I have posted before on the Obama administration’s desire to tax carried interest at the ordinary income rate (up to 35%) as opposed to the current capital gains rate (up to 15%). It now seems that the carried interest tax increase is one of the proposed tax increases that is causing Congressional Republicans to resist agreement on a deficit reduction plan, which Republicans have said is essential to any vote to increase in the federal debt ceiling. The Obama administration contends that raising the carried interest tax would contribute to $400 million in new tax revenue over the next 10 years.
IRS Increases Mileage Deduction
July 7, 2011 by
Starting last week (July 1), the IRS increased the tax deduction available for using a private vehicle for business purposes. The IRS cited persistent high gas prices as reason for the change. As of July 1, taxpayers who use their personal vehicle for business can deduct $0.55 1/2 per mile, an increase from the $0.51 per mile rate that was in effect for the first half of 2011.
IRS Toughens Audits of Small Businesses
May 31, 2011 by
The Internal Revenue Service (IRS) has adopted tougher standards for the records that small businesses must provide during the course of an audit. The IRS believes small businesses are some of the largest contributors to the “tax gap,” the difference between taxes owed and taxes paid, caused by noncompliance with the tax code. The IRS has begun requesting exact copies of the electronic records kept in the off-the-shelf accounting software used by many small businesses. This has raised concerns that small business owners will be forced to turn over customer lists, personnel data and other unrelated information that is often stored along with the tax information in the accounting software.
Unlike large businesses, small business owners often use retail accounting software such as QuickBooks to store a wide variety of business records, not only financial data. Requests for exact copies of such information exposes small business owners to the risk that the IRS will review information that is outside the scope of the particular audit, or contact customers, suppliers or other third-parties to seek additional information about a small company’s business practices.
To help minimize this risk, small businesses should routinely backup and condense financial information that may have to be provided to the IRS in the event of an audit. Software companies may also address this issue by allowing financial data to be segregated from operations data within the software program itself.
Senate Repeals 1099 Provision
April 6, 2011 by
The Senate, by an 87-12 vote, has repealed a provision of the health-care reform law that would have greatly increased the burden on businesses to file 1099 forms with the IRS. Currently, businesses are only required to file a 1099 form with the IRS for services it receives from unincorporated vendors (e.g., partnerships). A provision of the health-care reform law would have broadened that requirement and mandated that businesses file a 1099 form for any vendor that provides services or goods with a value of more than $600 in a tax year. The repeal will now go to President Obama, who is expected to approve.
Review Your Tax Withholding Now for Savings in 2011
March 29, 2011 by
Many individuals and families look forward to receiving a significant income tax refund each April. However, if you are accustomed to receiving a large refund each year, it is advisable to review your income withholding and possibly make adjustments to lower the amount withheld. A tax refund is essentially an interest-free loan that you make to the government. Most savvy investors would not make an interest-free loan, and the same should apply to your tax payments.
Adjusting your withholding can also allow you to keep more money in your bank account throughout the year, where you have access to it at anytime. Building up a sizable tax refund essentially ties up your cash in a government account that is inaccessible until after April 15th. In addition, if you are an individual or family in a distressed financial situation, your tax refund could be seized by a bankruptcy trustee in the event you are required to file for bankruptcy.
Making an adjustment to your income tax withholding is a relatively easy way to retain more of your income during the year. Of course, be sure to make the necessary adjustments in consultation with your attorney or financial advisor.
Proposed Legislation Seeks Tax Breaks for Commercial Real Estate Investment
March 24, 2011 by
The Community Recovery and Enhancement Act of 2011, recently introduced in the U.S. House of Representatives, seeks to stimulate commercial real estate investment by offering tax incentives to investors. The Act would allow investors to take a one time immediate depreciation bonus of 50% on certain “qualifying investments,” and also eliminates the passive loss limitations on such investments. [Read more...]
IRS Revises Rules to Aid Taxpayers
March 3, 2011 by
In an effort to assist struggling taxpayers, the IRS has amended its rules relating to the filing of tax liens for delinquent taxes, and has expanded eligibility for certain repayment programs. The IRS will often file a lien on a taxpayer’s property if the delinquent taxes exceed a certain threshold. In 2010, the IRS filed liens against more than 1 million taxpayers, a 550% increase since 1999. Tax liens appear on credit reports issued by all 3 credit rating agencies, and can lower a taxpayer’s credit score by up to 100 points. Tax liens often further burden already distressed taxpayers, making it more difficult for a taxpayer to dispose of an underwater piece of property. In addition, because many employers perform credit checks on prospective employees, a tax lien can make it more difficult for an unemployed taxpayer to find work. [Read more...]
Obama Revisits the Carried Interest Tax
February 21, 2011 by
The carried interest tax is back on the table in the Obama administration’s budget proposal for fiscal year 2012, released early last week. If adopted, the proposal would tax carried interest at ordinary income rates (up to 35%), rather than at the capital gains rate (up to 15%). A similar proposal was introduced in 2010, but failed to gain traction in the legislature. The Obama administration estimates that a change to the carried interest tax rate would increase tax revenue by $14.8 billion over the next 10 years.
The carried interest tax rate is a critical consideration for private equity and venture capital fund managers, as it is often the fund manager’s primary source of income. Fund managers typically receive two streams of income, management fees and carried interest. Management fees earn 1-2% of assets under management, while the carried interest can amount to as much as 20% of the profits of the fund. The fund manager begins to earn carried interest after the fund has returned the original capital contributions of the investors, plus a priority return on those contributions (referred to as the “hurdle”). Once the fund manager has achieved the hurdle, additional fund profits are divided 80% to the investors, and 20% to the fund manager. [Read more...]
Tax Refund? There’s an App for That
February 8, 2011 by
Last week the Internal Revenue Service (IRS) annoucned the release of a smartphone application that allows taxpayers to check the status of their tax refund. The free app, called IRS2Go, is available on the iPhone and Android phones. iPhone users can download the app in the Apple App Store, and the app is available to Android users in the Android Marketplace. Taxpayers who file a return electronically can use the app to track refund status within 72 hours of receiving confirmation from the IRS that the tax return was received.
Pima County to Auction $35.5 Million of Tax Liens
February 8, 2011 by
Pima County officials have set a date for the annual auction of county tax liens: Wednesday, February 23rd. The County will auction more than 15,000 tax liens, worth almost $35.5 million. Information regarding the liens available at auction will be published in the Wednesday, February 9th edition of The Daily Territorial.
Land owners in Arizona pay taxes to the county in which the property is located, which provides the county with a consistent revenue stream. When a taxpayer is delinquent, the county places a lien on the property and then auctions off the right to receive the delinquent tax payment in order to replace the revenue gap caused by the delinquency. At auction, tax lien investors bid on the amount of interest that will accrue on the delinquent payment, meaning that the investor willing to accept the lowest interest rate wins the bid. Interest rate bidding starts at the maximum amount of 16% and is bid down from there. Tax lien investors do not receive title to the underlying property, only a right to receive the amount of the delinquent tax (plus accrued interest, penalties and fees). However, if the taxpayer does not pay the delinquent amount within a specific period (typically 3 years), the tax lien investor can initiate a legal proceeding to acquire the underlying property.
Tax lien purchasing has become a popular investment strategy in the last several years, as the economic downturn has caused a large number of property owners to be delinquent on their taxes. Tax liens are often billed as a low-risk investment due to the fact that the county lien often has priority over other liens on the property. The February 23rd auction begins at 8AM, and will be held at the Pima County Administration Building. Prospective bidders are required to register with the Pima County Treasurer’s Office.
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