesc. Sec 529 contribution

i. Contributions made through April 17, 2012 can be designated to 2011ii. State deduction only, no federal deduction

iii. Can contribute up to $65,000 if single or $130,000 if married with no gift tax consequences

II. New Developmentsa. Income tax filing due dates for 2011 returns

i. Corporation returns – March 15, 2012ii. Individuals, Partnership & Fiduciary returns – April 17, 2012

1. April 15th is on a Sunday2. April 16th is Emancipation Day, a DC holiday which is treated like a

federal holiday by the IRSb. 1099-MISC reporting

i. New check boxes on business tax returns1. “Did you make any payments in 2011 that would require you to file

Form(s) 1099?”2. “If ‘Yes,’ did you or will you file all required Forms 1099?”

ii. Penalty amounts for failure to file increases from $100 to $250 for each formc. New Form 1099-K for credit card transactions

i. Issued by merchant account companies to retailersii. New line on forms for this figure, not in use until 2012

d. Basis reporting on Form 1099-Bi. Basis reported for shares bought and sold in 2011

ii. Must also report whether gain or loss is long-term/short-term

e. Inflation adjusted amountsi. Personal exemption

1. 2011 - $3,7002. 2012 - $3,800

ii. Standard deductions1. 2011 – MFJ $11,600, Single $5,800, HOH $8,500, MFS $5,800,

Dependent $9502. 2012 – MFJ $11,900, Single $5,950, HOH $8,700, MFS $5,950,

Dependent $9503. Both years – Additional Blind/Age 65 or over Married $1,150, Unmarried

$1,450iii. Social Security (OASDI) Maximum Earnings

1. 2011 - $106,800 (unchanged from 2010)2. 2012 - $110,100

iv. Retirement plan contribution limits1. 2011 – IRA $5,000 ($6,000 over 50), 401(k) $16,500 ($22,000 over 50),

SEP/Keogh $49,0002. 2012 – IRA $5,000 ($6,000 over 50), 401(k) $17,000 ($22,500 over 50),

SEP/Keogh $50,000 f. New foreign account reporting

i. Foreign Account Tax Compliance Act (FATCA) 1. Requires foreign financial institutions to report directly to the IRS

certain information about financial accounts held by a. US taxpayersb. Foreign entities in which US taxpayers hold a substantial

interest2. Potential withholding of 30% for those who do not provide information

ii. New Form 89381. More information than a TDF 90-22.1 (FBAR) form2. Must be filed by any US resident or citizen who owns certain foreign

assets3. Minimum filing thresholds

a. For individuals living in the USi. $50,000 at the end of the year

ii. $100,000 at any time during the yearb. For individuals living abroad

i. $200,000 at the end of the yearii. $400,000 at any time during the year

4. Not necessary if taxpayer files Forms 3520, 5471, 8621, or 8865 with similar information

III. 2010 Small Business Jobs Act (provisions impacting 2011 tax returns)a. Section 179 expensing

i. For 2010 and 2011, increased the expensing allowance from $250,000 to $500,000

ii. The limit is phased out if qualifying property placed in service during the year exceeds $2 million, up from $800,000

iii. Within the $500,000 limit, certain real property acquisitions up to $250,000 may be expensed

1. Qualified leasehold improvement property2. Qualified restaurant & retail improvement property

b. S Corp BIG tax recognition periodi. An S corporation that was a former C corporation must pay a “built-in gains”

(BIG) tax of 35% on gains that existed as of the date of the S corporation election if those gains are recognized during the 10-year period following the date of the S corporation election.

ii. The 10-year recognition period was reduced to 7 years for taxable years beginning in 2009 or 2010.

iii. The SBJA of 2010 temporarily shortened the holding period of assets subject to the BIG tax to 5 years if the 5th year in the holding period precedes the tax year beginning in 2011 (after 2011 it goes back to a 10-year period).

c. Roth IRA conversionsi. Income limitations removed

ii. For conversions made in 2010 and election made to defer payment of tax, first half of payment is due with 2011 tax return, second half is due with 2012 return

IV. 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (2010 TRA)a. Extended Bush tax rate reductions & deduction provisions through December 31, 2012

i. 10% bracketii. 25%, 28%, 33% and 35% brackets

iii. No phase-out of personal exemptions and itemized deductionsb. Extended favorable 15% rate through December 31, 2012

i. Long term cap gainsii. A dividend received from stock in a domestic corporation or stock in a foreign

corporation that is a resident in a country that has comprehensive tax treaty with the U.S.

c. Extended other major provisions through:i. December 31, 2012

1. Child tax credit of $1,0002. Marriage penalty relief3. Education incentives such as American Opportunity tax credit4. EITC expansion5. Increased child and dependent care credits

ii. December 31, 20111. Deduction for mortgage insurance premiums2. IRA distributions to charity

3. Tuition and fees deduction (above the line)4. State and local sales tax deduction5. Educator’s expense deduction6. Non-business energy credits (under old rules)

d. AMT exemption amounts & creditsi. 2011 amounts are $48,450 unmarried, $74,450 MFJ, $37,225 MFS

ii. Nonrefundable personal credits against AMTe. Temporary decrease in self-employment tax rate

i. 2011 only, recently extended through February 29, 2012ii. Cuts Social Security rate from:

1. 12.4% to 10.4% for self-employed taxpayers2. 6.2% to 4.2% for employees, no change in employer portion

f. Medicare tax increase in 2013i. Increases from 2.9% to 3.8%

ii. High-income earners > $250,000iii. Unearned income including qualified dividends

g. Bonus depreciationi. The Small Business Jobs Act of 2010 extended the 50% bonus depreciation for

assets acquired and placed in service before 2011ii. The 2010 Tax Relief Act allows 100% first-year depreciation for qualifying assets

that are acquired and placed in service after September 8, 2010 through December 31, 2011 (through December 31, 2012 for aircraft and other long-production period assets)

iii. Bonus depreciation will revert to 50% after December 31, 2011 through December 31, 2012 (after December 31, 2012 through December 31, 2013 for aircraft and other long-production period assets)

iv. Eligible Assets1. To be eligible for first-year bonus depreciation, an asset must meet all of

the following criteria:2. It must be “Qualified Property”

a. Modified accelerated cost recovery system (MACRS) property with a recovery period of 20 years or less

b. Computer softwarec. Water utility propertyd. Qualified leasehold improvement property

i. Made to an interior portion of a non-residential buildingii. Made pursuant to or under a lease by either the lessee

(or any sublessee) or the lessor iii. Made to real property that will be occupied exclusively

by the lessee (or any sublessee)iv. Placed into service more than three years after the date

the building was placed into service

3. The original use of the asset must commence with the taxpayer after December 31, 2007, and before September 9, 2010 (for 50% expensing), or after September 8, 2010 (for 100% expensing)

4. There was no written binding contract for the acquisition of the asset in effect before January 1, 2008

5. The asset must be placed in service no later than December 31, 2012 (December 31, 2013 for aircraft and other long-production period assets)

6. Does not apply to:a. Expenditures to enlarge a buildingb. Costs for elevators or escalatorsc. Any structural components benefitting a common aread. Costs for the internal structural framework of a buildinge. Improvements made pursuant to leases between related parties

that are members of an affiliated groupv. Guidance from Rev. Proc. 2011-26

1. Taxpayers may “elect out” of bonus depreciation by attaching a statement to a timely filed tax return

2. Taxpayers may make separate elections for all assets belonging to each separate class of property

3. Taxpayers may not make separate elections for 50% property and 100% property in the same year

4. Property is considered acquired when the taxpayer has paid or incurred the cost of the property

5. Property that a taxpayer manufactures, constructs or produces is considered acquired when the self-construction activity begins

vi. Additional considerations1. Bonus depreciation is allowed for both regular and AMT purposes2. Bonus depreciation property must be taken into account in determining

whether the mid-quarter convention applies3. Costs incurred to recondition or rebuild an asset will apparently satisfy

the original use requirement4. Safe-harbor rule on reconditioned or rebuilt assets – assets containing

used parts will be considered new if the used parts are 20% or less of the total cost

5. Qualified restaurant and qualified retail property are specifically excluded from bonus depreciation but Rev. Proc. 2011-26 confirms that restaurant and retail property is eligible if it also qualifies as leasehold improvement property

6. Section 280F limits the amount of first-year depreciation for passenger automobiles placed in service in 2010 and 2011 to $11,060

V. Expiration of other provisions under current law

a. Expired at the end of 2010i. Self-employment deduction for medical insurance premiums

b. Expired at the end of 2011i. AMT increased exemptions

ii. Refundable adoption creditiii. $500,000 Sec 179 expense limit, down to $139,000 for 2012

c. Will expire at the end of 2012i. 2% reduction in Social Security tax (2/29/12)

ii. 50% bonus depreciation

Tony PerricelliScott and Company LLP

tperricelli@scottandco.com803-753-5244