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Looking Back:
Top 10
Federal Tax Developments of 2011
 Looking
back over 2011, the IRS, Congress and the courts made many tax
decisions impacting taxpayers of all types. Some tax
developments were taxpayer-friendly; others imposed new
requirements on taxpayers. Here is a brief rundown of the top
10 federal tax developments of 2011.
1. Bush-era tax cuts unresolved
Reduced individual income tax rates, marriage penalty
relief, an enhanced child tax credit, and much more are part
of a package of tax breaks known as the "Bush-era tax cuts."
All of these incentives were renewed in 2010 and are scheduled
to expire after 2012. President Obama wants to allow the
Bush-era tax cuts to expire for higher income individuals,
which the White House broadly defines as single persons with
incomes over $200,000 and families with incomes over $250,000.
In the summer of 2011, the White House and the GOP reportedly
came close to an agreement but nothing materialized. The fate
of the Bush-era tax cuts will likely be one of the major
issues in the 2012 presidential election.
 2.
Foreign account reporting oversight increases
Since passage of the Foreign Account Tax Compliance Act (FATCA)
in 2010, the Treasury Department and the IRS have ratcheted-up
their oversight of foreign accounts. In December 2011, the IRS
issued final Form 8938, Statement of Specified Foreign Assets,
which taxpayers will file to report foreign accounts (if they
meet certain requirements). The IRS also issued guidance in
2011 for foreign financial institutions about their reporting
obligations under FATCA. In related news, the Treasury
Department issued final rules on Form TD-F 90-22.1, Report of
Foreign Bank and Financial Accounts (FBAR) in February 2011.
Lastly, the IRS launched a new campaign in 2011 to encourage
taxpayers to voluntarily disclose unreported offshore
accounts. The 2011 Offshore Voluntary Disclosure Initiative (OVDI)
rewarded taxpayers who came forward voluntarily with a reduced
penalty framework (although not as generous as a similar
program in 2009).
3. Payroll tax cut extended two months
President Obama signed the Temporary Payroll Tax Cut
Continuation Act of 2011 in December 2011. The new law extends
the employee-side payroll tax cut through the end of February
2012. The two-month extension is intended to give Congress
additional time to negotiate a longer-term extension of the
payroll tax cut to cover all of calendar year 2012.
4. Cell phones removed from listed property category
The Small Business Jobs Act of 2010 removed cell phones
from the definition of "listed property." That category
generally requires additional recordkeeping by taxpayers. In
September 2011, the IRS issued guidance on the treatment of
employer- provided cell phones as an excludible fringe
benefit. When an employer provides an employee with a cell
phone primarily for noncompensatory business reasons, the
business and personal use of the cell phone is generally
nontaxable to the employee and the IRS will not require
recordkeeping of business use to receive this tax-free
treatment.
5. IRS launches Voluntary Classification Settlement
Program
In September 2011, the IRS launched a new program to enable
employers to voluntarily reclassify their workers for federal
employment tax purposes and take advantage of a reduced
penalty framework. The Voluntary Classification Settlement
Program (VCSP) is open to employers currently treating their
workers as independent contractors and who want to
prospectively treat the workers as employees. The employer
must not be under audit and satisfy other requirements. The
IRS has not announced an end-date to the VCSP.
6. IRS makes mid-year 2011 adjustment to business
standard mileage rate
For the third time in six years, the IRS announced a
mid-year adjustment to the business standard mileage rate
because of rising gasoline prices. The business standard
mileage rate increased from 51 cents-per-mile to 55.5
cents-per-mile for the second half of 2011. The medical/moving
standard mileage rate increased from 19 cents-per-mile to 23.5
cents-per-mile for the second half of 2011. Congress did not
make a mid-year adjustment to the charitable standard mileage
rate, which remained at 14 cents-per-mile for the second half
of 2011. For 2012, the business standard mileage rate is 55.5
cents-per-mile and the medical/moving standard mileage rate is
23 cents-per-mile. The statutorily-determined charitable
standard mileage rate remains at 14 cents-per-mile for 2012.
7. FUTA surtax expires
In 1976, Congress enacted the 0.2 percent FUTA surtax to
help repay federal revenues paid in unemployment benefits. The
Worker, Homeownership and Business Assistance Act of 2009
extended the surtax through 2010 and the first six months of
2011.The 0.2-percent FUTA surtax expired after June 30, 2011.
In December 2011, the IRS released Form 940, Employer's Annual
Federal Unemployment (FUTA) Tax Return, and accompanying
schedules, for 2011. Form 940 for 2011 reflects the mid-year
expiration of the FUTA surtax.
8. IRS continues
Fresh Start Initiative
During 2011, the IRS continued its Fresh Start Initiative,
which the agency explains is its response to the economic
slowdown. The Fresh Start Initiative allows lien withdrawals
for taxpayers entering into direct debit installment
agreements (and for taxpayers who convert from a regular
installment agreement to a direct debit agreement). The IRS
also announced it would make streamlined installment
agreements available to more small businesses. Qualified small
businesses with $25,000 or less in unpaid taxes can
participate in the streamlined installment agreement program.
9. Basis
overstatement regs
The Supreme Court agreed in September 2011 to resolve a
split among the federal courts of appeal over IRS regulations
that impose a six-year limitations period on assessments due
to overstated basis. The IRS asked the Supreme Court to
decide, among other questions, whether an understatement of
gross income attributable to an overstatement of basis in sold
property is an omission from income that can trigger the
six-year assessment period.
10. Congress bans tax strategy patents
In September 2011, President Obama signed the America
Invents Act. The new law is a comprehensive overhaul of the
nation's patent laws. The new law treats any strategy for
reducing, avoiding or deferring tax liability as prior art
under patent law and therefore not patentable.
Using Fringe
Benefits as an Income Substitute
During the Economic Downturn?
Many businesses are foregoing salary increases this year
because of the economic downturn. How does a business find and
retain employees, as well as keep up morale, in the face of
this reality? The combined use of fringe benefits and the tax
law can help. Some attractive fringe benefits may be provided
tax-free to employees and at little cost to employers.
De minimis fringe benefits
A de minimis fringe benefit is any property or service whose
value is so small or minimal that accounting for it would be
administratively impracticable. Such benefits are excluded
from an employee's gross income. Examples of de minimis fringe
benefits include:
Occasional overtime meals and meal money. To qualify as
a tax-free de minimis fringe benefit, the meal or meal money
must be provided to your employees so that they can extend
their normal workday, thereby enabling them to work overtime.
Such meals and meal money can only be provided occasionally.
This means that they generally cannot be provided routinely,
when overtime work is a common occurrence or are contractually
mandated for overtime work. Occasional snacks may also qualify
as a de minimis fringe benefit but if the snacks are provided
daily, they would not qualify.
Occasional transportation. Transportation costs can
also qualify as de minimis fringe benefits. Taxi-fare for an
employee to return home after working late, for example, may
be a de minimis fringe benefit. The transportation must be
occasional.
Holiday gifts. Traditional holiday gifts, such as a
Thanksgiving turkey, with a low fair market value can
generally qualify as a de minimis fringe benefit. However,
cash or a cash equivalent such as a gift certificate in lieu
of the property, do not qualify. In fact, cash and cash
equivalent fringe benefits, no matter how little, are never
excludable as a de minimis fringe benefit, except for
occasional meal money or transportation fare.
E-filing. Electronically filing an employee's tax
return, but not paying for someone to prepare the return, may
qualify as a de minimus fringe benefit.
Telephone calls. An employer may treat the cost of
local telephone calls made by employees as a de minimis fringe
benefit.
Working condition fringe benefits
A working condition fringe benefit is any type of property or
service provided to your employees to the extent that the cost
of such property or services would have been deductible by the
employee as a trade or business expense, depreciation
expenses, or as if the employee paid for the property/services
himself or herself. Working condition fringe benefits have
special tax rules for employers and employees.
Vehicles. If an employer-provided vehicle is used 100
percent for business and the use is substantiated, use of the
vehicle is considered a working condition fringe benefit. The
value of use of the vehicle is not included in the employee's
wages. However, when an employer-provided vehicle is used by
the employee for both personal and business purposes, an
allocation between the two types must be made. The portion
allocable to the employee's personal use is generally taxable
to the employee as a fringe benefit. The portion allocable to
business use is generally considered a working condition
fringe benefit and is excludable from the employee's income.
No additional cost services
If an employer-provided service does not cause the employer to
incur any substantial additional costs, it may qualify as a
"no additional cost service" and be excludible from the
employee's income. The service must be offered to customers in
the employer's ordinary course of business. Some of the most
common examples are airline, rail and bus tickets and hotel
and motel rooms provided at a reduced rate or at no cost to
employees. This benefit can be offered to retired employees as
well as active employees. There are special rules for
highly-compensated employees.
If you are considering alternatives to salary compensation,
and would like to know what your options are, please contact
our office. We can discuss the tax benefits and drawbacks of
providing your employees with various types of fringe
benefits.
To read
this & my other articles online,
click here or go to
www.RebellaCPA.com and click on the Newsletter section.
 As
always you can call me at 714-619-0667 if you have any
questions about investing, retirement or any other tax &
accounting related issues.
Regards, Monica Rebella, CPA
President, Rebella Accountancy |
