Changing the Game for Retirement Plan Sponsors – What You Need To Know

May 23, 2012 – IMA CFO Breakfast Roundtable – Collier County
May 24, 2012 – IMA CFO Breakfast Roundtable – Lee County
Sponsored by HBKS Wealth Advisors

Most CFOs have some responsibility for their company’s qualified retirement plan. Therefore, a CFO’s understanding of how the U.S. Department of Labor’s new fee disclosure regulations will impact your company, employees, and plan’s operation is critically important.

Become informed and take action now or you may put your company’s qualified retirement plan at risk for committing a prohibited transaction, which may trigger interest, penalties and endanger the viability of the plan. A change of this scale has never occurred before in the pension industry and has the potential to be disruptive to the marketplace. On a national basis, as many as 483,000 retirement plans and 72 million participants will be affected.

These two regulations including ERISA Regulation 408(b)(2) which goes into effect on July 1st and ERISA Regulation 404(a)(5) which takes effect on August 30th will shine a spotlight on fees charged by service providers against plan assets that impact participant returns. Together, they require specific disclosures to both sponsors of retirement plans and participants. After plan sponsors receive these disclosures on July 1, they will have to make an assessment as to whether not these fees are reasonable. Additionally, for the first time ever, actual hard dollar fees taken from participant accounts for various services will be disclosed to participants beginning this year.

At this roundtable, Dean Piccirillo will discuss the most pertinent aspects of these regulations which require close attention by CFOs and plan sponsors, specifically those going into effect this summer. Mr. Piccirillo is a Principal and Senior Financial Advisor who also heads the Retirement Plan Unit at HBKS Wealth Advisors, a regional firm affiliated with top 100 accounting firm Hill, Barth & King.

There is no charge to attend, but reservations are required.  Please click on one of the links at the top of the article for the Collier or Lee County event, or visit www.swflima.org.

In addition to extending the Bush tax cuts, providing relief from the AMT, and cutting the payroll tax by two percentage points, the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (Tax Relief Act) extends a host of other important tax breaks for businesses and individuals. I’m writing to give you an overview of these key tax breaks that were extended by the new law. Please call our office for details of how the new changes may affect you or your business.

Individual tax relief

The following tax breaks for individuals that expired at the end of 2009 have been retroactively reinstated by the Tax Relief Act and extended through 2011.

• The election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes
• The above-the-line deduction for qualified higher education expenses
• The $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary materials used by the educator in the classroom
• The increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes
• The provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year. Individuals also will be allowed to make charitable transfers during January of 2011 and treat them as if made during 2010
• The look-thru rule for certain regulated investment company (RIC) stock in determining the gross estate of nonresidents
• The increase in the monthly exclusion for employer-provided transit and vanpool benefits to equal that of the exclusion for employer-provided parking benefits

In addition, the new law extends for an additional year (i.e., through 2011) the rule allowing premiums for mortgage insurance to be deductible as qualified residence interest.

Business tax relief

On the business side, the following business tax breaks that expired at the end of 2009 have been retroactively reinstated and extended through 2011 by the Tax Relief Act.

• The research and development credit
• 15-year writeoffs for qualified leasehold and retail improvements, and restaurant buildings (and certain improvements to such restaurant buildings)
• 7-year writeoffs for certain motorsports racetrack property
• The employer wage credit for activated military reservists
• The active financing exception from the Code’s Subpart F rules for a controlled foreign corporation predominantly engaged in the conduct of a banking, financing, or similar business
• Look-through treatment of payments between related controlled foreign corporations
• The Indian employment credit
• The new markets tax credit
• Accelerated depreciation for business property on an Indian reservation
• The railroad track maintenance credit
• The special expensing rules for certain film and television productions
• The mine rescue team training credit
• The election to expense advanced mine safety equipment
• Expensing of environmental remediation costs
• The deduction allowable for domestic production activities in Puerto Rico
• The American Samoa economic development credit
• The rules exempting from gross basis tax and from withholding tax the interest-related dividends and short-term capital gain dividends received from a RIC by certain foreign persons (extended to apply to tax years of a RIC beginning before 2012)
• The inclusion of a RIC within the definition of a “qualified investment entity” under the provisions of the Foreign Investment in Real Property Tax Act as codified in Code Sec. 897
• The enhanced deduction for contributions of food and book inventories, and computer equipment for educational purposes
• A liberal rule for S corporations making charitable donations
• The special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity
• Empowerment zone tax incentives
• Tax incentives for investments in the District of Columbia
• The work opportunity credit (extended for four months (through the end of 2011))
• Qualified zone academy bonds

In addition, the new law extends for an additional year (i.e., through 2011) the temporary exclusion of 100% of gain on the sale of certain small business stock.

Energy provisions

The following energy provisions were extended by the Act (through 2011).

• The credit for manufacturers of energy-efficient new homes
• Incentives for biodiesel and renewable diesel
• The credit for refined coal facilities
• Excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures
• The special rule to implement FERCs and State electric restructuring policy
• Suspension of the limitation on percentage depletion for oil and gas from marginal wells
• Grants for specified energy property in lieu of tax credits
• Provisions related to alcohol used as fuel
• The energy efficient appliance credit
• The credit for energy-efficient improvements to existing homes
• The 30% investment tax credit for alternative vehicle refueling property

Disaster relief provisions

The following disaster relief provisions are extended through 2011.

• New York Liberty Zone tax-exempt bond financing
• Increased rehabilitation credit for structures in the Gulf Opportunity Zone
• Low-income housing credit rules for buildings in Gulf Opportunity Zones
• Tax-exempt bond financing for the Gulf Opportunity Zones
• Bonus depreciation deduction applicable to specified Gulf Opportunity Zone extension property

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

Keith A. Veres, CPA is a Principal with Hill, Barth & King LLC in the Fort Myers, Florida office.   Keith has worked as a CPA helping clients in Fort Myers, Cape Coral and other Southwest Florida communities for the last 8 years.  He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1991.  Keith can be contacted by phone at 239-482-5522 or email at kveres@hbkcpa.com.

Now I am not talking about changing estimating software, construction methods or even replacing personnel. As a CPA in southwest Florida serving many construction clients both large and small, many of whom have struggled over the last three years seeing revenues drop considerably to levels that most of us would care not to remember; especially in the Lee County markets. Surprisingly, this may have provided some contractors with the ability to change tax accounting methods to one that will allow them to defer taxes on new business as hopefully the rebound takes off with more robust activity in the construction markets.

If I have your interest, read on. First off, this opportunity still may not be available to all contractors. Generally speaking, contractors are required to account for long-term contracts on a percentage completion method of accounting. Small contractors, those with average revenue over the preceding three (3) years under ten (10) million per year, were able to make the election to report tax revenue on a completed contract basis. What happened during the construction explosion and real estate market run up was that many contractors were required to switch from the completed contract method to the percentage completion method because their average revenues grew in multiples. This was more than likely an unpleasant tax surprise to the business owners during the year that the change was forced upon them.

Second, those companies that were forced into the accounting change in the boom years now can look to changing back in the, lets say more challenging times, as long as they now can comply with the average revenue test. The IRS surprisingly makes this change fairly easy. In many cases changes to accounting methods require prior consent of the service but in this scenario, this is what we call in the tax and accounting world, an automatic change. IRS Revenue Procedure 2002-28 indicates that the method change simply needs to be disclosed on the next timely filed tax return for the business. The election indicating the method change and the dollar impact of the change must be disclosed on IRS form 3115, which must be attached to the business return.

Third, lets be clear about a couple points. This method change does not eliminate taxes but merely defers them to a later date. Generally, tax planning ideas try to accomplish two things; (1) accelerate deductions or in this case (2) defer income. You can almost never completely avoid the tax man. The best you can do is to keep him out of your back pocket for as long and for as much as possible. Also, this method change may not be permanent. Just like back in the boom era, if your company grows above the average revenue thresholds, you will be forced back into the percentage of completion method. Without proper planning, the tax sting may make you feel like an NFL linebacker that just got fined for helmet to helmet contact. The difference in this case is you get hit with both, the cash drain and maybe the concussion too.

Don’t take me the wrong way based on the last comment, we at Hill, Barth and King, a premier accounting, tax and consulting firm in Fort Myers, Naples and Sarasota in southwest Florida will almost always recommend a tax strategy that defers income but many factors can come into play when making this type of a decision. No decision should be made in a vacuum without adequate discussion with your tax advisor. Please contact me or any of our construction niche members to discuss this or any other tax planning ideas.

Gerald (Jerry) Kimble, CPA is a Principal with Hill, Barth & King LLC in the Fort Myers, Florida office.  Jerry helps clients in Fort Myers, Cape Coral and other Southwest Florida communities.  He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1990.  Jerry can be contacted by phone at 239-482-5522 or gkimble@hbkcpa.com.

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business, paid for with various revenue raisers. Here’s a brief overview of the tax changes in the new law.

Tax Breaks and Incentives

• Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.    The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

• 100% exclusion of gain from the sale of small business stock for qualifying stock acquired after date of enactment and before Jan. 1, 2011. Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don’t exceed $50 million, and the corporation must meet active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after date of enactment and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.
• General business credits of eligible small businesses for 2010 allowed to be carried back five years. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
• General business credits of eligible small businesses in 2010 aren’t subject to AMT. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.
• S corporation holding period. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.
• Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).
• Special rule for long-term contract accounting. The new law provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.
• Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.
• Limitation on penalty for failure to disclose certain reportable transactions (including listed transactions) on a return. The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively). These changes are retroactively effective to penalties assessed after Dec. 31, 2006.
• Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.
• Cell phones removed from listed property category. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Offsets (Revenue Raisers)

• Information reporting required for rental property expense payments. For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).
• Increased information return penalties. Effective for information returns required to be filed after Dec. 31, 2010.
• Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after date of enactment, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).
• Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.
• Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of date of enactment.
• Crude tall oil (a waste by-product of the paper manufacturing process) is excluded from eligibility for the cellulosic biofuel producer credit. The new law limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., with an acid number of 25 or less), effective for fuels sold or used after Dec. 31, 2009.
• Nonqualified annuity contracts. The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.
• Guarantee fees. Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after date of enactment are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.

Please keep in mind that these are just highlights of the most important changes in the new law. If you would like more details about any aspect of the new legislation, please do not hesitate to call our Fort Myers Hill, Barth and King CPA office in Southwest Florida 239-482-5522.

The Senate passed the 2009 Small Business Jobs Act on 9/16/10 and the legislation now goes to the House for consideration.  The House passed a similar bill in June 2010 which included several differences.  The House plans on taking up the legislation quickly.  We expect the Senate version of the bill to likely be the version passed since it has been more difficult to pass this legislation.

Some of the provisions of the Senate passed legislation include:

• Expansion of 50% bonus depreciation for assets placed in service in 2010
• Extend and expand Section 179 to 2010 and 2011 up to $500,000 (from $250,000) with the maximum additions would increase to $2,000,000 (from $800,000)
• Allow general business credits to reduce AMT for years beginning after 2009 for certain small businesses
• Allow a 5-year carryback of general business credits for certain small businesses
• The S corporation built-in gains period would be reduced to 5 years for years beginning in 2011
• Allow health insurance deduction for partners and more than 2% S corporation shareholders to be deductible in determining self-employment tax, only for the first year beginning after 12/31/09
• Remove cell phones from the definition of listed property for years beginning after 12/31/09
• Significantly increase the penalty for failure to file information returns

We will keep you informed of developments.  Additional tax legislation is being debated on whether to extend the 2001 Bush tax cuts and on the Federal estate tax.  There may be significant legislation passed before the end of this calendar year.

The amount of loss permitted to be deducted by an S corporation shareholder is generally limited to the shareholder’s basis in corporate stock and/or debt.  Losses in excess of a shareholder’s basis in stock and/or debt is suspended and carried forward indefinitely to be used at such time as additional basis is created.  Thus, if a shareholder expects a loss for the current year, but anticipates not having sufficient basis to deduct the loss, one or more of the following techniques may be utilized to increase basis before year-end.

I.  Techniques for Creating Additional Basis:

• Cash Contribution: A shareholder may increase stock basis by contributing additional capital to the corporation before the last day of the corporation’s taxable year. This technique is generally used, however, only if all shareholders plan to contribute cash on a pro-rata basis.
• Stock Purchase: Stock basis is also increased by purchasing additional corporate stock prior to year-end, either from other shareholders or directly from the corporation.
• Cash Loan: A shareholder may increase basis by lending money directly to the S corporation. The loan will be respected so long as the shareholder is placed in the economic position of being a creditor.
• Back-to-Back Loan: A shareholder may personally borrow money and lend the proceeds directly to the S corporation. This back-to-back loan will generally result in a basis increase for the shareholder.
• Property Contribution: A contribution of property by a shareholder to an S corporation will create additional stock basis equal the basis of the property in the shareholder’s hands. A contribution of appreciated property will generally be tax-free to the shareholder so long as all shareholders contributing on that day own at least 80% of the corporate stock immediately after the contribution.
• Purchase of Stock or Debt for Shareholder’s Note: A shareholder should receive cost basis for S corporation stock or debt obligations purchased from a third party for the shareholder’s note.
• Payment of Corporate Debt: The payment of corporate debt guaranteed by the shareholder will increase the shareholder’s basis. Through subrogation, the corporation becomes indebted to the shareholder, and the result is the same as if the shareholder had loaned cash to the corporation, which in turn paid its own debt.
• Shareholder Loan Substitution: A shareholder’s basis is increased by the substitution of a shareholder’s own note for a corporate obligation for which the shareholder is a guarantor, so long as the corporation is released from the obligation and the creditor looks solely to the shareholder for satisfaction of the debt.
• Shareholder Assumption of Corporate Debt: Basis may be increased when a shareholder assumes a corporate debt and the corporation is released by the creditor.

II. Techniques Not Resulting in Additional Basis:

• Guarantee of Corporate Debt: It is important to note that the S corporation rules differ significantly from their partnership counterpart in that corporate debts to third parties do not increase a shareholder’s stock basis.  Thus, if a shareholder guarantees a corporate debt, the shareholder’s stock basis will not presently increase as a result the mere guarantee.
• Related-Party Loan: Loans to an S corporation from individuals or entities related to the shareholder generally do not result in a shareholder basis increase.

Mark R. Giallonardo, JD, LLM is a Principal in HbK’s Tax Department and currently supports HbK’s Florida offices. Mark has been developing tax planning strategies for owner-operated companies for more than 20 years and may be reached at (239) 263-2111 or mgiallonardo@hbkcpa.com.

Distributions from your S Corporation are generally tax free to the extent that you have basis in your stock.  However, when your C Corporation elected S status, all of its accumulated earnings and profits (E&P) were frozen.  Any distributions you take from E&P accrued when your business was a C Corporation are taxed as a dividend.

Under current tax law, qualified dividends are taxed at a maximum rate of 15%.  Starting in 2011, dividends will be taxed at the same rate as ordinary income.  The top marginal rate on ordinary income for 2011 will be 39.6% (unless new legislation is passed extending the current lower rate).  Given the expected increase to the tax rate on dividends, the cost of distributing your E&P may substantially increase.

Distributions are typically deemed to be made from accumulated E&P when they exceed the corporation’s accumulated adjustments account (AAA).  A corporation’s AAA generally consists of its net income or loss for all S Corporation years less any distributions that were sourced from AAA.  However, an S Corporation can elect, with the consent of all its shareholders, to distribute its earnings and profits before AAA.

If the corporation does not have sufficient cash on hand to distribute all of its E&P, it can eliminate E&P by distributing its own corporate notes, or by making a deemed dividend election.  A deemed dividend is a hypothetical distribution of E&P to all shareholders that is treated as being immediately contributed back to the corporation.  As a result, the stockholder pays tax on the deemed distribution and receives basis for the contribution.  The additional created basis can be used by the taxpayer to take losses otherwise suspended by basis limitations, or offset gain on the ultimate sale of the S Corporation Stock.

With the expected increase in tax on dividends, we suggest that you consider distributing your E&P in 2010.   There are many relevant considerations when deciding to distribute E&P.  Please contact us to discuss if it will be advantageous for you to distribute your E&P in 2010.

Tax Department – Hill, Barth & King For more information about how these changes relate to your unique circumstances, please call our Fort Myers office at 239-482-5522.

Whether a taxpayer may “write-down” year-end inventory depends upon 1) the inventory method chosen and, 2) the type of inventory involved.  With respect to inventory methods, a taxpayer generally will have chosen to value ending inventory either at cost, or at lower of cost or market (LCM).  And with respect to inventory type, a taxpayer will generally be sitting on either “normal” or “subnormal” goods.  Normal goods in inventory may generally not be written down below cost unless the taxpayer has elected to use LCM, and the current bid price (replacement or reproduction cost) of all inventoriable costs is lower than cost reflected on taxpayer’s books, or the goods had in fact been offered for sale prior to the inventory date at a net realizable value lower than cost.  Subnormal goods, on the other hand, may be valued at net realizable value regardless of whether the taxpayer has elected to use LCM.

The term “cost” is generally defined as the invoice price less trade or other discounts.  To this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods.  For taxpayers acquiring merchandise for resale that are subject to the uniform capitalization rules of §263A, additional amounts may be required to be included in inventory costs.  For merchandise purchased for resale by taxpayers with average 3-year annual gross receipts over $10 million, cost also includes purchasing, handling, storage, and a portion of general administrative costs.  In the case of merchandise produced by the taxpayer, cost is generally defined to include the cost of raw materials and supplies consumed in connection with the product, expenditures for direct labor, and indirect production costs incident to and necessary for the production of the particular article.

For purposes of the LCM, “market” is generally based on the current bid price (replacement or reproduction cost), not the price at which the goods can be sold.  The concept of net realizable value, although acceptable for financial reporting purposes, is only acceptable for tax purposes if the merchandise has been offered for sale prior to the inventory date at a price lower than its replacement cost.  The final income tax regulations issued under §263A made revisions to the definition of market.  The regulations now state that under ordinary circumstances and for normal goods in an inventory, market means the aggregate of the current bid prices prevailing at the date of the inventory.  The basic elements of cost include direct materials, direct labor, and certain indirect costs.  Thus, for taxpayers to which §263A applies, the basic elements of cost must reflect all direct costs and all indirect costs properly allocable to goods on hand as of the inventory date at the current bid price of those costs, including but not limited to the cost of purchasing, handling, and storage activities conducted by the taxpayer, both before and subsequent to acquisition or production of the goods.

For financial reporting purposes, a taxpayer has the option of performing an LCM analysis on the basis of item-by-item, group of items, category of inventory, business segment, or for inventory as a whole depending on the particular facts and circumstances.  For tax purposes, however, the market value of each article on hand must be compared with the cost of the article to determine each article’s lower of cost or market value.  The requirement of valuing each item separately prevents a taxpayer from using a percentage write-down approach even though it would be permitted for accounting purposes.

Regardless of the inventory valuation method employed by the taxpayer (cost or LCM), “subnormal” goods should be valued at net realizable value.  Subnormal goods are any goods that are unsalable at normal prices or in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange.  Subnormal goods originally acquired for resale, or produced finished goods should be valued at bona fide selling prices less direct costs of disposition.  Bona fide selling price means the price at which such subnormal goods are actually offered for sale during the tax year or within 30 days after the tax year.  The “30-day rule” has been strictly applied by the IRS in cases involving goods acquired for resale and finished produced goods.  Thus, even where subnormal goods exist, the taxpayer must be able to prove the actual offering at less than cost.  Verification must be made through contemporaneous recordkeeping.

Mark R. Giallonardo, JD, LLM is a Principal in HbK’s Tax Department and currently supports HbK’s Florida offices. Mark has been developing tax planning strategies for owner-operated companies for more than 20 years and may be reached at (239) 263-2111 or mgiallonardo@hbkcpa.com.

One of the most commonly missed tax credits for construction and warehouse activities is the Alternative Fuel Tax Credit for taxpayers that use propane powered forklifts. The forklift use qualifies for a 50 cent per gallon credit for both “C” corporations and pass-thru entities. To be eligible for the credit, a taxpayer must first register with the IRS. This is accomplished on Form 637, Application for Registration (For Certain Excise Tax Activities). This credit could be a significant benefit to any construction or warehousing operation. For Example, four forklifts that consume approximately 5 gallons per day for 250 days in a year, would typically consume approximately 5,000 gallons of propane. That equates to a $2,500 tax credit per year.

Form 637 is completed only one time to obtain the initial registration number. Once registered, the
company simply keeps track of the gallons of propane used and claims the credit on Form 4136 –
Credit for Federal Tax Paid on Fuels. Please contact a professional at Hill, Barth & King LLC if you
have any questions or would like assistance in preparing Form 637.

William E. North, II, CPA, CCIFP is a Principal in the Sarasota, Florida office of Hill, Barth & King LLC and is a member of HBK’s Construction Industry Group.

The Treasury Department has announced that, as a part of a three-pronged initiative to reduce the amount of paper transactions it handles, most employers that are now allowed to use Federal Tax Deposit Coupons and checks to make payroll tax deposits will have to make those deposits electronically through the Electronic Federal Tax Payment System (EFTPS) beginning in 2011.  The primary exemption will be for employers that have $2,500 or less in quarterly payroll tax liability and that pay their liability when filing their employment tax returns (e.g. Forms 941 or 944).

Currently, employers are required to use EFTPS at the beginning of the second calendar year after their total federal tax deposits (e.g., payroll, income, excise, etc.) exceed $200,000 in a calendar year.  Once they meet the threshold, they must use EFTPS even if their total tax deposits dip below $200,000 in a future year.

What does this mean for you?  Starting in 2011, if you make your payroll tax liability deposits in any manner other than paying them with the quarterly return, you will be required to deposit them electronically through EFTPS.  You will no longer be allowed to pay them at your bank with a coupon.

As soon as possible, you will need to sign up for EFTPS.  It is easy and it is free.  Just go to www.irs.gov and on the right hand side of the page, you will see the EFTPS logo.  Click on this and it will take you to a page that contains a brief description of the program and a link which allows you to register for the program.  Some of the items that you will need to complete the registration besides the company name and address include your company’s Federal I.D. number and banking information.  You will also need to assign a designated individual as the primary contact.

Once your company is enrolled, you can make any of your federal tax deposits via the internet or telephone.  By 8:00 p.m.(ET) at least one calendar day in advance of the due date, you access EFTPS directly to report your tax information. You will instruct  EFTPS to move the funds from your account to the Treasury’s account for payment of your federal taxes. Funds will not move from your account until the date you indicate. You receive an immediate acknowledgement of your payment instructions, and your bank statement will confirm the payment was made.  You can initiate your tax payment 24 hours a day, seven days a week.

As an added convenience,  EFTPS allows taxpayers to schedule tax payments in advance. Businesses can schedule payments up to 120 days in advance of their tax due date. Individuals can schedule payments up to 365 days in advance of their tax due date. EFTPS will automatically make your payments for you on the due date you indicate. Scheduled payments can be changed or cancelled up to 2 business days in advance of the scheduled payment date.

If you have any questions regarding this program or anything else regarding your payroll or business, please contact the CPA professionals at Hill, Barth & King’s Fort Myers office at 239-482-5522 and we will be glad to help.