2011 Federal Tax UpdateGary Fox, CPA

Key IssuesBush Tax cutsBonus DepreciationSection 179 ExpensingS Corporation Built-in Gains TaxStart-Up Expense DeductionSelf-Employed Health Insurance1099 requirementsObamacareExpiring Tax Benefits

Expiration of Bush Tax CutsWill they be extended?Current rates range from 10% to 35%New rates range from 15% to 39.6Dividends now subject to ordinary ratesCapital Gains rate up to 20% from 15%Tax for Married filing joint with $ 100,000 of

taxable income from $ 17,369 in 2010 to $ 18,895 in 2011

Bonus Depreciation50% Bonus depreciation for 2011 Only Automobiles and real estate are

excludedEquipmentQualified Leasehold improvementsCan be used to generate a taxable loss

Section 179 ExpensingIncreased 179 expensing in 2011Maximum is now $ 500,000Phase out begins at $ 2,000,000Qualified leasehold property can be expensed

up to $ 250,000 (Code section 168(e))

S-Corp Built-In Gains TaxBIG tax is 35% of appreciation on assetsOnly applies to C Corps that convert to S

CorpOnly assessed if S Corp assets are sold within

10 years (old law)New law reduces holding period to five years

Cell PhonesCell Phones (and similar devices) are no

longer “Listed Property”Relieved of strict substantiation requirementsPersonal use of primarily business cell phone

now excluded from Gross IncomeRelic from the days of expensive phones

Start-Up Expense DeductionCosts related to creating or investigating the

creation or acquisition of an active trade or business

Old law allowed $ 5,000 deductionNew law increase this to $ 10,000If more than $ 60,000 is spent, the deduction

gets reduced dollar for dollar

Self-Employed Health InsuranceNo change in tax deductionNow deductible for self-employment tax

purposesSelf-employment tax starts at 15.3% and

drops to 2.9% about $ 110,000 for 2011For self-employed with income of $ 110,000

and health insurance of $ 12,000, the savings is $1,836

For self-employed with income of $ 200,000 and health insurance of $ 12,000, the savings is $ 348

1099 RequirementsIndividuals who receive rental income must

issue 1099’s to all service providers paid over $ 600

Patient Protection and Affordable Care Act (aka Obamacare)Devil is in the detailsSmall employer health insurance credit.35% of employer contributionsMust pay at least half of the costNo more than 25 full-time employeesEmployee wages average no more than $

50,000Full credit available only to employer with 10

or fewer employees with wages under $ 25,000

Self-employed not treated as employees

Patient Protection and Affordable Care Act (aka Obamacare)Health coverage for employee’s children

under 27 is tax freeAdoption credit is increased to a maximum of

$ 13,170 per childCredit is now refundable10% excise tax on tanning servicesW-2 must include cost of employer-provided

health insurance (optional in 2011) Benefits not taxable (Yet)

Over the counter medicine no longer allowed in FSA

Patient Protection and Affordable Care Act (aka ObamacareInformation reporting requirements in 20121099’s must be filed for any entity paid over

$ 600 during the year.Individuals (same as current law)Partnerships and LLC’s (same as current law)Corporations (This is new)

Patient Protection and Affordable Care Act (aka Obamacare)2013Increased tax on high-earning workers and

self-employed0.9% Hospital insurance tax on wages or self-

employed incomeOver $ 250,000 for married filing jointOver $ 125,000 for singleOver $ 200,000 for othersThis is called “Foot in the door tax”

Patient Protection and Affordable Care Act (aka Obamacare)Surtax on “Unearned” income of higher-

income individualsMedicare tax will apply to investment incomeTax is 3.8% of lesser of Net investment

income or excess of modified AGI over $ 250,000 MFJ or $ 125,000 for single

Net investment income includes interest, dividends, royalties, rents, passive activity GROSS income and net gain from disposition of property

Patient Protection and Affordable Care Act (aka Obamacare)Higher threshold for medical expense

deduction10% of AGI from 7.5% of AGIFlexible Spending Arrangements capped at $

2,500 compared to $ 5,200

Patient Protection and Affordable Care Act (aka Obamacare)2014 changesIndividuals must pay penalty if they don’t

maintain minimum essential coverageLarge employers must pay penalty if any

employee purchases insurance through state exchange

Patient Protection and Affordable Care Act (aka Obamacare)Changes for 2018Cadillac Tax40% excise tax on high-cost employer

sponsored health coverage

Expiring Tax BenefitsExclusion of unemployment compensation ($

2,400)Tax-free distributions from IRA’s to charities

($ 100k)Deduction for educator expenses ($ 250)Tuition and fees deductionItemized deduction for sales tax on new

motor vehicleResearch creditAlternative motor vehicle credit (golf cart

credit)Estate tax Exemption down to $ 1,000,000

tax at 55%15-year depreciation on leasehold

improvements

Expiring Tax BenefitsShareholder basis adjustment for stock of S

Corporations making charitable contributionsEnvironmental cleanup cost deductionMarriage penalty is backChild tax credit reduced from $ 1,000 to $

500Dependent care credit reduced to $ 720

Conclusion

I expect some of the Bush tax cuts to be extended for at least two years

For practice owners, the bonus depreciation and section 179 expensing can be used to offset any tax increases

If you are considering buying, building or selling a practice, now is the time sit down and map out a strategy.