Over the past few months, there has been talk in Congress about increasing federal income taxes on "millionaires." Many people, including members of Congress, are concerned that such an increase will be counterproductive because tax increases will take away the millionaires' incentive to work. In fact, I heard a Congressman make that statement in a recent radio interview. This reason could not be further from the truth.
In 1987, tax laws were changed to encourage businesses operating in the corporate form to elect S corporation status. At that time, most closely held businesses that were not already S corporations elected S status. The main difference between a C corp and an S corp is that a C corp pays tax on its income, and an S corp does not. The S corp passes its income through to its shareholders, who include it on their personal income tax returns and pay personal income tax on the income, whether or not the income is distributed to them.
Why is this important? It is important because a person that has ownership in an S corporation, partnership, or limited liability company may report income high enough to throw them into the "millionaire" tax bracket, when they receive little or none of the income that they are required to report on their tax returns. The problem is compounded by other tax rules, which require many businesses to report taxable income on the accrual basis of accounting, that is, recognizing taxable income when the income is earned rather than when it is received. So now imagine this reality; the S corp shareholder is not only paying tax on income that he has not received, but is paying tax on income not even received by his corporation! And if any tax rate increase is enacted, it may very well be this phantom income that causes the shareholder to be subject to the millionaires' tax.
So if the S corp shareholders must pay tax on income that they have not received, where do they get the money to pay this tax? Sometimes it comes from the shareholders' personal funds, but most often it is distributed to the shareholders from the corporation. The theory is that if the business was a C corp, it would be required to pay its own income taxes, so it distributes an equivalent amount to reimburse the shareholders for the tax liability arising from reporting the S corp income. And if there is a tax increase, it is likely that this policy will continue, but the additional distribution will reduce the amount of money available to the business to create jobs, purchase equipment, and finance growth. This is the reason why business owners object to the proposed milionaires' tax. It is not because it takes away their incentive to work, but because it reduces their ability to reinvest in their business. The most troubling part of this whole story is that members of the United States Congress do not grasp this concept.
Can this problem be solved without upsetting our entire pass through entity tax structure? I think it can, and the solution is relatively simple. If any proposed millionaires' tax is enacted, the only pass through entity income that should be considered in calculating income subject to the tax should be the amount actually distributed by the S corp, partnership, or limited liability company. Furthermore, distributions used to pay federal or state income taxes on the pass through entity income should be excluded from the calculation and the increased tax rates. This will prevent business owners who report phantom income from being subject to increased taxes on income not received.
January 17, 2012
December 6, 2011
New 2011 Tax Reporting Requirements Place Greater Burden on Taxpayers
The IRS has published many 2011 tax forms on its website, and let me tell you, it is getting ugly. Each year, a greater compliance burden is placed on taxpayers, making tax reporting even more time consuming and complicated. Although I haven't had a chance to review all the form changes, I did look at Schedules C and E, and it is scary.
Schedule C is the form used by individual taxpayers to report the income and expenses of a business operated as a sole proprietorship or a single member LLC. Schedule E the form used to report the income and expenses of operating rental real estate. Each of these forms contains two new questions. The first is "Did you make any payments that would require you to file forms 1099?" The second question is "If yes, did or will you file all required forms 1099?"
Form 1099 is generally required to be issued to report payments made in the course of a trade or business to any individual or unincorporated entity if the total of the payments is $600 or more in a calendar year. This seems simple enough, right? Wrong! Whether you own a two family house or operate a small business on a part time basis, you are subject to the 1099 filing requirements. For you rental property owners, are the landscaper and snow plower corporations? What about the roofer and the plumber? If they are unincorporated, do you have their addresses and federal tax identification numbers? After all, you do need this information to file the 1099 forms with the government by February 15. Do you see where I'm going with this? And by the way, if the 1099's are late filed, you are subject to penalty, so unless you plan to prepare these forms on your own, you can't wait until whenever you get around to it to see your accountant.
Getting back to the two questions, how will you answer them if you are required to but do not file forms 1099? It doesn't take a genius to know that the IRS is not asking these questions for their health. Keep in mind that when you sign your tax return, you are doing it under penalties of perjury, so you do not want to give a false answer. I would love to hear your thoughts on this, so please comment if you have any. I will provide more information as it becomes available. And by the way, these questions also appear on the 2011 partnership tax return form 1065. S Corporation form 1120 S has not yet been released for 2011, but I suspect the question will also appear on it.
Next time, I will discuss the new basis reporting requirements on Schedule D and new form 8949, which requires disclosure of whether or not basis was reported to you on form 1099, and potentially requires the filing of six different forms 8949 to comply with these reporting requirements. Like I said, it is getting really ugly.
Please contact us if you have any questions or we can be of assistance in any way.
Schedule C is the form used by individual taxpayers to report the income and expenses of a business operated as a sole proprietorship or a single member LLC. Schedule E the form used to report the income and expenses of operating rental real estate. Each of these forms contains two new questions. The first is "Did you make any payments that would require you to file forms 1099?" The second question is "If yes, did or will you file all required forms 1099?"
Form 1099 is generally required to be issued to report payments made in the course of a trade or business to any individual or unincorporated entity if the total of the payments is $600 or more in a calendar year. This seems simple enough, right? Wrong! Whether you own a two family house or operate a small business on a part time basis, you are subject to the 1099 filing requirements. For you rental property owners, are the landscaper and snow plower corporations? What about the roofer and the plumber? If they are unincorporated, do you have their addresses and federal tax identification numbers? After all, you do need this information to file the 1099 forms with the government by February 15. Do you see where I'm going with this? And by the way, if the 1099's are late filed, you are subject to penalty, so unless you plan to prepare these forms on your own, you can't wait until whenever you get around to it to see your accountant.
Getting back to the two questions, how will you answer them if you are required to but do not file forms 1099? It doesn't take a genius to know that the IRS is not asking these questions for their health. Keep in mind that when you sign your tax return, you are doing it under penalties of perjury, so you do not want to give a false answer. I would love to hear your thoughts on this, so please comment if you have any. I will provide more information as it becomes available. And by the way, these questions also appear on the 2011 partnership tax return form 1065. S Corporation form 1120 S has not yet been released for 2011, but I suspect the question will also appear on it.
Next time, I will discuss the new basis reporting requirements on Schedule D and new form 8949, which requires disclosure of whether or not basis was reported to you on form 1099, and potentially requires the filing of six different forms 8949 to comply with these reporting requirements. Like I said, it is getting really ugly.
Please contact us if you have any questions or we can be of assistance in any way.
November 23, 2011
Thanksgiving Thoughts
As the holidays approach, our thoughts turn to how fortunate we are, and how we can help those who are truly in need of assistance. Although KRS provides generous financial support to many worthwhile causes, there are three special causes that we support with direct involvement, that is, providing pro-bono accounting, tax, and when needed, consulting services. Each of these charities is operated for the benefit of the needy; no one who manages or works for these charities receives compensation of any kind. With cutbacks in government programs, these and other charities fill a need that is greater than ever before. It is our hope that you will pause for a moment and think about how you can help, whether it be with financial support or volunteering your time.
The Gardiner Foundation http://thegardinerfoundation.org/ was founded in the Bronx by Dexter Gardiner, in memory of the loss of six family members in a horrific car accident. Since organizing the Foundation, Dexter has worked tirelessly for its cause, also making up financial shortfalls with his limited resources. The Gardiner Foundation supports the Bronx community, providing college scholarships, computers, school supplies, burial assistance, mentoring and guidance. This week, Dexter gave out over 200 free turkeys to help need families celebrate Thanksgiving. The Gardiner Foundation's main fund raiser is a basketball tournament that takes place each August. Please visit the website to learn more about the Gardiner Foundation and how to contribute.
The Wells Mountain Foundation http://www.wellsmountainfoundation.com/ was organized and is run by our good friend Tom Wells. This Foundation provides funding and support in the areas of education, literacy, and the arts, primarily in the developing world. During 2011, 28 new scholarships were awarded from 982 applications, bring the total to over 40 scholarships in more than a dozen developing countries. After the Haitian earthquake, The Wells Mountain Foundation stepped up in a big way, providing food and clothing to the victims. Please visit the website to learn more about the Wells Mountain Foundation and how to contribute.
Although the Zabota Foundation does not yet have a website, it does help fill an urgent need for semi-independent housing for disabled adults. In New Jersey, the waiting list for this type of housing is several years long, but the need continues to grow. This Foundation is run by Errol Seltzer, who has devoted his life to helping the elderly and disabled. Thanks to the donation of a house by a generous contributor, the Zabota Foundation now houses four disabled adults, allowing them to live independently with assistance when needed. But this is only the beginning. Additional funds are needed to continue Zabota's worthwhile mission. If you are inclined to contribute to this cause, please send me an email and I will help arrange it.
Whether it is by time or money, to one of the charities described above or another, please consider helping those less fortunate than you. Helping others is truly rewarding. As so eloquently stated by Mahatma Gandhi, "You must be the change you want to see in the world."
Maria, Brad, and I want to thank our employees, our clients, our friends, and our families, and extend our best wishes to all. Although we don't say it nearly often enough, we are truly thankful for all of these relationships. Happy Thanksgiving!
The Gardiner Foundation http://thegardinerfoundation.org/ was founded in the Bronx by Dexter Gardiner, in memory of the loss of six family members in a horrific car accident. Since organizing the Foundation, Dexter has worked tirelessly for its cause, also making up financial shortfalls with his limited resources. The Gardiner Foundation supports the Bronx community, providing college scholarships, computers, school supplies, burial assistance, mentoring and guidance. This week, Dexter gave out over 200 free turkeys to help need families celebrate Thanksgiving. The Gardiner Foundation's main fund raiser is a basketball tournament that takes place each August. Please visit the website to learn more about the Gardiner Foundation and how to contribute.
The Wells Mountain Foundation http://www.wellsmountainfoundation.com/ was organized and is run by our good friend Tom Wells. This Foundation provides funding and support in the areas of education, literacy, and the arts, primarily in the developing world. During 2011, 28 new scholarships were awarded from 982 applications, bring the total to over 40 scholarships in more than a dozen developing countries. After the Haitian earthquake, The Wells Mountain Foundation stepped up in a big way, providing food and clothing to the victims. Please visit the website to learn more about the Wells Mountain Foundation and how to contribute.
Although the Zabota Foundation does not yet have a website, it does help fill an urgent need for semi-independent housing for disabled adults. In New Jersey, the waiting list for this type of housing is several years long, but the need continues to grow. This Foundation is run by Errol Seltzer, who has devoted his life to helping the elderly and disabled. Thanks to the donation of a house by a generous contributor, the Zabota Foundation now houses four disabled adults, allowing them to live independently with assistance when needed. But this is only the beginning. Additional funds are needed to continue Zabota's worthwhile mission. If you are inclined to contribute to this cause, please send me an email and I will help arrange it.
Whether it is by time or money, to one of the charities described above or another, please consider helping those less fortunate than you. Helping others is truly rewarding. As so eloquently stated by Mahatma Gandhi, "You must be the change you want to see in the world."
Maria, Brad, and I want to thank our employees, our clients, our friends, and our families, and extend our best wishes to all. Although we don't say it nearly often enough, we are truly thankful for all of these relationships. Happy Thanksgiving!
September 6, 2011
New Jersey Will Follow Federal Tax Relief for Hurricane Irene Victims
On September 1, 2011, the New Jersey Division of Taxation announced that it is following the federal guidlines for tax relief for victims of Hurricane Irene. Taxpayers who reside or have a business in a designated Presidential Disaster Relief Area will now have until October 31, 2011 to file their New Jersey tax returns such as individual income tax, corporation business tax, sales tax inheritance tax, estate tax, partnership and other business taxes admininstered by the Division of Taxation.
The Presidential Disaster Relief Area consists of Bergen, Essex, Morris, Passaic, and Somerset counties. Should the President expand the scope of the disaster declaration the Division will append their notice to include additional counties.
This announcement also extends to October 31 the due date for all payments which have an original or extended due date on or after August 27, 2011 and on or before October 31, 2011. Estimated tax payments for the third quarter of 2011 are now due October 31, 2011 instead of September 15, 2011.
Please contact us or post a comment if you have any questions on this announcement.
The Presidential Disaster Relief Area consists of Bergen, Essex, Morris, Passaic, and Somerset counties. Should the President expand the scope of the disaster declaration the Division will append their notice to include additional counties.
This announcement also extends to October 31 the due date for all payments which have an original or extended due date on or after August 27, 2011 and on or before October 31, 2011. Estimated tax payments for the third quarter of 2011 are now due October 31, 2011 instead of September 15, 2011.
Please contact us or post a comment if you have any questions on this announcement.
September 1, 2011
Tax Filing Due Date Extended
The IRS announced today that the tax filing deadline for certain taxpayers has been extended to October 31. The affected taxpayers include corporations and businesses that have previously received September 15 extensions, and individuals that have previously received October 17 extensions. It also includes third quarter 2011 estimated tax payments, which would normally be due September 15.
This relief applies to New Jersey residents of Bergen, Essex, Morris, Passaic and Somerset Counties, and certain counties and municipalities in New York, North Carolina, and Puerto Rico. Check the IRS website for further details and information.
Be aware that as of now, no state has announced similar due date relief. This may be especially troublesome to business taxpayers who file in many states, because some states require copies of the federal tax return as part of their filing. Although I expect that New York and New Jersey will follow the IRS and extend the filing and payment due date, we have many clients who file in states not affected by the hurricane. It is not likely that those states will extend the due date.
Although Hurricane destruction in Vermont received a lot of television coverage, the initial IRS announcement does not extend the tax due date for any Vermont residents. It is not clear why Vermont residents received no relief.
Please contact us if you have questions or we can be of any assistance.
This relief applies to New Jersey residents of Bergen, Essex, Morris, Passaic and Somerset Counties, and certain counties and municipalities in New York, North Carolina, and Puerto Rico. Check the IRS website for further details and information.
Be aware that as of now, no state has announced similar due date relief. This may be especially troublesome to business taxpayers who file in many states, because some states require copies of the federal tax return as part of their filing. Although I expect that New York and New Jersey will follow the IRS and extend the filing and payment due date, we have many clients who file in states not affected by the hurricane. It is not likely that those states will extend the due date.
Although Hurricane destruction in Vermont received a lot of television coverage, the initial IRS announcement does not extend the tax due date for any Vermont residents. It is not clear why Vermont residents received no relief.
Please contact us if you have questions or we can be of any assistance.
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