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As the Democrats took control of the House and Senate in Congress, they promised a flurry of legislation in the first 100 hours of office. One of the efforts was to go after big oil.

Energy costs that last few years have certain come front and center for most of us. Gas prices are way up, a fact that puts a crimp in the disposable income of a lot of people. To make matters more aggravating, the big oil companies have been reporting record profits. This one-two punch certain created a political climate where such companies were ripe for attack and the new Democrat majority is following through on promises to cut some of the government breaks given to big oil by the Republican majority of the last Congress.

The first issue on the plate is the 6.5 billion dollars in tax breaks given oil companies. The money comes from a tax deduction given to big oil for oil production and refinement from 2004 through 2014. The ironic thing? The oil companies never asked for the tax breaks. In fact, the Chairman of ExxonMobil even testified before Congress in this regard. For some reason, the breaks were passed anyway. Welcome to the concept of government waste. The Democrats are certainly no strangers to blowing money in odd and unique ways, but they seem determined to reduce this mistake by their predecessors.

The second issue has to do with the oil drilling in the Gulf of Mexico. When an oil company wishes to drill on land owned by the federal government, it is supposed to pay royalties on the oil produced. The underwater terrain in the Gulf of Mexico qualifies as such. Alas, somebody in the government failed to include the proper royalty language in the leases signed by various oil companies for the Gulf.

The way the leases are written, the oil companies must pay royalties on the price of crude oil at the time the agreements were entered. There is no language about the royalty being reconfigured as the price of oil goes up. This is standard language for any government lease of this sort. The total lost tax revenue? About 10 BILLION dollars. Oops!

To remedy the lease problem, Congress is threatening to change the underlying law governing them. In truth, most oil companies are already coming on board with the idea of changing the agreements. Five have done so already and the remaining 45 are expected to do so soon. The new tax revenues will be put into an account used to fund research into renewable energy sources. While this is a noble goal, one can predict a good chunk of the money will be wasted because we are talking about the government after all.

By: Richard Chapo

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Guess what my friends; a new tax law is upon us once again. What seems frustrating for some is but another day at the office for those of us in the business of looking out for new tax laws.

For 2010, there is no Federal Estate Tax but keep in mind that it returns in 2011 with a reduced exemption in the amount of $1 million. It would be advisable to make sure that your estate plan is current. The year 2010 is also the year for converting traditional IRA’s to Roth IRA’s. Should you or shouldn’t you is always the question that needs to be answered. As always with tax and financial planning, the decision depends on many factors (see my article:”Converting Traditional IRA’s to Roth IRA’s”).

Also in 2010, there is a new credit for small employers providing healthcare to its employees. The credit is available to “for profit businesses” as well as for tax exempt entities. The credit to be taken by the for profits is part of the general business credit which makes it subject to income tax due as well as the alternative minimum tax limitations. The credit is calculated by multiplying the lesser of employer provided insurance premiums or the premium limits established by the Health and Human Services Secretary, by 35%. The credit is allowed to the extent that the business’ average compensation is not greater than $50,000.

In fact, the credit is phased-out between $25,000 and $50,000. In addition, the small employer begins a credit phase out between 10 and 25 employees. It is important to note that 5% or more owners of corporations, and 2% or more owners of subchapter S corporations, do not count in the average salary and number of employees computation. In addition, in order to calculate the number o fulltime equivalent employees (FTE’s), the entity divides the total number of hours worked by employees (not including the employee group excluded from the calculation mentioned above) by 2,080 hours.

If there are 15 employees working 25,000 hours in 2010, the calculated number of FTE’s would be 12. What about looking at an example? Suppose that the employer pays 80% of the cost of insurance for employees. The premiums at 80% for 2010 are $20,000. This just happens to agree with HHS’ assessment of premiums for 2010. The average salary for the 15 employees for 2010 is $30,000 (again, not including the employee owner groups mentioned above). The raw credit calculation is $7,000 ($20,000 times 35%). The phase out of the credit is as follows:

$7,000 x 2/12 for number of employees $1,167
$7,000 x $5,000/$25,000 for average wages $1,400
The total credit is then reduced to $4,433 ($7,000-$2,567).
Are we done yet; of course not? Remember, this credit is part of the general business credit and is subject to those limitations as well.

The credit for 2010 through 2013 is 35%. It is raised to 50% after 2013. For tax exempt entities, the credit is calculated the same way. However, the credit percentage is 25% for 2010 through 2013 (as opposed to 35%) and 35% after 2013 (as opposed to 50%). The phase out rules are the same as for profit businesses. From our previous example, the credit is $3,167 ($5,000-$1,833) after substituting 25% for 35%. The good news is that the credit is refundable; which means the rules of the general business credit do not apply.

The tax exempt entity is however, faced to deal with a limitation. This limitation is based on the amount of payroll taxes (federal withholding taxes, plus Medicare tax withheld, and the matching Medicare paid by the employer). If the payroll tax limitation is calculated to be $28,050, the entire credit of $3,167 can be taken. Presumably, IRS will be devising a new form 990 to accommodate taking this credit.

Also in 2010, there is a payroll tax holiday for hiring unemployed workers. For qualified workers hired beginning on March 19, 2010 and ending on December 31, 2010, the matching Social Security payment made by employers is suspended (The OASDI tax at 6.2%). This is true for both profit and not for profit entities. The reduction is claimed on the quarterly 941 form.

There is also a credit for hiring unemployed workers providing they have been on your payroll for a 52 week period. This will mean that the credit is not actually available until 2011. The credit is based on the 6.2% QASDI tax not to exceed $1,000 per qualifying employee. If there is one qualifying employee at $30,000 per year, the OASDI would be $1,860 ($30,000 times 6.2%). In this case, the credit is limited to $1,000. The credit is part of the general business credit and subject to those limitations. This rule also applies to tax exempt entities meaning that there must be a tax liability in order for the credit to be taken (990T). This is different from the health insurance credit available to tax exempt entities on a refundable basis.

Well my friends that is the short of it all. Tax planning takes on a new wrinkle as we move from 2010 into 2011. The time to begin tax planning is right now. Remember, you can do whatever you want, but my way is better.

Ron Piner, CPA
Senior Tax Manager
Saggar & Rosenberg, PC
ronp@sr.cpa.pro

By: Ron Piner

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More than a few people prefer to form corporations to protect their businesses, but look for a more favorable tax situation. The answer, of course, is the S-corporation.

For a long time, corporations were the dominant business entity available to most business. With their rigid rules protecting shareholders from personal liability for the debts of the business, they were a smart and popular choice. The downside of the corporate entity, however, had to do with taxes. Simply put, a double taxation situation arose because the corporation had to pay taxes on its profits and then the shareholders had to also pay taxes on their dividends and earnings.

The IRS eventually got around to dealing with the double taxation issue. Well, Congress did. Instead of changing how the corporation was taxed, Congress enacted Subchapter S of the internal revenue code. This section, of course, lends its title to the name of the “S” corporation.

The goal with the new tax code section was to give small business a break when they used corporations. Instead of dealing with double taxation issues, small businesses could elect to be treated differently. By electing to be an S-corporation, they could pass through the finances of the business to their personal tax returns much like a partnership. This is not a tax article per se, so the important thing to understand is the tax burden is less with the S election.

In passing the code, Congress also limited the situations in which it could be used. The restrictions are fairly basic. You can have no more than 75 shareholders. The shareholders can be individuals, but not LLCs or C corporations. Congress also required you to show your cards early on your designation. You have 2 months and 15 days from formation to declare your S status by filing form 2553 with the IRS.

You will note from the above discussion, there is no mention of states. This is because the S corporation is purely a federal tax issue. Many states do not even recognize that S corps exist for tax purposes, meaning they tax it exactly like a C corporation. Obviously, you will have to check your states view on the matter.

Regardless, the important thing to tax from this article is the S-corporation is largely a tax issue on the federal level. When it comes to forming the entity in your state, you just file the basic corporation papers required by your secretary of state. The S election is then made with the IRS.

By: Richard Chapo

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Getting married is a glorious event, certainly one of the most important in your life. That being said, the sheer joy involved can easily result in missing out on some practical issues that can pop up. This includes remembering to handle some administrative things with your taxes.

While all your friends and family know you are getting married, you dear friends at the IRS do not! You probably could not care less, but it can lead to problems. For instance, you might file taxes in the coming year under a different or modified name. This will be tagged in the IRS computer, but probably will not be updated for a year or two. As a result, the IRS might not acknowledge getting your return or might send any refund to an older address. Neither is a good thing! So, what should you do?

The first step is not to contact the IRS. Odd, eh? The agency you need to contact is the Social Security Administration. The IRS tracks individuals through social security numbers, so getting your information updated with the Administration using form SS-5 is the way to go. Many people don’t do this and a huge mess can result as social security withholdings in paychecks are applied to the wrong account and so on. The form is incredibly easy to fill out, so just take the 5 minutes to do it.

The second step is to notify the IRS of any address change. This should also be done with your employer. Regardless, sending direct notice to the IRS will help prevent any major problems with notices and refund checks going to old addresses.

The third and final step actually is not mandatory, but it should be undertaken. As a married couple, you are now probably a two income family. Why does this matter? Well, your combined income may bump you up into a higher tax bracket. This can result in a bad surprise when you hit the end of the year and find out you owe a sizeable chunk of change to the IRS and probably your state tax agency as well. Take the time to sit down and go through your new financial situation. If necessary, adjust your withholdings so that you avoid owing money when the 15th comes around.

Taxes are the last thing newlyweds want to deal with. That is certainly understandable. Enjoy your wedding and honeymoon. Just make sure you take a few minutes to deal with these issues when you get back so you don’t run into problems down the line.

By: Richard Chapo

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