by R. Dean Piccirillo, CFP®, CRPS®, AIFA®
Principal/Senior Financial Advisor
HBK Sorce Financial LLC

Over the last few weeks, I have had the opportunity to review two different 401(k) retirement plans; each one having over seventy available investment options.  Participants had to develop their own personal allocation by choosing from dozens of different investment options, many of which were in the same investment category or asset class. It seemed to me that this large number of choices for each participant had the potential to become an overwhelming task that could actually create a situation where a participant was likely to become less diversified, rather than more. (Read full article…)

A business with net income from “qualified production activities” is entitled to a tax deduction of 9% in 2010. This is a tax break designed to benefit companies that produce and pay wages domestically.  However, the more complicated the business, the more complicated the math for calculating the “Domestic Production Activities Deduction,” as Section 199 comes with a very complex set of rules.

This deduction was created as part of the American Jobs Creation Act of 2004.  A business with net income from a qualifying production activity was eligible to take a tax deduction of 3% in tax years 2005 and 2006. The deduction then increased to 6% for years 2007, 2008 and 2009, and is now 9% for years 2010 and beyond.

Which activities qualify and which don’t?
A business engaged in one of the following “qualified production activities” is eligible to claim the Domestic Production Activities Deduction under Internal Revenue Code Section 199:

• Manufacturing based in the United States,
• Selling, leasing, or licensing items that have been manufactured in the United States,
• Selling, leasing, or licensing motion pictures that have been produced in the United States,
• Construction services in the United States, including building and renovation of residential and commercial properties,
• Engineering and architectural services relating to a US-based construction project, or
• Software development in the United States, including the development of video games.

However, the following lines of business are specifically excluded from claiming the Domestic Production Activities Deduction:

• Construction services that are cosmetic in nature, such as painting.
• Leasing or licensing items to a related party.
• Selling food or beverages prepared at a retail establishment.

Figuring the Tax Deduction
The key to figuring the Domestic Production Activities Deduction is to first calculate “qualified production activities income” (QPAI), which is essentially all income arising from qualified production activities, less expenses related to such activity.  For a company with only one line of business, QPAI will generally be the same as taxable income.  For a company with multiple lines of business where some might qualify and others might not, the gross receipts and corresponding expenses must be allocated among the qualifying and non-qualifying business lines.  The calculation can thus become much more complicated.

In a nutshell, the Domestic Production Activities Deduction is calculated as follows: Domestic Production Gross Receipts (DPGR)
minus Qualified production activities expenses
equals Qualified production activities income (QPAI)
times The QPA deduction amount of 9%
equals The Tentative QPA Deduction

Limitations
The dollar amount of the Domestic Production Activities Deduction is subject to a couple of limitations.  First, the 9% deduction amount is applied to the lesser of QPAI or regular taxable income.  Second, the deduction cannot exceed the overall limitation of 50% of W-2 wages paid.

Example: A homebuilder here in Lee County with a single line of business has qualified production activity income of $500,000, regular taxable income of $600,000 and W-2 wages of $700,000.

9% of lesser of taxable income or QPAI    $45,000
50% of W-2 wages                                                 $350,000

For 2010, the qualified production activity deduction would be $45,000. The deduction is claimed on Form 8903.

At HbK, our CPAs are well-versed with Internal Revenue Code Section 199. We also understand tax planning is essential for our clients’ financial success and we are proud to be proactive in maximizing the tax benefits you deserve.

Samantha M. Howes, CPA is a Senior Accountant with Hill, Barth & King LLC in the Fort Myers, Florida office. Samantha has worked as a consultant and a CPA helping clients in Fort Myers, Cape Coral, Naples and other Southwest Florida communities for the past 6 years. She has been with Hill, Barth & King LLC, a top 75 accounting firm, since 2004.  Samantha can be contacted by phone at 239-482-5522 or email at showes@hbkcpa.com.

This may be the year to take a tax deduction for medical expenses.  It is typically difficult for many people to write off medical expenses because of the limits imposed by the IRS.  Medical expenses are only deductible after they exceed 7.5% of adjusted gross income.  However, with the tough economical times and higher levels of unemployment, many are finding that for the first time they may be in a position to take advantage of this deduction.

Another reason to focus on the possibility of taking the medical expense deduction this year is that the Health Care Reform Act increases the adjusted gross income threshold for claiming the itemized deduction for medical expenses from 7.5% to 10%.  Individuals age 65 and older would be able to claim the itemized deduction for medical expenses at 7.5% of adjusted gross income through 2016.  This is effective in 2013.

Even though it is difficult for many people to write off medical expenses due to the limits, you may qualify by including EVERY expense allowed.  It is important to know what types of expenses qualify so that you are capturing all possible expenses to help exceed the threshold amount.  The medical deduction covers a wide range of expenses – from contact lenses and solution to Lamaze classes for mothers-to-be.  In addition, insurance premiums are deductible if they are paid with after-tax dollars.  This is especially important to those who have lost their jobs and are paying COBRA insurance out of pocket.

It is not only important to know the eligible expenses but to do some strategic planning as well.  Pay as many medical expenses as you can in one year to help exceed the threshold in that year instead of carrying over the expenses to the next year and not being able to meet the threshold in either year.  Some examples would be buying additional contacts, perhaps an extra pair of glasses, paying for orthodontic treatment for several children in one year.  Keep in mind that you can deduct medical expenses for your dependents as well.

Some of the qualified procedures allowed for medical expenses may surprise you.  For example, most insurance plans won’t cover laser eye surgery, “Lasik”, because it is considered a cosmetic procedure.  But it generally qualifies for a medical deduction and as an expense in a flexible spending account.  The rules can be tricky.  For example, you can’t write off the cost of unnecessary cosmetic surgery to improve your appearance.  However, you can deduct cosmetic surgery that’s needed to improve a deformity directly related to a congenital abnormality, an injury from an accident, or a disfiguring disease.

In general, the IRS allows deductions for such things as acupuncture, physical therapy, fertility treatments, psychiatric care and psychotherapy, some weight loss programs, dentures, hearing aids, orthopedic shoes.  In addition, don’t forget the cost of traveling to your doctor or medical facility for treatment.  This is an expense that is often overlooked.  The mileage rate for 2010 is 16.5 cents.  The cost of other forms of travel such as airplanes, taxis and public transportation is also deductible.  Skilled nursing-home care is fully deductible as well as a portion of assisted-living expenses.

Some things not allowed by the IRS include expenses for cosmetic surgery, diapers, hair transplants, gym memberships, marriage counseling, maternity clothes, teeth bleaching and toothpaste.  You may not deduct funeral or burial expenses, toiletries, cosmetics, a trip or program for the general improvement of your health.

You may receive more favorable results for deducting medical expenses by utilizing a Flexible Spending Arrangement (FSA), a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA).  You should check with your employer to see if any of these plans are available and if so, you should consider utilizing them for your medical expenses.

As the year-end approaches, it would be worthwhile to take a look at your medical expenses.    If you are not in an employer sponsored plan mentioned above and if you are close to or exceed the 7.5% threshold, it is important to begin strategizing, i.e., including as many expenses in the 2010 year as possible.  If you find that you are close to the threshold as the year-end closes, be sure to contact your tax professional to get a more comprehensive list of all items allowed and disallowed as medical expenses by the IRS.

Elizabeth (Libby) M. Slater, CPA is a Principal with Hill, Barth & King LLC in the Fort Myers, Florida office.  Libby has worked as a CPA helping clients in Fort Myers, Cape Coral and other Southwest Florida communities for the past 10 years.  She has been with Hill, Barth & King LLC, a top 75 accounting firm, since 2002.  Libby can be contacted by phone at 239-482-5522 or lslater@hbkcpa.com.