Reed Tinsley, CPA

Unreasonably Low Wages by S Corporation Court Case Could Impact Physician Practices

If you are a physican practice organized as an S Corporation, pay attention to the recent tax court case below if you are paying the shareholder(s) low salary and high distributions:

The CPA taxpayer replaced his individually held partnership interest in an accounting firm with his 100% owned S corporation. For the audit years, the accounting firm paid $24,000 in compensation and made profit distributions of $203K and $175K to the taxpayer through his S corporation. An IRS expert estimated the FMV of taxpayer's accounting services to be $91K per year. The 8th Circuit upheld the District Court's findings (1) that the taxpayer was a qualified accountant with an advanced degree and 20 years experience, (2) who worked 35–45 hours per week as a primary earner in a reputable firm with substantial gross earnings, and (3) a $24,000 salary is unreasonably low compared to other similarly situated accountants. David Watson PC v. U.S ., 109 AFTR 2d 2012-XXXX (8th Cir.).

New Way to Report Capital Gains and Losses for 2011

In most cases, taxpayers now use new Form 8949 to report capital gain and loss transactions. Schedule D, the form traditionally used to show these individual transactions, is now used as a summary sheet, reporting amounts for total sales price, basis and other adjustments for all individual transactions, and for figuring the tax. For securities both bought and sold in 2011, the Form 1099-B, issued by the broker, normally shows the taxpayer’s basis. The information on this form will help taxpayers correctly fill out Form 8949. See the instructions for Form 8949 and Schedule D for details.

IRS Releases Factsheet that Summarizes 2011 Tax Changes

The IRS reminded taxpayers (see www.irs.gov/newsroom/article/0,,id=251837,00.html ) of several available benefits and new reporting requirements for the 2011 tax return, including: (1) the nonbusiness energy credit up to a $500 maximum, but reduced by amounts claimed in prior years, (2) the second of 15 annual repayment installments is due where the first-time homebuyer credit was claimed for a 2008 purchase and must be reported on Form 1040, Line 59b, (3) capital gain and loss transactions are now reported on Form 8949 with Schedule D used as a summary sheet, (4) all income from a 2011 Roth IRA conversion must be included on the 2011 return, and (5) the self-employed (SE) health insurance deduction cannot be used to reduce income in computing the SE tax.

Six Year-End Tips to Reduce 2011 Taxes

The IRS wants to remind all taxpayers that with the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits. Here are six tax-saving tips for you to consider before the calendar turns to 2012:

1. Make Charitable Contributions – If you itemize deductions, your donations must be made to qualified charities no later than Dec. 31 to be deductible for 2011. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn't paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.

2. Install Energy-Efficient Home Improvements – You still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation, new windows and water heaters to your main home can provide up to $500 in tax savings. Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment. The credit equals 30 percent of the cost of qualifying solar, wind, geothermal, or heat pump property. For details see Special Edition Tax Tip 2011-08, Home Energy Credits Still Available for 2011 on the IRS.gov website.

3. Consider a Portfolio Adjustment – Check your investments for gains and losses and consider sales by Dec. 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income. If your net capital losses are more than $3,000, the excess can be carried forward and deducted in future years.

4. Contribute the Maximum to Retirement Accounts – Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2011 must be made by Dec. 31. However, you have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. You normally can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is also available to low- and moderate-income workers who voluntarily contribute to an IRA or workplace retirement plan. The maximum Saver’s Credit is $1,000, and $2,000 for married couples, but the amount allowed could be reduced or eliminated for some taxpayers in part because of the impact of other deductions and credits.

5. Make a Qualified Charitable Distribution – If you are age 70½ or over, the qualified charitable distribution (QCD) allows you to make a distribution paid directly from your individual retirement account to a qualified charity, and exclude the amount from gross income. The maximum annual exclusion for QCDs is $100,000. The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs in 2011. This benefit is available even if you do not itemize deductions.

6. Don't Overlook the Small Business Health Care Tax Credit – If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid. An employer with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify. For more information see the Small Business Health Care Tax Credit page on IRS.gov.

And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.
For more year-end tax information and to access all IRS forms and publications, visit the IRS website at http://www.irs.gov.

Six Year-End Tips to Reduce 2011 Taxes

The IRS wants to remind all taxpayers that with the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits. Here are six tax-saving tips for you to consider before the calendar turns to 2012:

1. Make Charitable Contributions – If you itemize deductions, your donations must be made to qualified charities no later than Dec. 31 to be deductible for 2011. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn't paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.

2. Install Energy-Efficient Home Improvements – You still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation, new windows and water heaters to your main home can provide up to $500 in tax savings. Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment. The credit equals 30 percent of the cost of qualifying solar, wind, geothermal, or heat pump property. For details see Special Edition Tax Tip 2011-08, Home Energy Credits Still Available for 2011 on the IRS.gov website.

3. Consider a Portfolio Adjustment – Check your investments for gains and losses and consider sales by Dec. 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income. If your net capital losses are more than $3,000, the excess can be carried forward and deducted in future years.

4. Contribute the Maximum to Retirement Accounts – Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2011 must be made by Dec. 31. However, you have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. You normally can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is also available to low- and moderate-income workers who voluntarily contribute to an IRA or workplace retirement plan. The maximum Saver’s Credit is $1,000, and $2,000 for married couples, but the amount allowed could be reduced or eliminated for some taxpayers in part because of the impact of other deductions and credits.

5. Make a Qualified Charitable Distribution – If you are age 70½ or over, the qualified charitable distribution (QCD) allows you to make a distribution paid directly from your individual retirement account to a qualified charity, and exclude the amount from gross income. The maximum annual exclusion for QCDs is $100,000. The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs in 2011. This benefit is available even if you do not itemize deductions.

6. Don't Overlook the Small Business Health Care Tax Credit – If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid. An employer with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify. For more information see the Small Business Health Care Tax Credit page on IRS.gov.

And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.
For more year-end tax information and to access all IRS forms and publications, visit the IRS website at http://www.irs.gov.

2012 IRS mileage rates are out

The rates are:

• 55.5 cents per mile for business miles driven;
• 23 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service to charitable organizations.

The business rate is the same as the mid-2011 adjustment that took effect on July 1. The rate for medical and moving miles actually fell by 0.5 cents per mile.

Health Professionals' Student Loan Repayments

Effective for amounts received after 1/1/09, IRC Sec. 108(f)(4) authorizes an income exclusion for amounts received under a state loan repayment program or loan forgiveness program that is intended to increase the availability of health care services in areas that a state determines are underserved or have a shortage of health professionals. In this legal memo, the IRS determined that loan repayments received by participants in a state program designed to encourage healthcare professionals to perform services in underserved areas are excludable from income under this provision. The repayments are not wages, are not subject to income tax withholding or employment taxes, and are not subject to Form W-2 or Form 1099.

Reporting employer health care coverage on Form W-2

From the Internal Revenue Service:

An Oct. 31 webinar will explain the Affordable Care Act provision that requires some employers to report health care coverage on Form W-2.

Related links:

• IR-2011-31, IRS Issues Interim Guidance on Informational Reporting of Employer-Sponsored Health Coverage
• Employer-Provided Health Coverage Informational Reporting Requirements: Frequently Asked Questions

Sale of a professional practice

In this case, the 9th Circuit affirmed a District Court's finding that amounts received by the taxpayer for personal goodwill from the sale of his dental practice should be treated as the sale of a corporate asset with a subsequent dividend distribution. In the same year the taxpayer incorporated his dental practice he entered into a covenant not to compete with the solely-owned corporation. The courts denied him capital gain treatment for proceeds from the sale allocated to personal goodwill because, as an employee of the corporation with a covenant not to compete, any goodwill generated from his professional work belonged to the corporation. The patient relationships were personal, but the economic value of those relationships did not belong to the taxpayer since he had conveyed them to the corporation. Howard v. U.S., 108 AFTR 2d 2011-XXXX (9th Cir.).

Physican Practices and the Small Business Health Care Credit

As the deadline for filing extended 2010 tax year returns approaches, the IRS encourages small employers to verify whether they are eligible for the new Small Business Health Care Tax Credit. The credit is designed to help small businesses and tax-exempt organizations that primarily employ 25 or fewer workers with average income of $50,000 or less. Employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the credit. For tax year 2010, eligible small businesses with no tax liability can carry back unused general business credits (including the small employer health care tax credit) five years, instead of the previous one year carryback period. Furthermore, businesses that locked into health insurance plan structures and contributions for 2010 (and so could not make any needed adjustments to qualify for the credit for 2010) may be eligible to claim the credit on 2011 or later year returns.