Tax Summary: The American Jobs Act

Last week President Obama unveiled The American Jobs Act, a multi-faceted plan to boost the nation’s employment. Here are the tax provisions included in the proposal:

Employer Payroll Tax Cut
For 2012, the American Jobs Act would cut the employer Social Security tax rate from 6.2% to 3.1% on wages up to $5 million. Additionally, any increase in wages from 2011 (up to a maximum of $50 million) would be completely exempt from Social Security taxes.

Employee Payroll Tax Cut
The employee Social Security tax rate, typically 6.2%, is currently 4.2%. The American Jobs Act would further reduce this percentage to 3.1% for 2012.

Bonus Expensing Extension
100% expensing of qualifying business equipment purchases is scheduled to expire at the end of 2011. The American Jobs Act would extend this provision until the end of 2012.

Targeted Employer Credits
$4,000 for hiring long-time unemployed workers
$5,600 for hiring long-time unemployed veterans
$9,600 for hiring long-time unemployed veterans with service-related disabilities

Additionally, the proposal includes non-tax provisions that include infrastructure modernization, wireless internet expansion, and unemployment insurance expansion. The Obama Administration estimates the price tag to be $447 billion. This will add to the $1.5 trillion in deficit reductions that the Congressional “super committee” is tasked with identifying. Obama’s stated intent is for this proposal to be paid by big business and high income individuals.

Posted in Federal Deficit Reduction, Federal Tax Legislation, Taxation | Leave a comment

2011/2012 Year-End/Year-Round Tax Planning Guide

At Dent, Baker & Company, LLP, we are committed to being your most trusted advisor. Our tax professionals are dedicated to providing comprehensive methods for determining tax-saving strategies, helping you accomplish your financial goals and preserve your family’s wealth. To that end, enclosed please find our 2011/2012 Year-End/Year-Round Tax Planning Guide.

As you read through this guide, you’ll find helpful explanations of the current federal tax rules, tax tables and even worksheets. Use these tools to make a preliminary estimate of your 2011 taxable income and make note of the dozens of tips for lowering your personal and business taxes.

The tax-saving ideas in this booklet are offered as suggestions only. As you begin to consider your individual and business tax planning needs, we encourage you to contact us concerning your specific situation before choosing any of the methods outlined.

Dent, Baker welcomes the opportunity to provide you with guidance and help you maximize your income through effective implementation of tax-saving strategies. Please contact our office if you have questions or wish to review your specific tax situation and determine whether a particular planning strategy is right for you.

The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.
Posted in Federal Tax Legislation, Taxation | Leave a comment

2009 Jefferson County Occupational Tax Refund Update: Employer Reporting Extension Granted

According to The Birmingham News, the judge presiding over the 2009 Jefferson County Occupational Tax refunds has granted an extension for employers to report the employment data required by the Special Administrator to compute employee refunds. The extended deadline is September 15th. For additional information on the employer reporting requirements, please refer to our previous post regarding the settlement guidelines.

Posted in Taxation | Leave a comment

The Tax Case for Investing in Your Business Now

Businesses can deduct most asset purchases over periods ranging from 3 to 15 years. However, in recent years, businesses have been able to deduct most, if not all, of the cost of these same assets in Year 1 thanks to two key tax provisions – the Section 179 business expensing election and bonus depreciation. After next year, these “Year 1” deductions will pretty much be a thing of the past.

Section 179 of the Internal Revenue Code allows businesses to offset current year income with an immediate deduction for qualifying asset purchases up to a certain threshold amount. In 2011, this amount is $500,000. What this means is that if you pay tax at the highest federal rate of 35%, then $175,000 of the $500,000 in asset purchases is funded by tax savings.

Section 179 is an effective way to invest in a growing business while minimizing taxable income in those high growth years. However, beginning in 2012, the expensing availability declines significantly to $125,000 and then again in 2013 to $25,000.

Bonus depreciation allows a business to write off a certain percentage of the asset’s cost “off the top” prior to regular depreciation. Since roughly the fourth quarter of 2010 and continuing through the end of this year, the write off percentage is 100%, which means a business can use bonus depreciation to fully deduct the cost of a qualifying asset purchase in the first year. This percentage falls to 50% in 2012. In 2013, bonus depreciation is eliminated.

There are a few of key differentiators between Section 179 expensing and bonus depreciation:

  • Bonus depreciation is applicable to new asset purchases only. Section 179 expensing applies to new and used asset purchases.
  • Bonus depreciation can create a tax loss which may be carried back to recover tax dollars paid in a prior year. Section 179 expensing is limited to current year income and, thus, cannot be used to create a loss.
  • Section 179 expensing is subject to an investment limitation above which the expensing amount is reduced dollar for dollar ($2 million in 2011). Bonus depreciation has no investment limitation.

Since the tax benefits of these two tax provisions will soon be significantly curtailed, we recommend businesses evaluate their capital expenditure needs now. If certain capital expenditures will be necessary within the next three to five years, the shorter recovery of those tax benefits this year and next might make an acceleration of those purchases more attractive than waiting.

Posted in Cash Flow Management, Federal Deficit Reduction, Federal Tax Legislation, Taxation | Tagged , , , | Leave a comment

Individual and Business Income Tax Overhaul Taking Shape

As the debate continues over raising the federal debt limit, lawmakers have also turned their attention to how individual and business income taxes can be overhauled to reduce the federal deficit. As usual, these discussions will center on who pays and how much.

Currently, individuals pay tax across six rate brackets ranging from 10% to 35%. A proposal currently garnering bipartisan support would collapse the six brackets into three – 12%, 22%, and 29%. These new rates are consistent with the recommendation of President Obama’s deficit reduction panel.

On its face, this appears to be a big win for supporters of low taxes and tax simplification; however, this same plan proposes a limitation on certain deductions that, for many taxpayers, would drive effective tax rates up. The primary targets are mortgage and home equity loan interest and charitable contributions of high income taxpayers. Additionally, this plan would lower the annual deductible amount of retirement plan contributions.

On the business tax side, the story is the same – reduced tax rates and broadened tax base. The top corporate rate, currently 35%, would fall to between 23% and 29%. This rate reduction would be funded by the elimination of the Domestic Production Activities Deduction (DPAD), less favorable depreciation rules, and a scale back or elimination of the R&D credit. These concessions will certainly set off a fight between small businesses that benefit greatly from DPAD, generous depreciation, and the R&D credit and large corporations that view a lower corporate tax rate as essential to effectively competing in the global marketplace. We discussed this dynamic in greater detail back in March.

Bear in mind that any overhaul in individual and business income tax will result in greater revenue to the Federal government. Also bear in mind that the Federal government will collect this additional revenue from those with the greatest ability to pay – high income taxpayers. The silver lining is that no legislator would dare push through a big tax increase ahead of an election, so we are probably looking at a 2013 implementation at the earliest.

Posted in Federal Deficit Reduction, Federal Tax Legislation, Taxation | Leave a comment

Keys to Effective Business Cash Flow Management

Plain and simple, businesses fail when they run out of cash. Depending on their attractiveness to lenders and the equity markets, some businesses may exist for many years without generating the first dollar of cash. But at some point, every business has to generate cash to survive, and this basic tenet of business holds true regardless of whether you run a Fortune 500 company or a shaved ice stand.

But positive cash flow is difficult to achieve, especially in a recession economy. Most businesses pay expenses well in advance of service delivery and invoicing to their customers. Accounting for this time lag between cash going out and cash coming in requires careful planning and attention.

Cash flow management in a professional services firm can be particularly challenging. Assume the following facts:

  • Your firm accumulates time on a project for 60 days before the project is invoiced and delivered to your customer.
  • Your customer then remits payment, but only after another 60 days has passed.
  • Your project and overhead payables are due every 30 days, and you pay your employees on a semi-monthly basis.

In this scenario, you have paid four months of expenses between project inception and collection! In prosperous times, this time lag is masked by volume (i.e. robbing Peter to pay Paul), but in recession conditions, this cash flow scenario can kill your business.

Because it is much easier to change your internal processes than it is to get your customers to pay faster, here are a few observations on how to close that cash flow gap from an invoicing perspective:

  • Bill regularly. I am surprised at the number of business owners who delay billing or simply bill irregularly. Your best opportunity to collect is when your service is fresh in the mind of your customer. Billing quickly and regularly will improve collections and lessen the risk of unknowingly providing additional services to a customer who is unwilling or unable to pay.
  • Fix any problems with the system. Flowcharting your service delivery and invoicing processes will allow you to identify inefficiencies and bottlenecks. Eliminating unnecessary steps in the process can shorten the collections cycle by days, weeks, or even months.
  • Set a monthly goal for getting invoices out and hold yourself and others accountable for meeting that goal. We close each billing cycle on the last Saturday of the month, and require that customer invoices be mailed by the following Wednesday. Meeting this deadline is the top priority in our firm, even in the busiest of times.
  • Review invoice formatting. Does the invoice clearly state when payment is due and who to contact for questions?

Regarding collections, regular contact and follow up is vitally important. If payment is due within 30 days, don’t wait 90 days or more to initiate contact. Collection issues do not age well, and so it is best to handle these matters while they are current. Here are a few thoughts on how to improve the collections – most come from clients or others who have honed their processes:

  • Develop a collections process and put someone in charge. The steps should be well-defined and documented. Know what you will do first, second, and third when the check doesn’t hit the mailbox on the due date. We represent a firm whose owner and controller meet each week to review and discuss receivables, which is an excellent way to keep collections on the radar.
  • Consider extra measures for larger invoices and/or slow pay customers. Another client of ours calls customers to confirm receipt of the invoice and to review any questions his customers might have. The company places another call several days before the invoice due date to again handle any questions and, more importantly, to gain clarity on whether timely collection will be a problem. This may be overkill on every customer but should be considered as an additional measure for large invoices and/or new customers.
  • If you have doubts about a customer’s ability to pay, take action. Think of your business as the bank – would you loan this customer money? If not, it may be time to lower the customer’s credit limit or revise payment terms. Securing advance payment before beginning additional work is one way to limit your exposure with a customer that you deem to be a credit risk.

Cash flow management is the key to business survival, and refining your business’s invoicing and collections procedures is essential to maintaining or improving the financial health of your business. Implementing some or all of these strategies will have an immediate impact on your business’s cash position.

Posted in Cash Flow Management, Positive Cash Flow | Leave a comment

IRS Announces Mid-Year Mileage Rate Increase of 4.5 Cents

The IRS has announced an increase in the optional standard mileage rates for the final six months of 2011 [IR-2011-69, 6-23-11; www.irs.gov/newsroom/article/0,,id=240903,00.html]. Citing “recent gasoline price increases,” the IRS has increased the standard business mileage rate from 51 cents to 55.5 cents a mile for all business miles driven from July 1 through December 31, 2011. The rate for deductible medical or moving expenses is increased from 19 cents to 23.5 cents a mile. Note: The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

The mileage rate may be used to compute the deductible cost of operating a passenger car (also vans, pickups, or panel trucks) for business purposes. It may also be used by employers to reimburse employees for business use of their personal vehicles and to determine the amount that needs to be imputed to an employee’s income for personal use of certain company-owned or leased nonluxury vehicles.

Mileage Rate Changes

 

Purpose

Rates 1/1 through 6/30/11

Rates 7/1 through 12/31/11

Business

51

55.5

Medical/Moving

19

23.5

Charitable

14

14

Posted in Taxation | Leave a comment