A traditional approach to strategy assumes the utilization of proper analytic tools, which enable management to predict future financial scenarios within their organization. However, this process can underestimate the uncertainty involved in these predictions. I have always recommended management recognize any potential uncertainties in the planning process. 

The basis of the traditional approach to strategy is the assumption that, by utilizing the proper analytic tools, management can forecast the future accurately enough to design a clear strategy.  However, this process usually underestimates the uncertainty involved with predicting future events.

Business owners and managers like to lay out a single, clearly defined strategy (for example, the current year’s plan).  In uncertain times, a static plan can be marginally helpful at best, and at worst can dangerously lead to strategies that do not defend a business against outside threats or take advantage of opportunities.   I have always recommended management recognize any potential uncertainties in the planning process.  

By identifying uncertainties, management can develop early warning systems to identify when the plan needs revising.  In some instances, the early warning process should include immediate action items in order to shorten the time between identification and the appropriate reaction.

If you would like to learn more on this topic, please read the attached article from McKinsey Quarterly by Hugh G. Courtney, Jane Kirkland and S. Patrick Viguerie titled “Strategy Under Uncertainty”.

The CFO can provide unbiased financial data as well as analysis of histroical successes and failures to help overcome a decision maker's cognitive biases such as;

• Overconfidence
• Risk avoidance
• Confirmation bias

Click on the article title for more information.

Bill Huyett  (Bill_Huyett@McKinsey.com) is a partner in McKinsey’s Boston office, and Tim Koller (Tim_Koller@McKinsey.com) is a partner in the New York office. Copyright © 2011 McKinsey & Company. All rights reserved.

Harvard Business Review article by Dominic Barton titled “Capitalism for the Long Term”.  The author identifies three failures by business leaders as the main cause of the Great Recession;

• Failures in Corporate Governances,
• Failures in Decision Making, and
• Failures in leadership.

Click on the articles title for more details

Capitalism for the Long Term - Harvard Business Review

by Dominic Barton

The near meltdown of the financial system and the ensuing Great Recession have been, and will remain, the defining issue

for the current generation of executives. Now that the worst seems to be behind us, it’s tempting to feel deep relief—and a

strong desire to return to the comfort of business as usual. But that is simply not an option. In the past three years we’ve

already seen a dramatic acceleration in the shifting balance of power between the developed West and the emerging East, a

rise in populist politics and social stresses in a number of countries, and significant strains on global governance systems. As

the fallout from the crisis continues, we’re likely to see increased geopolitical rivalries, new international security challenges,

and rising tensions from trade, migration, and resource competition. For business leaders, however, the most consequential

outcome of the crisis is the challenge to capitalism itself.

That challenge did not just arise in the wake of the Great Recession. Recall that trust in business hit historically low levels

more than a decade ago. But the crisis and the surge in public antagonism it unleashed have exacerbated the friction between

business and society. On top of anxiety about persistent problems such as rising income inequality, we now confront

understandable anger over high unemployment, spiraling budget deficits, and a host of other issues. Governments feel

pressure to reach ever deeper inside businesses to exert control and prevent another system-shattering event.

My goal here is not to offer yet another assessment of the actions policymakers have taken or will take as they try to help

restart global growth. The audience I want to engage is my fellow business leaders. After all, much of what went awry before

and after the crisis stemmed from failures of governance, decision making, and leadership within companies. These are

failures we can and should address ourselves.

In an ongoing effort that started 18 months ago, I’ve met with more than 400 business and government leaders across the

globe. Those conversations have reinforced my strong sense that, despite a certain amount of frustration on each side, the two

groups share the belief that capitalism has been and can continue to be the greatest engine of prosperity ever devised—and

that we will need it to be at the top of its job-creating, wealth-generating game in the years to come. At the same time, there is

growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social

contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results.

Most important, the dialogue has clarified for me the nature of the deep reform that I believe business must lead—nothing less

than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. (For a rough definition of

“long term,” think of the time required to invest in and build a profitable new business, which McKinsey research suggests is at

least five to seven years.) This shift is not just about persistently thinking and acting with a next-generation view—although

that’s a key part of it. It’s about rewiring the fundamental ways we govern, manage, and lead corporations. It’s also about

changing how we view business’s value and its role in society.

There are three essential elements of the shift. First, business and finance must jettison their short-term orientation and

revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their

organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers,

creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s

essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged

ownership by bolstering boards’ ability to govern like owners.

None of these ideas, or the specific proposals that follow, are new. What is new is the urgency of the challenge. Business

leaders today face a choice: We can reform capitalism, or we can let capitalism be reformed for us, through political measures

and the pressures of an angry public. The good news is that the reforms will not only increase trust in the system; they will

also strengthen the system itself. They will unleash the innovation needed to tackle the world’s grand challenges, pave the way

Capitalism for the Long Term - Harvard Business Review for a new era of shared prosperity, and restore public faith in business.

1. Fight the Tyranny of Short-Termism

As a Canadian who for 25 years has counseled business, public sector, and nonprofit leaders across the globe (I’ve lived in

Toronto, Sydney, Seoul, Shanghai, and now London), I’ve had a privileged glimpse into different societies’ values and how

leaders in various cultures think. In my view, the most striking difference between East and West is the time frame leaders

consider when making major decisions. Asians typically think in terms of at least 10 to 15 years. For example, in my

discussions with the South Korean president Lee Myung-bak shortly after his election in 2008, he asked us to help come up

with a 60-year view of his country’s future (though we settled for producing a study called National Vision 2020.) In the U.S.

and Europe, nearsightedness is the norm. I believe that having a long-term perspective is the competitive advantage of many

Asian economies and businesses today.

Myopia plagues Western institutions in every sector. In business, the mania over quarterly earnings consumes extraordinary

amounts of senior time and attention. Average CEO tenure has dropped from 10 to six years since 1995, even as the

complexity and scale of firms have grown. In politics, democracies lurch from election to election, with candidates proffering

dubious short-term panaceas while letting long-term woes in areas such as economic competitiveness, health, and education

fester. Even philanthropy often exhibits a fetish for the short term and the new, with grantees expected to become selfsustaining

in just a few years.

Lost in the frenzy is the notion that long-term thinking is essential for long-term success. Consider Toyota, whose journey to

world-class manufacturing excellence was years in the making. Throughout the 1950s and 1960s it endured low to nonexistent

sales in the U.S.—and it even stopped exporting altogether for one bleak four-year period—before finally emerging in the

following decades as a global leader. Think of Hyundai, which experienced quality problems in the late 1990s but made a

comeback by reengineering its cars for long-term value—a strategy exemplified by its unprecedented introduction, in 1999, of a

10-year car warranty. That radical move, viewed by some observers as a formula for disaster, helped Hyundai quadruple U.S.

sales in three years and paved the way for its surprising entry into the luxury market.

To be sure, long-term perspectives can be found in the West as well. For example, in 1985, in the face of fierce Japanese

competition, Intel famously decided to abandon its core business, memory chips, and focus on the then-emerging business of

microprocessors. This “wrenching” decision was “nearly inconceivable” at the time, says Andy Grove, who was then the

company’s president. Yet by making it, Intel emerged in a few years on top of a new multi-billion-dollar industry. Apple

represents another case in point. The iPod, released in 2001, sold just 400,000 units in its first year, during which Apple’s

share price fell by roughly 25%. But the board took the long view. By late 2009 the company had sold 220 million iPods—and

revolutionized the music business.

It’s fair to say, however, that such stories are countercultural. In the 1970s the average holding period for U.S. equities was

about seven years; now it’s more like seven months. According to a recent paper by Andrew Haldane, of the Bank of England,

such churning has made markets far more volatile and produced yawning gaps between corporations’ market price and their

actual value. Then there are the “hyperspeed” traders (some of whom hold stocks for only a few seconds), who now account

for 70% of all U.S. equities trading, by one estimate. In response to these trends, executives must do a better job of filtering

input, and should give more weight to the views of investors with a longer-term, buy-and-hold orientation.

If they don’t, short-term capital will beget short-term management through a natural chain of incentives and influence. If CEOs

miss their quarterly earnings targets, some big investors agitate for their removal. As a result, CEOs and their top teams work

overtime to meet those targets. The unintended upshot is that they manage for only a small portion of their firm’s value. When

McKinsey’s finance experts deconstruct the value expectations embedded in share prices, we typically find that 70% to 90% of

a company’s value is related to cash flows expected three or more years out. If the vast majority of most firms’ value depends

on results more than three years from now, but management is preoccupied with what’s reportable three months from now,

then capitalism has a problem.

Some rightly resist playing this game. Unilever, Coca-Cola, and Ford, to name just a few, have stopped issuing earnings

guidance altogether. Google never did. IBM has created five-year road maps to encourage investors to focus more on whether

it will reach its long-term earnings targets than on whether it exceeds or misses this quarter’s target by a few pennies. “I can

Capitalism for the Long Term - Harvard Business Review

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easily make my numbers by cutting SG&A or R&D, but then we wouldn’t get the innovations we need,” IBM’s CEO, Sam

Palmisano, told us recently. Mark Wiseman, executive vice president at the Canada Pension Plan Investment Board,

advocates investing “for the next quarter century,” not the next quarter. And Warren Buffett has quipped that his ideal holding

period is “forever.” Still, these remain admirable exceptions.

To break free of the tyranny of short-termism, we must start with those who provide capital. Taken together, pension funds,

insurance companies, mutual funds, and sovereign wealth funds hold $65 trillion, or roughly 35% of the world’s financial

assets. If these players focus too much attention on the short term, capitalism as a whole will, too.

In theory they shouldn’t, because the beneficiaries of these funds have an obvious interest in long-term value creation. But

although today’s standard practices arose from the desire to have a defensible, measurable approach to portfolio

management, they have ended up encouraging shortsightedness. Fund trustees, often advised by investment consultants,

assess their money managers’ performance relative to benchmark indices and offer only short-term contracts. Those

managers’ compensation is linked to the amount of assets they manage, which typically rises when short-term performance is

strong. Not surprisingly, then, money managers focus on such performance—and pass this emphasis along to the companies

in which they invest. And so it goes, on down the line.

As the stewardship advocate Simon Wong points out, under the current system pension funds deem an asset manager who

returns 10% to have underperformed if the relevant benchmark index rises by 12%. Would it be unthinkable for institutional

investors instead to live with absolute gains on the (perfectly healthy) order of 10%—especially if they like the approach that

delivered those gains—and review performance every three or five years, instead of dropping the 10-percenter? Might these

big funds set targets for the number of holdings and rates of turnover, at least within the “fundamental investing” portion of their

portfolios, and more aggressively monitor those targets? More radically, might they end the practice of holding thousands of

stocks and achieve the benefits of diversification with fewer than a hundred—thereby increasing their capacity to effectively

engage with the businesses they own and improve long-term performance? Finally, could institutional investors beef up their

internal skills and staff to better execute such an agenda? These are the kinds of questions we need to address if we want to

align capital’s interests more closely with capitalism’s.

2. Serve Stakeholders, Enrich Shareholders

The second imperative for renewing capitalism is disseminating the idea that serving stakeholders is essential to maximizing

corporate value. Too often these aims are presented as being in tension: You’re either a champion of shareholder value or

you’re a fan of the stakeholders. This is a false choice.

The inspiration for shareholder-value maximization, an idea that took hold in the 1970s and 1980s, was reasonable: Without

some overarching financial goal with which to guide and gauge a firm’s performance, critics feared, managers could divert

corporate resources to serve their own interests rather than the owners’. In fact, in the absence of concrete targets,

management might become an exercise in politics and stakeholder engagement an excuse for inefficiency. Although this

thinking was quickly caricatured in popular culture as the doctrine of “greed is good,” and was further tarnished by some

companies’ destructive practices in its name, in truth there was never any inherent tension between creating value and serving

the interests of employees, suppliers, customers, creditors, communities, and the environment. Indeed, thoughtful advocates of

value maximization have always insisted that it is long-term value that has to be maximized.

Capitalism’s founding philosopher voiced an even bolder aspiration. “All the members of human society stand in need of each

others assistance, and are likewise exposed to mutual injuries,” Adam Smith wrote in his 1759 work, The Theory of Moral Sentiments

.“The wise and virtuous man,” he added, “is at all times willing that his own private interest should be sacrificed to the public interest,” should circumstances so demand.

Smith’s insight into the profound interdependence between business and society, and how that interdependence relates to

long-term value creation, still reverberates. In 2008 and again in 2010, McKinsey surveyed nearly 2,000 executives and

investors; more than 75% said that environmental, social, and governance (ESG) initiatives create corporate value in the long

term. Companies that bring a real stakeholder perspective into corporate strategy can generate tangible value even sooner.

Creating direct business value, however, is not the only or even the strongest argument for taking a societal perspective.

Capitalism depends on public trust for its legitimacy and its very survival. According to the Edelman public relations agency’s

just-released 2011 Trust Barometer, trust in business in the U.S. and the UK (although up from mid-crisis record lows) is only

in the vicinity of 45%. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in

India, and 81% in Brazil. The picture is equally bleak for individual corporations in the Anglo-American world, “which saw their

trust rankings drop again last year to near-crisis lows,” says Richard Edelman.

How can business leaders restore the public’s trust? Many Western executives find that nothing in their careers has prepared

them for this new challenge. Lee Scott, Walmart’s former CEO, has been refreshingly candid about arriving in the top job with a

serious blind spot. He was plenty busy minding the store, he says, and had little feel for the need to engage as a statesman

with groups that expected something more from the world’s largest company. Fortunately, Scott was a fast learner, and

Walmart has become a leader in environmental and health care issues.

Tomorrow’s CEOs will have to be, in Joseph Nye’s apt phrase, “tri-sector athletes”: able and experienced in business,

government, and the social sector. But the pervading mind-set gets in the way of building those leadership and management

muscles. “Analysts and investors are focused on the short term,” one executive told me recently. “They believe social initiatives

don’t create value in the near term.” In other words, although a large majority of executives believe that social initiatives create

value in the long term, they don’t act on this belief, out of fear that financial markets might frown. Getting capital more aligned

with capitalism should help businesses enrich shareholders by better serving stakeholders.

3. Act Like You Own the Place

As the financial sector’s troubles vividly exposed, when ownership is broadly fragmented, no one acts like he’s in charge.

Boards, as they currently operate, don’t begin to serve as a sufficient proxy. All the Devils Are Here, by Bethany McLean and

Joe Nocera, describes how little awareness Merrill Lynch’s board had of the firm’s soaring exposure to subprime mortgage

instruments until it was too late. “I actually don’t think risk management failed,” Larry Fink, the CEO of the investment firm

BlackRock, said during a 2009 debate about the future of capitalism, sponsored by the Financial Times. “I think corporate

governance failed, because...the boards didn’t ask the right questions.”What McKinsey has learned from studying successful family-owned companies suggests a way forward: The most effective

ownership structure tends to combine some exposure in the public markets (for the discipline and capital access that exposure

helps provide) with a significant, committed, long-term owner. Most large public companies, however, have extremely

dispersed ownership, and boards rarely perform the single-owner-proxy role. As a result, CEOs too often listen to the investors

(and members of the media) who make the most noise. Unfortunately, those parties tend to be the most nearsighted ones.

And so the tyranny of the short term is reinforced.

The answer is to renew corporate governance by rooting it in committed owners and by giving those owners effective

mechanisms with which to influence management. We call this ownership-based governance, and it requires three things:

More-effective boards.

In the absence of a dominant shareholder (and many times when there is one), the board must represent a firm’s owners and

serve as the agent of long-term value creation. Even among family firms, the executives of the top-performing companies

wield their influence through the board. But only 43% of the nonexecutive directors of public companies believe they

significantly influence strategy. For this to change, board members must devote much more time to their roles. A governmentcommissioned

review of the governance of British banks last year recommended an enormous increase in the time required of

nonexecutive directors of banks—from the current average, between 12 and 20 days annually, to between 30 and 36 days

annually. What’s especially needed is an increase in the informal time board members spend with investors and executives.

The nonexecutive board directors of companies owned by private equity firms spend 54 days a year, on average, attending to

the company’s business, and 70% of that time consists of informal meetings and conversations. Four to five days a month

obviously give a board member much greater understanding and impact than the three days a quarter (of which two may be

spent in transit) devoted by the typical board member of a public company.

Boards also need much more relevant experience. Industry knowledge—which four of five nonexecutive directors of big

companies lack—helps boards identify immediate opportunities and reduce risk. Contextual knowledge about the development

path of an industry—for example, whether the industry is facing consolidation, disruption from new technologies, or increased

regulation—is highly valuable, too. Such insight is often obtained from experience with other industries that have undergone a

similar evolution.

In addition, boards need more-effective committee structures—obtainable through, for example, the establishment of a strategy

committee or of dedicated committees for large business units. Directors also need the resources to allow them to form

independent views on strategy, risk, and performance (perhaps by having a small analytical staff that reports only to them).

This agenda implies a certain professionalization of nonexecutive directorships and a more meaningful strategic partnership

between boards and top management. It may not please some executive teams accustomed to boards they can easily

“manage.” But given the failures of governance to date, it is a necessary change.

More-sensible CEO pay.

An important task of governance is setting executive compensation. Although 70% of board directors say that pay should be

tied more closely to performance, CEO pay is too often structured to reward a leader simply for having made it to the top, not

for what he or she does once there. Meanwhile, polls show that the disconnect between pay and performance is contributing to

the decline in public esteem for business.

CEOs and other executives should be paid to act like owners. Once upon a time we thought that stock options would achieve

this result, but stock-option- based compensation schemes have largely incentivized the wrong behavior. When short-dated,

options lead to a focus on meeting quarterly earnings estimates; even when long-dated (those that vest after three years or

more), they can reward managers for simply surfing industry- or economy-wide trends (although reviewing performance

against an appropriate peer index can help minimize free rides). Moreover, few compensation schemes carry consequences

for failure—something that became clear during the financial crisis, when many of the leaders of failed institutions retired as

wealthy people.

There will never be a one-size-fits-all solution to this complex issue, but companies should push for change in three key areas:

• They should link compensation to the fundamental drivers of long-term value, such as innovation and efficiency, not just to

share price.

• They should extend the time frame for executive evaluations—for example, using rolling three-year performance evaluations,

or requiring five-year plans and tracking performance relative to plan. This would, of course, require an effective board that is

engaged in strategy formation.

• They should create real downside risk for executives, perhaps by requiring them to put some skin in the game. Some experts

we’ve surveyed have privately suggested mandating that new executives invest a year’s salary in the company.

Redefined shareholder “democracy.”

On December 17, 2010 the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) was signed into law.  The Act includes;

• Lower Tax Rates (Bush Tax Cuts) extended through 2012,
• Marriage Penalty Relief extended through 2012,
• Social Security Tax reduction for 2011 only,
• Personal Exemption and Itemized Deduction Phase-outs repealed through 2012,
• AMT patched for 2010 and 2011,
• $5 Million Estate Tax Exemption and 35% estate tax rate for 2011 and 2012,
• Estate tax exemption portability for 2011 and 2012, and
• First year bonus depreciation allowed for assets placed in service through 2012.

Changes Affecting Individuals

Lower Tax Rates Extended through 2012. The Act extends the 10%, 15%, 25%, 28%, 33%, and 35% federal income tax rates on ordinary income through 2012. Without the new law, these rates would have been replaced in 2011 and beyond by the pre-Bush rates of 15%, 28%, 31%, 36%, and 39.6%.

The Act also extends the 0% and 15% federal income tax rates on most long-term capital gains and dividends through 2012. Without the new law, most long-term capital gains would have been taxed at 10% or 20% and dividends would have been taxed at ordinary rates of up to 39.6%.

Marriage Penalty Relief Extended through 2012. As you know, getting married can cause a couple’s combined federal income tax bill to be higher than when they were single. The 2001 Bush tax cut legislation eased this marriage penalty by tweaking the lowest two tax brackets for married couples and by giving them bigger standard deductions. Without the new law, these fixes would have disappeared after 2010. The Act extends them through 2012.

Social Security Tax Reduction for 2011 Only. The Act cuts the 6.2% Social Security tax withholding rate on employee salaries from 6.2% to 4.2%. This temporary change only affects the first $106,800 of 2011 wages (i.e., wages up to the 2011 Social Security tax ceiling). The maximum savings are $2,136 for unmarried individuals and $4,272 for couples. The Social Security tax component of the self-employment tax is cut from 12.4% to 10.4% for 2011, so self-employed folks will benefit too.

Good News: Because of this change, employees should notice bigger paychecks by the end of January, if not sooner. Self-employed folks will account for the change by reducing their 2011 estimated payments.

Personal Exemption and Itemized Deduction Phase-outs Repealed through 2012. For 2010, unfavorable phase-out rules that could reduce some of your most-cherished write-offs were temporarily repealed. The phase-out rules were scheduled to come roaring back in 2011. Thankfully, the Act keeps the repeal in place through 2012.

Alternative Minimum Tax (AMT) Patch for 2010 and 2011. As you know, it has become an annual ritual for Congress to “patch” the AMT rules to prevent millions more households from getting socked with this add-on tax. The patch primarily consists of allowing bigger AMT exemptions and allowing personal tax credits to offset the AMT. The Act makes the patch for 2010 and for 2011 as well.

100% Gain Exclusion for Qualified Small Business Corporation Stock Extended to Cover Shares Issued in 2011. The Small Business Jobs Act of 2010 (enacted last September) created a temporary 100% gain exclusion (within limits) for sales of qualified small business corporation (QSBC) stock issued between 9/28/10 and 12/31/10. The Act extends the window for taking advantage of this change by one year to cover QSBC shares issued between 9/28/10 and 12/31/11.

Note: QSBC shares must be held for more than five years to be eligible for the gain exclusion break. Thus, we are only talking about sales that will occur well down the road.

IRA Qualified Charitable Contributions Extended through 2011. For 2006–2009, IRA owners who had reached age 70½ were allowed to make annual tax-free distributions of up to $100,000 paid directly out of their IRAs to charitable organization. These donations are called qualified charitable distributions (QCDs). They generally do not directly affect your federal income tax bill because no deductions are allowed. However, you do not have to itemize deductions to benefit and QCDs count as IRA required minimum distributions (RMDs). Therefore, charitably inclined seniors can get a break by arranging for tax-free QCDs to take the place of taxable RMDs and those who do not itemize can effectively get the benefit of the deduction by arranging for tax-free QCDs. The QCD break expired at the end of 2009. The Act retroactively restores it for 2010 and extends it through 2011.

Bigger Child Credit Extended through 2012. For 2011 and beyond, the maximum credit was scheduled to drop from $1,000 to only $500. The Act extends the $1,000 credit through 2012.

American Opportunity Education Credit Extended through 2012. The American Opportunity credit can be worth up to $2,500, can be claimed for up to four years of undergraduate education, and is 40% refundable. It was scheduled to expire at the end of 2010 and be replaced by the Hope Scholarship credit which is smaller, can only be claimed for the first two years of college, is subject to phase-out at lower income levels, and is nonrefundable. The Act extends the more generous American Opportunity credit through 2012.

College Tuition Deduction Extended through 2011. This write-off, which can be as much as $4,000, or $2,000 at higher income levels, expired at the end of 2009. The Act retroactively restores the deduction for 2010 and extends it through 2011.

More Generous Student Loan Interest Deduction Rules Extended through 2012. This write-off, which can be as much as $2,500 (whether you itemize or not), was scheduled to fall under less favorable rules in 2011 and beyond. The Act extends through 2012 the more favorable rules established by the 2001 Bush tax cut legislation.

More Generous Coverdell Education Savings Account Rules Extended through 2012. For 2011, the maximum contribution to federal-income-tax-free Coverdell college savings accounts was scheduled to drop from $2,000 to only $500, and a stricter phase-out rule would have limited contributions by many married joint-filing couples. The Act extends through 2012 the more generous contribution rules established by the 2001 Bush tax cut legislation.

Employer Educational Assistance Plans Extended through 2012. Through 2010, an employer can provide up to $5,250 in annual federal-income-tax-free educational assistance to each eligible employee. Both undergraduate and graduate school costs can be covered by the plan, and the education need not be job-related. This taxpayer-friendly deal was scheduled to expire at the end of 2010. The Act extends it through 2012.

Option to Deduct State and Local Sales Taxes Extended through 2011. For the last few years, individuals who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local general sales taxes. The sales tax deduction option expired at the end of 2009. The Act retroactively restores it for 2010 and extends it through 2011.

More Generous Earned Income Tax Credit Rules Extended through 2012. The 2009 Stimulus Act increased the refundable earned income credit (EIC) percentage for families with three or more qualifying children from 40% to 45%. This change was effective for 2009 and 2010, and it resulted in larger EICs for affected families. The Stimulus Act also increased the income threshold for the phase-out rule that can reduce or eliminate EICs for married joint-filing couples. Both changes were scheduled to expire at the end of 2010. The Act extends them through 2012.

More Generous Dependent Care Tax Credit Rules Extended through 2012. For the last few years, parents could claim a credit of up to $600 for costs to care for one under-age-13 child or up to $1,200 for costs to care for two or more under-age-13 kids, so the parents can go to work. Lower-income parents can claim larger credits of up to $1,050 and $2,100, respectively. For 2011 and beyond, the maximum credits were scheduled to drop. The Act extends the more generous maximum credit amounts through 2012. Note that in some cases, the credit can also be claimed for dependents other than under-age-13 children.

Smaller Tax Credit for 2011 Energy-efficient Home Improvements. The 2009 Stimulus Act provided that 30% of 2009 and 2010 expenditures for energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in U.S. residences could qualify for a credit, up to a maximum credit amount of $1,500 over the two years combined. The new law extends the credit through 2011, but the credit percentage is scaled back to only 10% and the lifetime credit limit is only $500. The $500 credit cap is reduced by any credits claimed in 2006–2010.

$250 Deduction for K–­12 Educators Extended through 2011. For the last few years, teachers and other eligible personnel at K­–12 schools could deduct up to $250 of school-related expenses paid out of their own pockets—whether they itemized or not. This break expired at the end of 2009. The Act retroactively restores it for 2010 and extends it through 2011.

Bigger Tax-free Limit for Employer-provided Transportation Fringes Extended through 2011. The 2009 Stimulus Act increased the maximum monthly amount that an employee can receive as a tax-free fringe benefit for employer-provided transit passes and/or employer-provided transportation in a commuter highway vehicle (van pooling) to equal the maximum monthly tax-free amount for employer-provided parking benefits. As a result of the increase, the maximum monthly tax-free amount that could be received in 2010 for transit passes and/or van pooling (together or separately) was $230. However, the increased limit expired at the end of 2010. The new law extends the increased limit for transit passes and/or van pooling through 2011. The IRS just announced that the 2011 tax-free monthly limit for transit passes and/or van pooling is $230 (same as for 2010).

New Estate and Gift Tax Rules for 2010–2012

The new law includes favorable estate tax provisions for individuals who died in 2010, as well as those who die in 2011 and 2012. Here is a brief summary.

$5 Million Estate Tax Exemption and 35% Rate. For estates of individuals who die in 2010–2012, the Act establishes a $5 million federal estate tax exemption with the 2012 amount indexed for inflation. Big estates are taxed at 35% above the $5 million threshold. (We’ll have more on special rules for estates of individuals who died in 2010 later.)

Unused Estate Tax Exemption Can Be Left to Surviving Spouse. For the first time, married individuals who don’t use up their estate tax exemptions will be able to pass along unused amounts to surviving spouses. In other words, unused exemptions of individuals who die in 2011 or 2012 (but not 2010) will be “portable.” The ability to pass along unused estate tax exemptions to surviving spouses is a very favorable development. It allows both spouses’ exemptions to be utilized without having to set up a credit shelter trust or engage in other tax planning maneuvers—as long as they both die in 2011 or 2012. Unfortunately, this new portability rule sunsets after 2012, so it won’t help decedents who die after 2012. Also, the portability rules do not apply to the generation-skipping transfer tax exemption. Thus, trusts may still be needed in certain situations.

Unlimited Basis Step-ups for Inherited Assets. For heirs of decedents who die in 2011 and beyond, the familiar rule that allows the federal income tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect fair market value on the date of death is reinstated. This favorable rule is also reinstated for decedents who died in 2010 unless the estate elects to instead use the modified carryover basis rule. (We’ll have more on this election shortly.) With the restoration of the unlimited basis step-up rule, heirs won’t owe any federal capital gains taxes on appreciation that occurs through the date of death—as long as that date is after 2010 or, for decedents who died in 2010, their estate doesn’t elect to use the modified carryover basis rules.

Estate and Gift Tax Exemptions and Rates Are Equalized. The Act sets the lifetime federal gift tax exemption for 2011 and 2012 at $5 million—with the 2012 amount indexed for inflation (ditto for the generation-skipping transfer tax exemption). Thus, the gift tax and estate tax exemptions are equalized for 2011 and 2012. This is a huge improvement over the previous $1 million gift tax exemption (which continues to apply for 2010). An unmarried person can now give away up to $5 million while alive without paying any gift tax, and a married couple can give away up to $10 million. (To the extent you dip into your gift tax exemption, your estate tax exemption is reduced dollar-for-dollar.) The tax rate on 2011 and 2012 gifts in excess of the $5 million exemption is 35%, same as the estate tax rate. Again, thanks to sunset provisions, the gift tax exclusion reverts to $1 million after 2012.

Clarity for Estates of 2010 Decedents and 2010 Generation-skipping Transfers. The Act clarifies the estate tax treatment of estates of individuals who died in 2010 and the generation-skipping transfer (GST) tax treatment of generation-skipping gifts made in 2010, but it does so in a weird way. The new law reinstates both taxes for 2010 with $5 million exemptions for each. But, executors have the option of electing out of the estate tax for 2010 in accordance with the 2010 repeal.

If executors elect out of estate tax, the aforementioned modified carryover basis rules apply to heirs for income tax basis purposes. So, heirs of large estates can wind up owing capital gains taxes on appreciation that occurs through the decedent’s date of death, but there won’t be any federal estate tax. If the election out is not made for an estate, the $5 million exemption applies for 2010, and the income tax basis of inherited assets equals FMV on the date of death.

For 2010, the GST exemption is $5 million. However, the 2010 GST rate is deemed to be 0%, so there’s no actual GST liability for 2010. Therefore, large generation-skipping gifts can be made in 2010, and only the gift tax will be owed (2010 gifts in excess of the $1 million gift tax exemption for that year are taxed at a flat 35% rate). The GST tax exemption is not subject to any portability, unlike the estate tax exclusion amount.

Thus, up to $5 million of GST tax exemption may be allocated to transfers in trust in 2010 (depending on how much GST tax exemption was used by the transferor prior to 2010).

Note: The $5 million GST tax exemption is available to an estate whether the executor of an estate for a decedent who died in 2010 chooses to be subject to estate tax or elects out of the estate tax and instead applies the modified carryover basis rules.

Business Depreciation and Depletion Changes

First-year Bonus Depreciation Allowed for Assets Placed in Service through 2012. The Act generally allows 100% first-year bonus depreciation for qualifying new (not used) assets that are acquired and placed in service between 9/9/10 and 12/31/11. It also allows 50% first-year bonus depreciation for qualifying new (not used) assets that are placed in service in calendar year 2012. For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitation, the 100% and 50% bonus depreciation breaks increase the maximum first-year depreciation deduction by $8,000 for vehicles acquired and placed in service by 12/31/12.

15-year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements Extended through 2011. The 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements is retroactively restored for property placed in service in 2010 and extended to cover property placed in service in 2011. (Without the favorable 15-year depreciation rule, leasehold improvements, restaurant building improvements, restaurant buildings, and retail space improvements generally would have to depreciated straight-line over 39 years.)

Suspension of Percentage Depletion Net Income Limitation for Marginal Properties Extended through 2011. The suspension of the 100%-of-net-income limitation on percentage depletion deductions for marginal oil and gas properties is retroactively reinstated for tax years beginning in 2010 and extended through tax years beginning in 2011.

Business Tax Credit Changes

Research Credit Extended through 2011. The Act retroactively restores the research credit for 2010 and extends it through 2011 to cover qualifying expenses paid or incurred in those years.

Work Opportunity Credit Hiring Deadline Extended by Four Months. The Act extends the general deadline for employing eligible individuals for purposes of claiming the Work Opportunity Tax Credit by four months, from 8/31/11 to 12/31/11.

Differential Pay Credit for Small Employers Extended through 2011. Legislation enacted in 2008 created a tax credit for eligible small employers that provide differential pay to employees while they serve in the military. The credit equals 20% of differential pay of up to $20,000 paid to each qualifying employee during the tax year. The credit expired at the end of 2009. The Act retroactively restores it to cover payments made in 2010 and extends it to cover payments made in 2011.

Contractor Credit for Building Energy-efficient Homes Extended through 2011. The Act retroactively reinstates the $2,000 per-home contractor tax credit for building new energy-efficient homes in the U.S. (including manufactured homes) for 2010 and extends it through 2011. The credit can also be claimed for substantially reconstructing and rehabilitating an existing home and making it more energy-efficient. Homes that don’t fully meet the energy-efficiency standards may qualify for a reduced $1,000 credit. To qualify for this credit, a home must be sold by 12/31/11 for use as a residence.

Business Charitable Contribution Changes

Enhanced Deduction for Food Donations Extended through 2011. The new law retroactively restores for 2010 and extends through 2011 the enhanced charitable contribution deduction for non-C corporation businesses that donate food (it must be apparently wholesome when donated). This provision is intended for non-C corporation businesses that have food inventories, such as restaurants.

Enhanced C Corporation Deduction for Book Donations Extended through 2011. The Act retroactively restores for 2010 and extends through 2011 the enhanced deduction for C corporations that donate books to schools. This provision is intended for C corporations that have book inventories, such as publishers and retailers.

Enhanced C Corporation Deduction for Computer Donations Extended through 2011. The new law retroactively restores for tax years beginning in 2010 and extends through tax years beginning in 2011 the enhanced deduction for C corporations that donate computer equipment and technology to qualifying educational organizations and libraries.

Favorable Rule for S Corporation Donations of Appreciated Assets Extended through 2011. The new law retroactively restores for tax years beginning in 2010 and extends through tax years beginning in 2011 the favorable shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets.

The 2010 Small Business Act has increased form 1099 reporting requirements to include any person receiving rental income, effective in 2011.  In addition, effective in 2011, the 2010 Patient Protection and Affordable Care Act (Health Reform Bill) has expanded the 1099 filing requirements to include all payments for goods or services exceeding $600 per payee.

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EFFECTIVE 2011

1.       Rental Property Owners required to file Form 1099

The 2010 Small Business Act expands the definition of trade or business for purposes of the Form 1099 information return reporting requirements.  Beginning in 2011, any person receiving rental income from real estate will be considered to be engaged in a trade or business and will be subject to the Section 6041(a) information reporting requirements.

As a result, rental income recipients making payments after December 31, 2010 totaling $600 or more in a calendar year to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return to the IRS (Form 1096) and the service provider (Form 1099). 

Exceptions to the information return reporting requirements:

a)       any individual if substantially all of their rental income is from temporarily renting their primary residence,

b)       persons who receive a minimal amount of rental income (definition of minimal is still to be determined by the IRS),

c)       any individual for whom the filing requirements would cause a hardship (definition to be determined),

d)       any payment card transactions (including credit cards) that are required to be reported under Section 6050W rules (the merchant acquiring entity or other entity will generally be required to file an information return),

e)       third-party network transactions if aggregate payments to a service provider exceed $20,000 and the aggregate number of transactions exceeds 200, and

f)        payments made in 2011 to corporations are generally not required to be reported.

2.       Harsher Penalties for Failure to Comply with Form 1099 Reporting Rules

Beginning in 2011 and beyond, the IRS can assess harsher penalties for failing to file information returns with the IRS and failing to send copies to payees.  The 2010 Small Business Act doubled the penalty amounts for failure to file correct information returns and failure to furnish correct payee statements.  The penalties vary based on the date the return is filed and gross receipts.  The maximum amounts are:

• Failure to file correct information returns, $100 per return up to $1.5 million
• Failure to furnish correct payee statements, $100 per statement up to $1.5 million

Therefore, by January 1, 2011, you should create procedures and update accounting systems to ensure compliance with the new information return filing requirements.  Please be sure to:

1. track cumulative payments made to each service provider,
2. request Form W-9 (Request for Taxpayer Identification Number and Certification) from each service provider which payments are $600 or more in one calendar year, and
3. prepare for filing information return Form 1096 & sending Form 1099-MISC by January 31, 2012.

EFFECTIVE 2012 – INCREASED INFORMATION REPORTING REQUIREMENTS

The 2010 Patient Protection and Affordable Care Act expands Form 1099 reporting requirements even further.  With payments made after December 31, 2011, an information return and payee statements will generally need to be filed for amounts paid:

a)       to a service provider in excess of $600 (such as a plumber, painter, or accountant) in the course of earning rental income,

b)       for goods purchased in the course of the payer’s trade or business (now includes rental activity) if the total annual payments to the payee are $600 or more,

c)       for “gross proceeds” in excess of $600 (gross proceeds still needs to be defined by the IRS), and

d)       payments to corporations must be reported.

Therefore, by January 1, 2012, you should create procedures and update accounting systems to ensure compliance with the new information return filing requirements.  Please be sure to:

1. track cumulative payments made to each service provider, including corporations,
2. track cumulative payments for goods purchased from the same payee, including corporations,
3. request Form W-9 (Request for Taxpayer Identification Number and Certification) from each service provider and vendor for which payments are $600 or more in one calendar year, and
4. prepare for filing information return Form 1096 & sending Form 1099-MISC by January 31, 2013.

Many businesses have already expressed concerns about the burden the 2012 increased reporting requirements will impose.  Therefore, Congress may adjust these filing requirements prior to their effective date.  However, because historically Congress has been unable to agree on tax legislation on a timely basis, we suggest you have your compliance systems in place by January 1, 2012 in order to avoid costly penalties and/or implementation costs.

On September 27, 2010 President Obama signed into law the new Small Business Jobs Act of 2010. The legislation effects;

• Rental Property Owners 1099 requirements,
• 401(k) rollovers to Roth IRA’s,
• Section 179 First-year Depreciation Deduction,
• 50% First-year Bonus Depreciation,
• First-year Auto and Light Truck Depreciation,
• Start-up Costs Deduction,
• QSBC Stock Sales,
• Eligible Small Business Treatment of 2010 General Business Credits,
• Cell Phones Used for Business,
• Health Insurance Premiums Deduction for self-employment tax, and
• Break in S Corporation Built-in Gains Recognized in 2011.

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1.      Rental Property Owners Must Issue 1099’s to Service Providers

Starting next year, owning a rental property will generally be considered a business for purposes of the Form 1099 information return reporting requirements.  Therefore, property owners will generally be required to file a 2011 Form 1099 for any service provider that is paid $600 or more during 2011.  Also, a copy of the Form 1099 must be provided to each payee. 

Note: Starting in 2012, another tax-law change included in the healthcare reform legislation will impose onerous new Form 1099 reporting requirements for payments by businesses.  Since owning a rental property is now considered a business for purposes of the 1099 rules, property owners will be affected by the new requirements. 

2.      401(K) Rollovers to Roth IRA Accounts

The new law authorizes 401(K), 403(b) and 457(b) governmental plans to allow participants to roll over qualified distributions, including in-service distributions, into a designated Roth account within their plans.  The rollover will be taxable, except for any after-tax contributions.  The provision is effective for distributions after September 27, 2010.  If an amount is rolled over in 2010, the amount is included ratably in income in equal amounts over 2011 and 2012, unless another election is made.

3.      Section 179 First-year Depreciation Deductions Doubled for 2010 and 2011

The Section 179 deduction privilege allows many small and medium-sized businesses to immediately write off most or all of the cost of qualifying new and used assets in the first year instead of having to depreciate the cost off over a number of years. The new law doubles the maximum annual Section 179 deduction to $500,000 for eligible assets placed in service in tax years beginning in 2010 and 2011.  Most types of depreciable personal property (including computers, other equipment, and furniture) and most purchased software qualify. For the first time, some types of real estate improvement costs also qualify.

However, larger businesses can lose all or part of the Section 179 deduction allowance due to an unfavorable phase-out rule. Under that rule, the allowance is reduced dollar for dollar by the cost of qualifying assets placed in service during the year (those that would otherwise be eligible for the Section 179 privilege) in excess of the applicable threshold. For tax years beginning in 2010 and 2011, the new law greatly increases the phase-out threshold to the quite-generous level of $2 million (way up from the $800,000 threshold for tax years beginning in 2009).

4.      Some Real Property Improvement Costs Qualify for Section 179 Depreciation Deductions

Until now, real property improvement costs were ineligible for the Section 179 deduction privilege.  For tax years beginning in 2010 and 2011, up to $250,000 of qualified improvement costs for the following types of real property can be immediately deducted under the Section 179 deduction provision:

• Interiors of leased nonresidential buildings.
• Restaurant buildings.
• Interiors of retail buildings.

The $250,000 Section 179 allowance for real estate improvements is part of the overall $500,000 allowance. Again, watch out if your business already has a tax loss for the year (or close) before considering any Section 179 deduction. You can’t claim a Section 179 write-off that would create or increase an overall business tax loss for the year.

5.      50% First-year Bonus Depreciation Retroactively Reinstated for 2010

The new law retroactively reinstates 50% first-year bonus depreciation for one year, to cover qualifying new personal property assets and purchased software placed in service by 12/31/10.

Unlike Section 179 deductions, bonus depreciation is available to even the largest businesses. However, small and medium-sized outfits that can take advantage of both the Section 179 deduction and bonus depreciation are the biggest winners.

6.      Bigger First-year Depreciation Deductions for New Autos and Light Trucks for 2010

If your business buys a new (not used) passenger auto or light truck during 2010 that’s subject to the luxury auto depreciation limitations (most passenger vehicles are except for big SUVs, pickups, and vans). The reinstated 50% bonus depreciation write-off increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service by 12/31/10.

• For new cars, bonus depreciation raises to the maximum first-year depreciation write-off for 2010 to $11,060 (assuming 100% business use).
• For new light trucks, the maximum first-year depreciation deduction for 2010 is raised to $11,160 (assuming 100% business use).

7.      Start-up Cost Deduction Rule Liberalized for 2010

For tax years beginning in 2010, the new law increases the maximum deduction that can be claimed for start-up costs in the year when a new business commences operations to $10,000 (up from $5,000). However, the $10,000 deduction allowance is phased out once cumulative start-up costs exceed $60,000. Start-up costs that cannot be deducted in the year when business commences under the $10,000 allowance can be amortized over 180 months, starting with the month when business commences.

8.      QSBC Stock Sale Rules Liberalized for Shares Issued in Narrow Three-month Window

Before the new law, non-C corporation sellers of Qualified Small Business Corporation (QSBC) shares generally paid a 28% capital gains tax on only 50% to 25% of the gain on the sale of these shares (depending on when the QSBC shares were purchased). However, a percentage of the excluded gain was potentially subject to the Alternative Minimum Tax (AMT). To encourage new investments in QSBC stock, the new law exempts 100% of the gain realized on qualifying sales of QSBC shares that are issued between September 28,2010 and December 31, 2010. This 100% exclusion applies for both the 28% capital gains tax and the AMT.

Note: The QSBC shares must be held for over five years to qualify for any of these gain exclusion breaks. Therefore, for the 100% exclusion to apply, we are talking about sales that will occur in 2015 and beyond. Also, there’s only a three-month window of opportunity to acquire QSBC shares that qualify for the 100% exclusion. If you’re interested in taking advantage of this, you’ll need to close the deal by December 31, 2010. Also, there are numerous rules that must be met for the stock to qualify as QSBC shares.

9.      Eligible Small Businesses Get Special Treatment for 2010 General Business Credits

Before the new law, most general business credits could be used to offset regular income taxes but not AMT. General business credits generated in the current year that could not be used in that year (unused credits) could be carried back one year or forward 20 years. The new law creates an exception that allows general business credits that arise in tax years beginning in 2010 to offset AMT for 2010. Also, unused general business credits from 2010 can be carried back five years. However, these exceptions are only available to Eligible Small Businesses (ESBs) with average annual gross receipts for the preceding three tax years of $50 million or less.

10.  Cell Phones Used for Business Are No Longer Listed Property

Effective for tax years beginning after 2009, cell phones and similar telecommunications devices used for business are no longer subject to the ultra-strict recordkeeping requirements that formerly applied. This retroactive change has some taxpayer-friendly consequences. For instance, a self-employed individual is no longer required to keep detailed usage records to prove that a cell phone is used for business. However, if the individual has only one cell phone that is used for both personal and business purposes, some sort of recordkeeping will still be necessary to determine allowable business deductions. An employee who uses a personal cell phone for his or her employer’s business can claim the related costs as a miscellaneous itemized deduction without having to prove the phone usage was for the employer’s convenience.

Note:  There’s some speculation that the IRS might soon issue rules that would allow employers to provide cell phones to employees as a tax-free fringe benefit.

11.  Health Insurance Premiums Can Be Deducted in Calculating 2010 Self-employment Taxes

Until now, a self-employed individual’s federal income tax deduction for health insurance premiums could not be deducted as an expense when calculating his or her self-employment tax liability on Schedule SE.  For 2010, the health insurance premium deduction is allowed as an expense on Schedule SE. This can be a fairly big deal, especially if your health insurance deduction is significant.

12.  Harsher Penalties for Failure to Comply with Form 1099 Reporting Rules

Starting next year, the IRS can assess much harsher penalties for failing to file Form 1099 information returns with the IRS and failing to send copies to payees (so-called payee statements). In many cases, the penalties will be doubled. The new rules (which are quite complicated) will apply to Forms 1099 and payee statements due in 2011 and beyond.

13.  Break for S Corporation Built-in Gains Recognized in 2011

When a C corporation converts to S corporation status, the corporate-level built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The recognition period is normally the 10-year period that begins on the conversion date. For tax years beginning in 2011, the new law exempts gains from the built-in gains tax if the fifth year of the recognition period has gone by before the start of the 2011 tax year. Therefore, deferring asset sales that would generate built-in gains until 2011 is something to consider.

On March 30, 2010, President Obama signed into law the final piece of his Health Reform legislation. Once fully phased in (not until 2018), the legislation will provide health care coverage to some 32 million uninsured and make it more affordable for millions more by:

• expanding Medicaid,
• requiring the establishment of state-run Insurance Exchanges through which certain individuals and families can receive federal subsidies to substantially reduce the cost,
• forbidding insurance companies from excluding coverage for pre-existing conditions (effective this year for children and in 2014 for adults),
• establishing temporary (through 2014) high-risk insurance pools for adults with pre-existing conditions, and
• requiring health plans to allow parents to keep their children on their family plans until they reach age 26.

The 10-year price is estimated to be $938 billion, which is largely paid for through significant tax increases on higher income taxpayers, Medicare reimbursement savings, and various revenue raisers targeting specific health-related industries.

On March 30, 2010, President Obama signed into law the final piece of his Health Reform legislation. Once fully phased in (not until 2018), the legislation will provide health care coverage to some 32 million uninsured and make it more affordable for millions more by:

• expanding Medicaid,
• requiring the establishment of state-run Insurance Exchanges through which certain individuals and families can receive federal subsidies to substantially reduce the cost,
• forbidding insurance companies from excluding coverage for pre-existing conditions (effective this year for children and in 2014 for adults),
• establishing temporary (through 2014) high-risk insurance pools for adults with pre-existing conditions, and
• requiring health plans to allow parents to keep their children on their family plans until they reach age 26.

The 10-year price is estimated to be $938 billion, which is largely paid for through significant tax increases on higher income taxpayers, Medicare reimbursement savings, and various revenue raisers targeting specific health-related industries.

Provisions Effective in 2010

1.      Small Employer Health Insurance Tax Credit.

Effective 2010-2013, the Health Reform legislation provides a new tax credit for qualifying small employers that purchase health insurance for their employees. To qualify for this new credit you must:

a)      employ no more than 25 Full-time Equivalent (FTE) employees during the tax year,

b)      pay annual FTE wages that average no more than $50,000 for the year,

 c)      have a qualified health insurance plan or arrangement under which you pay at least 50% of the premiums on a uniform basis for employees who enroll in the plan, and

 d)      pay the same percentage (which has to be at least 50%) of all its employees’ premiums. However, under a transition rule for 2010 only, an employer can qualify even if it pays differing percentages of different employees’ premiums as long all the employer payments are at least 50% of each employee’s premium (based on single—employee only—coverage). Also, premiums paid in 2010 before the Health Reform legislation was enacted can qualify for the credit.

 The credit generally equals 35% of the amounts paid by the employer for employee coverage.  However, the full amount of the credit is available only for employers that employee 10 or fewer FTE employees and have average annual FTE wages of less than $25,000 for the year. Also, no credit is allowed for premiums paid on behalf of partners, sole proprietors, 2% shareholders of an S corporation, 5% owners of the employer, and dependents of these individuals. Other limitations may apply as well.

The small employer health insurance credit will be claimed on the employer’s income tax return. It can offset regular income taxes and alternative minimum tax. Any unused credit can be carried back for one year (but not before 2010) and forward for 20 years to offset future taxes.

Note: In 2014 and later, eligible small employers who purchase coverage through a state-run Insurance Exchange (which the Health Reform legislation requires states to establish) will be eligible for a tax credit for two years of up to 50% of their contribution. Also, the wage limits will be indexed beginning in 2014.

2.      Liberalized Adoption Credit and Adoption Assistance Exclusion.

For 2010, the Health Reform legislation increases the adoption credit and the employer-provided adoption assistance exclusion to $13,170 (from $12,170). It also makes the credit refundable and extends both the exclusion and credit through 2011.

3.      Dependent Coverage in Employer Health Plans.

Effective March 30, 2010, self-employed individuals can deduct insurance coverage for their children who have not attained age 27 as of the end of the year. Similarly, employees can exclude from their taxable income the amounts their employer pays for health care insurance and expense reimbursements for their children who have not attained age 27 as of the end of the year. To qualify for this tax break, the child must be the individual’s son, daughter, stepson, stepdaughter or eligible foster child. The child does not have to be the individual’s dependent.

Although the exclusion for employer-provided health coverage for under-age-27 dependents is effective March 30, 2010, employers don’t have to provide health coverage of these adult children if they don’t otherwise cover dependents. If the employer plan does cover dependents, it must change its definition of “dependent” to include an employee’s unmarried children up to age 26, but not until its plan year beginning after September 22, 2010. Thus, employees may well have to wait until 2011 before they have an opportunity to cover these adult children and even then, only if their employer’s health plan otherwise covers dependents and the child is unmarried and under age 26. (The under-age-26 and marital status requirements appear to be a glitch in the law. Hopefully, future legislation will change this definition so that it is the same as for the income exclusion requirement where the child simply has to be under age 27.

4.      Codification of Economic Substance Doctrine and Imposition of Penalties.

The economic substance doctrine is a judicial doctrine that the courts have used inconsistently over the years to deny tax benefits when the transaction generating these tax benefits lacked economic substance. The Health Reform legislation clarifies the manner in which the economic substance doctrine should be applied by the courts. It also imposes a 20% penalty on understatements attributable to a transaction lacking economic substance.

Provisions Effective in 2011

1.      Employers must report the cost of Employer Sponsored Health Coverage on Form W-2. Beginning in 2011, employers will have to start reporting the value of health insurance coverage they provide to employees on the employee’s Form W-2.

 2.      Over-the-counter Medicine No Longer Reimbursable by Health Plans.

Under pre-Health Reform law, health plans [including health FSAs, Health Reimbursement Accounts (HRAs), Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (MSAs)] could reimburse, on a tax-free basis, the cost of medicine regardless of whether it was prescribed by a doctor.  On the other hand, only medicine (other than insulin) that required a doctor’s prescription was deductible for income tax purposes (as an itemized deduction).

Beginning in 2011, the Health Reform legislation provides that only insulin and doctor prescribed medicine qualifies for tax-free reimbursement through a health FSA, HRA, HSA, or Archer MSA. Thus, as with the itemized deduction for medical expenses, non-prescribed medicine (other than insulin) will not qualify for tax-free reimbursement.

3.      Increased Tax on Non-qualifying HSA and Archer MSA Distributions.

The additional tax for HSA withdrawals made before the owner turns age 65 that are not used for qualified medical expenses is increased from 10% to 20%. Similarly, the additional tax for post-2010 Archer MSA withdrawals that are not used for qualified medical expenses is increased from 15% to 20%.

4.      Simple Cafeteria Plans Available for Small Employers.

A new cafeteria plan, known as a Simple Cafeteria Plan, will be available to small employers that employed an average of 100 or fewer employees during either of the two preceding years. Basically, the Simple Cafeteria Plan and the benefits it provides (including group term life insurance, self insured medical expense reimbursements, and dependent care assistance) will be treated as meeting the applicable nondiscrimination rules if the cafeteria plan satisfies certain minimum eligibility, participation, and contribution requirements. This should make it simpler for small employers to provide tax-free benefits to their employees.

Provisions Effective in 2012

1.      Corporate Information Reporting. 

Businesses that pay more than $600 during the year to corporate providers of property and services will have to file an information report with each provider and the IRS. This will likely be done on Form 1099-MISC, Miscellaneous Income.

Provisions Effective in 2013

1.      Additional Hospital Insurance (HI) Tax for High Wage Workers.

The employee portion of the HI tax rate will be increased by 0.9% for employees who earn wages over $200,000 ($250,000 for married couples filing jointly or $125,000 for married filing separate). Similarly, an additional HI tax of 0.9% will be imposed on self-employment income in excess over $200,000 ($250,000 for married couples filing jointly or $125,000 for married filing separate) reduced (but not below zero) by wages taken into account in determining the FICA tax with respect to the taxpayer.

Note: The $125,000/$200,000/$250,000 thresholds are not indexed for inflation.

2.      New 3.8% Surtax on Unearned Income.

Beginning in 2013, taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for a joint return or $125,000 for married filing separate) will be subject to a 3.8% surtax (called the Unearned Income Medicare Contribution) on net investment income. Specifically, the tax equals 3.8% of the lesser of the following two amounts:

 a)      Net investment income (basically, interest, dividends, royalties, rents, and gains on the sale of investment property).

b)      The excess of MAGI over $200,000 ($250,000 for a joint return or $125,000 for married filing separate). MAGI is AGI increased by the amount excluded from income as foreign earned income, net of the deductions and exclusions disallowed with respect to the foreign earned income.

The tax also applies to estates and trusts. In this case, the tax is 3.8% of the lesser of (1) undistributed net investment income or (2) the excess of AGI over the dollar amount at which the highest estate and trust income tax bracket begins.

3.      Increased Medical Expense Deduction Threshold. 

The threshold for the itemized deduction for medical expenses for regular income tax purposes will be increased from 7.5% of AGI to 10% of AGI. However, for 2013 through 2016, if either the taxpayer or the taxpayer’s spouse turns 65 before the end of the tax year, the increase won’t apply and the threshold will remain at 7.5% of AGI.

4.      New Limit on Health FSA Contributions.

The maximum amount that an individual can contribute to an employer-provided health Flexible Spending Account (FSA) will be $2,500 per year. Note, however, that health FSA plans can (and typically do) limit contributions to an amount that is less than $2,500 per year. Therefore, this change may have little or no impact on you.

5.      Deduction for Retiree Drug Coverage Eliminated.

A number of large employers provide prescription drug coverage for their Medicare Part D eligible retirees, which is subsidized by the Department of Health and Human Services (HHS). This subsidy is excluded from the company’s income, and under pre-Health Reform law, it did not reduce the deduction otherwise allowed for the payment. Starting in 2013, the subsidy will reduce the allowed deduction. (As a result of this change, several large companies have already announced that they are reconsidering providing this retiree benefit.)

Provisions Effective in 2014

1.      Penalty for Individuals Not Having Health Insurance Coverage.

Most U.S. citizens and legal residents will have to maintain health care coverage or pay a penalty based on their household income and the number of uninsured individuals in the household. The penalty per household will generally be capped at $285 for 2014, $975 for 2015, and $2,085 for 2016. Individuals who, based on their household income, can’t afford coverage under their employer sponsored health plan are exempted from the penalty, as are individuals who reside outside the U.S. and those with certain religious beliefs.  Payment of the penalty does not entitle them to any health insurance coverage.

2.   Health Care Cost-sharing Subsidies (or Tax Credits) Available to Low-income Individuals.

A cost-sharing subsidy will be provided to low-income individuals to help cover their health insurance costs. Basically, individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four for 2009) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage will be able to obtain cost-sharing subsidies or tax credits that can be used to reduce premiums for health insurance obtained through the newly established state-run Insurance Exchanges.

3.      Penalty for Employers Not Offering Affordable or Adequate Health Insurance Coverage.

Large employers not offering health insurance coverage for all their full-time employees, or offering unaffordable or inadequate health insurance coverage, will have to pay a penalty if any full-time employee uses a tax credit or cost-sharing subsidy to purchase health insurance through a state-run Insurance Exchange. A large employer is generally, an employer that employed an average of at least 50 full-time employees during the preceding calendar year. Any penalty paid under this provision is not deductible as a business expense.

4.      Free Choice Vouchers.

Employers that have a health plan (or arrangement) under which they pay a portion of their employees’ health insurance coverage will have to provide certain low-income employees who don’t participate in the employer’s plan with a voucher (equal to the amount the employer would have contributed to the employer-offered health plan if the employee had participated) that can be applied to purchase health insurance through a state run Insurance Exchange.

Provisions Effective in 2018

1.      Excise Tax on High-cost Employer-sponsored Health Coverage (Cadillac Plans).

The last piece of the Health Reform legislation kicks in for 2018 when a nondeductible excise tax will be levied on so-called Cadillac plans—basically health plans with annual premiums exceeding $10,200 for single coverage and $27,500 for family coverage.  However, higher thresholds apply for retired individuals age 55 and older and for plans that cover employees engaged in high-risk professions. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.