When a home is converted to a rental property many questions arise regarding the property’s depreciable basis, when the property was placed in service and which depreciation method to use. The basis for depreciation purposes is the lower of:

• The adjusted basis on the date of conversion (adjusted basis is generally the purchase price plus capital improvements), or

• The fair market value of the property at the time of the conversion

Once the basis is determined, residential property is depreciated on a straight-line basis over 27.5 years beginning on the conversion date. The date placed in service as a rental is based on when the property is first available for rent, not when it is actually rented.

Obtaining an appraisal is often a prudent course of action to incorporate into the process to help establish the depreciable basis and also support the gain or loss reported on a subsequent sale.

• “Did your business make any payments in 2011 that would require it to file Form(s) 1099?”

• “If ‘yes’, did the business file or will it file all required Forms 1099?”

Every business – corporations, S corporations, partnerships, LLC’s, Schedule C proprietorships, Schedule F farming operations – must answer “Yes” or “No” to the above questions on their 2011 income tax returns this year.

Business owners should be prepared to answer these questions by reviewing their records and determining if they have complied with current Form 1099 reporting requirements. If you are not prepared for these questions or do not know if you are required to file Form(s) 1099, please contact us. We can help.

-Edward D. Garris, PhD, CPA

Approximately 160 million workers can jump for joy that the 2 percent reduction of social security tax will be extended and apply to wages paid through February 29, 2012. The tax benefits are not just for employees, but also independent contractors and other self-employed persons who pay self-employment taxes (SECA tax) on their earnings. The SECA tax is reduced to 13.3% from 15.3% on income up to the social security wage base of $110,100. Note that there may be a recapture of any benefits a taxpayer receives on wages in excess of $18,350 for January and February if the payroll tax cut is not extended beyond February. Many are anticipating the payroll tax holiday to be extended through the end of 2012 since neither political party wants to be responsible for “increasing” taxes on working Americans in an election year.

The payroll tax holiday extension should not be a bookkeeping and payroll processing burden for employers. The IRS has instructed employers to implement the new payroll tax rate as soon as possible in 2012.

-John Scaglione

-John Scaglione

While the Social Security wage limit had remained at $106,800 for the last three years, this year the maximum amount of income subject to Social Security taxes will increase to $110,100. The reduction in the employee portion of Social Security tax rate to 4.2% we saw in 2011 will expire December 31, 2011 and the rate will revert back to 6.2% for employees and 12.4% for self-employed individuals. Employees will notice a reduction in net pay on their first paycheck in January. It may be necessary for anyone self-employed to adjust their estimated tax payments in 2012 as a result of the tax increase. Keep a close eye on this one as congress is currently battling it out over new legislation to extend and maybe even expand the payroll tax holiday.

For 2012, the taxable wage base for state unemployment tax for Virginia remains at $8,000.00. On the first of December the Virginia Employment Commission (VEC) mailed Tax Rate Notices for Calendar Year 2012. QuickBooks users must be sure to edit the payroll item for state unemployment tax with their new rate before processing their first payroll in January. If the notice has not been received the rate can be found on your VA ifile VEC link where you would submit your Quarterly Tax Report to the VEC after January 1 or via phone at 800-897-5630.

A business must determine annually which deposit schedule (semi-weekly, monthly, or quarterly) it is required to use for submitting federal and state tax deposits. The Internal Revenue Service (IRS) and Virginia Department of Taxation (VDOT) send notices at year end notifying a business of a change in deposit frequency. However, it is the responsibility of the business to determine its filing frequency and to ensure they are depositing taxes timely. Your deposit schedule for a calendar year is determined by calculating your tax liability during the “Lookback Period”. This period is defined in Circular E, Employer’s Tax Guide issued by the IRS for the federal lookback and in the Commonwealth of Virginia Withholding Tax Guide issued by VDOT for the Virginia lookback.

Distribute Forms W-4 and VA-4 to employees so they may make changes in address, marital status and withholding allowances in the new year. It is helpful to remind employees to review paycheck information and have them advise you of any changes that may affect W-2 forms before year end. If an employee claimed exemption from income tax withholding last year on Form W-4, a new form must be completed by February 15th in order to continue the exemption another year.

Hopefully some of these reminders will help get your New Year off to a good start. Best wishes for a happy and healthy 2012!

- Dana Kirschnick

The expiring tax provisions applicable to businesses actually have the greatest potential for saving taxes. The current provision to allow businesses to expense (Section 179) up to $500,000 of business machinery, equipment and furniture will be reduced next year to $139,000. The current provision to allow businesses to expense (Section 179) up to $250,000 of certain real property additions, leasehold or restaurant improvements in the year of acquisition will expire after 2011. As usual, there are both caps and phaseouts for the Section 179 expensing options. Additionally, the provision allowing businesses to use 100% bonus depreciation on certain new assets will decrease to 50% next year. Another of the major expiring provisions is the Work Opportunity Tax Credit (WOTC), which currently gives employers a tax credit for certain workers hired before the end of 2011. However, as part of a new law signed by the President on November 21, 2011, the WOTC was extended by one year for hiring certain qualified veterans.

Individuals wishing to take advantage of expiring tax provisions should consider some of the following tax savings ideas. Individuals age 70½ or over are allowed to make a qualified tax-free charitable distribution of up to $100,000 from an IRA to a qualified charity before the end of the year. Although the deduction for higher education expenses expires at the end of 2011, the American Opportunity Credit for some of these same expenses extends through the end of 2012. The energy credit for homeowners who make energy efficient improvements to their main home will also expire on 12/31/11.

Tax planning strategies that apply to any year-end should also be considered. In the interest of keeping this blog to a manageable size, these will be included in the year-end company e-newsletter which will be available for download.

-Barb Franko, CPA

Stay tuned for an informative, can’t miss article about year-end tax planning from Barb Franko, CPA. This will be a must read article for the proactive tax planner looking to explore opportunities before the turn of a new calendar year.

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