1. Tax Talk
How to Plan for the Coming Tax Increases
and Steps to Take to Reduce Audit Risk
Daniel S. Gordon, CPA

2. The Government
Needs Money! The short term solution
will be to enforce the current tax rules and to raise taxes. The result
for the business owner will be to operate in a business environment
where the likelihood of tax audits will rise as well as be subject to
increasing tax rates.

3. Agenda
 Background
 Payroll Tax Holiday Expired
 Healthcare Act
 American Taxpayer Relief Act of 2012
 Record keeping

4. Background
Speaker of the House Tip O’Neill, an old-time Democratic politician
from Massachusetts, would say all kinds of mean things about
President Reagan. But rather than get angry or carry a grudge, the
President invented a rule that Tip could say whatever he wanted
during the day, but at 6 PM, the politics would stop and they would be
friends. Nothing told the story of Ronald Reagan’s magnanimity more
than pictures of those two old Irishmen swapping stories and laughing
uproariously in the evening after a day of pretty intense verbal
assaults.

5. Background
Enemies
Obama campaigned on a platform to raise taxes on the wealthiest Americans,
declaring that millionaires and billionaires need to "pay their fair share."
Romney at a May fundraiser, declaring that 47 percent of the population is made
up of people who believe they are “victims,” and are “dependent on government.”

6. Background
Congress ended 2012 with a 15 percent average
approval rating -- its lowest yearly average in history,
according to Gallup. The legislative branch of
government began 2013 with a 14 percent approval
rating, Gallup found.

7. So Politics in America are still broken but:
On January 1, 2013 by a vote of 89 to 8 the US Senate approved the
American Taxpayer Relief Act of 2012 where it was sent to the House
of Representatives and passed by a margin of 257 to 167 and signed
by the president
Background

8. We may not like it but at least we now know the Rules
Because of the last minute nature of the passage of the law, Tax Preparers
have been delayed in when they can start E-Filing Tax Returns because
many of the tax forms need to be updated
Rules
Background

9. Payroll Tax Holiday Expired
The Government Giveth then Taketh Away - Payroll Tax Cut
On December 17, 2010 President
Obama signed a multi-billion dollar
tax cut package, the Tax Relief,
Unemployment Insurance
Reauthorization and Job Creation
Act of 2010.

10. Payroll Tax Holiday Expired
The Government Giveth then Taketh Away - Payroll Tax Cut
One of the Provisions reduced the employee-share of Social Security tax
from 6.2% to 4.2% for wages earned in calendar year 2011 up to $106,800
– a maximum savings of $2,136.
Similarly, the Social Security portion of the self-employment tax dropped
from 12.4% to 10.4%.
 This was a 2% raise to all employees and owners who are subject to self
employment tax (Most everyone in your company including yourself).
The Payroll Tax cut was extended for tax year 2012

11. Payroll Tax Holiday Expired
 It was meant to be temporary and Spur on the Economy
 In fairness it wasn’t an income tax but rather funding Social
Security
 Beginning in 2013 the Holiday is Over
The result is that the average household making
$50,000 a year will pay an extra $1,000 this year in
taxes.

12. Payroll Tax
Holiday
Expired
Tax The Rich?
Consider this:
The wage earner making $50K will pay
$1,000 or 2% of his Salary from this tax.
The wage earner making $1million will
pay $2,274 or .223% of his salary

13. The Patient Protection and Affordable Care Act commonly called
Obamacare. Tax Provisions relating to Obamacare for 2013:
 3.8% Medicare Contribution Tax
 .9 additional Medicare Tax
 $2500 contribution Limit on Health Flexible Spending Accounts
 Increase Threshold for Itemized Medical Expenses
Healthcare Act

14. Medicare Contribution Tax
 The Affordable Care Act imposes a 3.8 percent Medicare contribution
tax on the unearned income of higher-income individuals, estates and
trusts effective January 1, 2013.
 The Medicare contribution tax applies to net investment income (NII),
and will generally apply to passive income. The Medicare contribution
tax also applies to capital gains from the disposition of property.
 For individuals, the Medicare contribution tax will apply to the lesser of
the taxpayer’s NII o r the amount of “modified” adjusted gross income
above a specified threshold.
 S-Corp Exception
Healthcare Act

15. Additional Medicare Tax
The Affordable Care Act also imposes an
additional 0.9 percent Medicare tax on higher
income individuals, effective January 1, 2013.
The additional Medicare tax applies to total
wages, other compensation, and self
employment income that exceeds the
applicable threshold amount for the individual’s
filing status.
Healthcare Act

16. Definition of Higher Income Individuals for Medicare
Contribution Tax and Additional Medicare tax is:
Modified Adjusted Gross Income of $200,000 for a Single,
$250,000 for Married Filing Jointly and $125,000 for Married
Filing Separately
Healthcare Act

17. Itemized Deduction for Medical Expenses
For tax years beginning after December 31, 2012, the Affordable Care
Act increases the 7.5 percent threshold for itemizing medical expenses to
10 percent.
However, the Affordable Care Act temporarily exempts individuals age
65 and older from the 10 percent threshold.
Healthcare Act

18. Health Flexible Spending Arrangements
After 2012, the Affordable Care Act caps the maximum salary
reduction contribution to a health flexible spending arrangement
(health FSA) at $2,500.
Salary reductions in excess of $2,500 will subject the employee to
tax on distributions from the health FSA. The $2,500 limit will be
indexed for inflation for tax years beginning after December 31,
2013.
Healthcare Act

19. American Taxpayer Relief Act of 2012

20. Individual Income Tax Rates on Ordinary Income:
Starting in 2013, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets
would remain in place.
There would be a new 39.6% rate, which would begin at the following
thresholds:
• Married Filing Jointly: $450,000 of taxable income
• Qualifying Widow(er): $450,000 of taxable income
• Head of Household: $425,000 of taxable income
• Single: $400,000 of taxable income
• Married Filing Separately: $225,000 of taxable income
American Taxpayer Relief Act of 2012

21. Tax Rates on Long-Term Capital Gains:
The law retains the zero percent tax rate on long-term gains,
modifies the 15% rate, and proposes a new 20% rate.
Starting in 2013 the tax rates on long-term gains would be:
• 0% if income falls below the 25% tax bracket
• 15% if income falls at or above the 25% tax
bracket but below the new 39.6% rate
• 20% if income falls in the 39.6% tax bracket
American Taxpayer Relief Act of 2012

22. Qualified Dividend Rates: Since 2003, taxpayers have enjoyed a
maximum tax rate of 15 percent on qualified dividends received by
individuals
The Act permanently extends the 15 percent dividend rates for most
taxpayers.
But the Act adds 20 percent dividend rate, the same as the Capital Gains
Rate for taxpayers with annual income in excess of the income tax
threshold amounts described on the prior slide
American Taxpayer Relief Act of 2012

23. Limitations on Itemized Deductions
Itemized deductions will be reduced by the lesser of 3% of the taxpayer's
adjusted gross income (AGI) over the threshold amount or by 80% of
otherwise allowable itemized deductions.
The threshold amounts at which itemized deductions would start to be limited
are:
 Married Filing Jointly: $300,000 of AGI
 Qualifying Widow(er): $300,000 of AGI
 Head of Household: $275,000 of AGI
 Single: $250,000 of AGI
 Married Filing Separately: $150,000 of AGI
These threshold amounts would be indexed for inflation for years after 2013
American Taxpayer Relief Act of 2012

24. Limitations on Personal Exemptions:
The personal exemption will be phase-out starting in 2013.
Taxpayers would see their total personal exemptions reduced by two
percent for each $2,500 (or fraction thereof) by which adjusted gross
income exceeds the threshold. The threshold amounts for 2013:
 Married Filing Jointly: $300,000 of AGI
 Qualifying Widow(er): $300,000 of AGI
 Head of Household: $275,000 of AGI
 Single: $250,000 of AGI
 Married Filing Separately: $150,000 of AGI
These threshold amounts would be indexed for inflation for years after
2013.
American Taxpayer Relief Act of 2012

25. Deductions, Credits, and Income Exclusions:
The following tax provisions are extended through the end of the year
2017:
 American Opportunity Credit
 Child Tax Credit at $1,000 maximum and partially refundable
 Earned Income Credit for 3 or more dependents
 Others
American Taxpayer Relief Act of 2012

26. The following provisions are extended through the end of 2013:
 Educator expenses deduction
 Exclusion for cancellation of debt on primary residences
 Mortgage insurance premium deduction
 Deduction for state and local sales taxes
 Tuition and fees deduction
 Others
American Taxpayer Relief Act of 2012

27. Business Provisions:
Section 179 Expensing of New Assets – 2012 and 2013 Limits are
$500,000 with a $2,000,000 investment limit.
This is probably the one provision that positively impacts our firms as
the 2012 and 2013 limits were moving down significantly.
Observation: 2012 is closed so the planning opportunity is gone
American Taxpayer Relief Act of 2012

28. Bonus Depreciation:
50% Bonus Depreciation also extended through 2013.
American Taxpayer Relief Act of 2012

29. Built In Gain for C Corps that have converted to S Corps:
 5 Year Period Extended thru 2013
 Will revert back to 10 years in 2014 unless the law is modified
American Taxpayer Relief Act of 2012

30. Record Keeping
We need to maintain accurate financial records. The most
obvious reasons for doing so:
To assess the results of operations against past periods, current
budgets, or to formulate future projections.
However, there is an external partner in your business that needs to
be fed accurate information and if that partner requests, you as an
owner/manager must prove the accuracy of the information
If you are wrong or can’t prove that the information is accurate, you
may be subject to fines. So who is this partner?
Well actually, there are several; and they are the IRS, and the state
and local taxing authorities.

31. Record Keeping
Essentially, you are responsible for providing these taxing authorities financial
statements that summarize the results of your operations in order to report tax
liabilities as well as provide payment of taxes.
Depending upon the type of legal entity you operate, you may be required to
provide a Balance Sheet as well as a Profit and Loss statement.
It’s your responsibility to be able to support each and every number on your
tax return with collaborating documentation.

32. Record Keeping
Sounds like a lot of work
And it is….
The problem is that we get so involved with running our businesses that
many times we put record keeping on the back burner and do a mad
dash at tax time to organize our records.
A small business has many moving parts
These issues make the bookkeeping function an extremely important
task that is required frequently rather than only at year end.

33. Record Keeping
So What Records are required?:
The IRS does not have a prescribed recordkeeping system. You may
choose any recordkeeping system that suits your needs as long as it
clearly shows your income and expenses.
Your recordkeeping system should also include a summary of your
business transactions. This summary is primarily the ledgers that are part
of your accounting system.
Most businesses that I work with use QuickBooks for their general ledger
requirements. It provides adequate detail when drilling into sub ledgers.
As long as the transactional information is accessible, accurate and
detailed enough to trace and agree to a source document, a small
business will fare well in the data presentation phase of an audit.

34. Record Keeping
Assuming your ledgers are correct, each transaction needs to be
supported by a source document (By the way these documents may be
electronic).
Purchases, sales, payroll, and other transactions will generate
supporting documents such as invoices, receipts and other supporting
documents.
These documents contain the information that must be recorded in your
ledgers. It is important to keep these documents because they support
the entries in your books and on your tax return.
You should keep them in an orderly fashion and in a safe place. For
instance, organize them by year and type of income or expense.

35. Record Keeping
Important Point:
A record not only needs to be verifiable, but it must support a
transaction that is includible in income or deductible as an expense
as allowed by the tax code and regulations promulgated there under.
In other words just showing you paid an item is not sufficient.
It must be necessary and reasonable supporting a business purpose
in order to be deductible.

36. Record Keeping
Here are some basic records that substantiate the following
items:
Gross receipts are the income you receive from your business. You
should maintain supporting documents that show the amounts and
sources of your gross receipts.
Documents for gross receipts include the following:
 Signed Service Tickets or Invoices
 Bank deposit slips
 Credit card charge slips
 Forms 1099-MISC received from customers

37. Record Keeping
Purchases are the items you buy and resell to customers or materials you
apply during your service visits.
Your supporting documents should show the amount paid and that the
amount was for purchases.
Documents for purchases include the following:
Vendor Invoices for Chemicals, Supplies and Equipment
Cancelled Checks
Credit card sales slips

38. Record Keeping
Expenses are the costs you incur (other than purchases) to carry on your
business.
Your supporting documents should show the amount paid and that the amount
was for a business expense.
Documents for expenses include the following:
 Cancelled checks
 Legal Agreements such as leases, note payable, mortgages etc.
 Account statements
 Credit card sales slips
 Vendor Invoices
 Petty cash slips for small cash payments

39. Record Keeping
How long should I retain records?
The minimum amount of time to retain records for tax purposes
depends on the item, when it is recorded and if it will be part of a future
transaction (for example, a if you purchase a vehicle and sell it in 5
years. The transaction 5 years hence would be a future transaction that
information from the original purchase would be needed).
Generally, you must keep your records that support an item of income
or deductions on a tax return until the statute of limitations for that tax
return runs out.

40. Record Keeping
The statute of limitations is the period of time in which you can amend
your tax return to claim a credit or refund, or that the IRS can assess
additional tax – usually three years after filing.
In the following situations you will need to produce records past the
normal statute of limitations:
You will need to produce your records for up to six years after
filing if you fail to include income that you should have reported,
and it is more than 25% of the gross income reported on the
original return.
You will need to produce your records for up to seven years after
filing if you file a claim for a loss from worthless securities or bad
debt deduction.

41. Record Keeping
Keep all employment tax records for at least 4 years after the
date that the tax becomes due or is paid, whichever is later.
If you file a fraudulent return or you don’t file a return, your
records may be examined indefinitely.
Keep records relating to property purchases and improvements
until the statute of limitations expires for the year in which you
dispose of the property. These records must be kept to figure any
depreciation or amortization and to figure the gain or loss when
you sell or dispose of the property.

42. Record Keeping
Conclusion:
A successful business person needs to keep accurate and complete
records that are supported by a well maintained bookkeeping system.
The benefits of doing so, allows and owner/manager to perform
proper planning for growth and profit.
Just as important though it also allows an owner/manager to comply
with any requests for records during an IRS audit should you be
called on to prove your tax return is accurate.

43. Record Keeping