Bonus Depreciation and Section 179 Depreciation 
by John Ratcliffe

If you are considering investing in business property in the next few months you may want to consider making the investment before the end of 2011. Depending upon whether the asset is new or used you could benefit from either the bonus depreciation rules or Section 179. If you are buying a new asset you should look to see if bonus depreciation is more beneficial than section 179 depreciation. If the asset you are purchasing is used then you can only benefit from the section 179 rule as bonus depreciation does not apply to used business property purchases. Regardless of the depreciation method you use the asset must be “placed in service” before you can depreciate it. This means that if the asset requires any installation or construction you cannot depreciate the asset until it is functional for use.

There is a 100% write-off in the placed-in-service year for the cost of property eligible for bonus depreciation under Code Sec. 168(k). This applies for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012. There is a 50% bonus first-year depreciation allowance under Code Sec. 169(k) for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013.

The Small Business Jobs Act of 2010 and Section 179 Deduction
A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property.

The Small Business Jobs Act increases the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years.

Under Small Business Jobs Act, qualifying businesses can now expense up to $500,000 of section 179 property for tax years beginning in 2010 and 2011. Without the Small Business Jobs Act, the expensing limit for section 179 property would have been $250,000 for 2010 and $25,000 for 2011.

The $500,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2,000,000.

The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011.

Depreciation limits on business vehicles:
The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) that you use in your business and first placed in service in 2010 is increased to $3,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2010 is increased to $3,160. (Note: with bonus depreciation for a new vehicle, the dollar cap becomes $11,060 for autos and $11,160 for trucks or vans). A word of caution: These limits are reduced if the business use of the vehicle is less than 100%.

In conclusion if you are considering a purchase of business property please seek advice from your tax advisor on how you could benefit by accelerating your depreciation deduction.

Tax Planning with Like Kind Exchanges by Karla Hopkins

A like-kind exchange provides a tax advantaged alternative to selling property. The sale of property may cause you to recognize a gain, which in turn may require the payment of taxes. A like-kind exchange, on the other hand, allows you to avoid gain recognition through the exchange of like-kind properties. The gain on the exchange of like-kind property is effectively deferred until you dispose of the property you receive. The IRS allows this tax-deferred transaction because it recognizes that just because you have exchanged one property for another, you should not have to incur taxable gains. Moreover, the deferral encourages re-investment and acknowledges that if you have re-invested your proceeds you may lack actual funds to pay tax on the sale of the original property. You will, however, have to recognize gain on any money or unlike property that you receive in the exchange.

Only qualifying property may receive like-kind treatment. To qualify, both the property you give up and the property you receive must be held by you for investment or for use in your trade or business. Buildings, rental houses, land, trucks, and machinery are examples of property that may qualify.

Like-kind exchanges provide a valuable tax planning opportunity if:

• You wish to avoid recognizing taxable gain on the sale of property that you will replace with like-kind property;
• You wish to diversify your real estate portfolio without tax consequence by acquiring different types of properties;
• You wish to participate in a very useful estate planning technique, or
• You would generate an alternative minimum tax liability upon recognition of a large capital gain in a situation where the gain would not otherwise be taxed.

The like-kind exchanges rules are very specific and very complex in terms of timing for identifying the property, completing the transaction and the handling of the proceeds for the transaction. Using a professional that is familiar with the like-kind exchange rules is important to ensure that the transaction is not disqualified and you are surprised by a tax consequence that you were not anticipating.

Education Tax Credits Available in 2011 by Karla Hopkins

The Federal form 1098-T is used to provide college students and their parents with information for claiming education benefits on their tax return. The form may include the amount of payments received OR the amount billed to the student. Remember though, the education credits are only for the amounts PAID during the year not the amount that was billed to you and remains unpaid at the end of the year. Your financial records such as canceled checks or credit card receipts are the official supporting documentation for calculating your education credit.

There are currently two education credits. The first is called the American Opportunity Tax Credit. The value of the credit is the first $2,000 plus 25% of the next $2,000 (maximum value $2,500) paid for each student for qualified expenses. To claim this credit the student must be in the first four years of post secondary eligible institution. They must be at least a half time student, and be enrolled in a program that leads to a degree or certificate. Qualified expenses include tuition, course materials, supplies and equipment. Qualified expenses DO NOT include room and board or athletic fees.

The second credit is called the Lifetime Learning Credit. The maximum lifetime learning credit is $2,000. Unlike the American Opportunity Tax Credit, this credit is available to students enrolled in one or more courses leading to an undergraduate, graduate or certification credential or if the course is to acquire or improve job skills.

In both cases, tuition and education expenses paid for with education or other types of loans are eligible for the tax credit.

One area of the educating tax credit laws that often reduces or eliminates the benefit of the education credit is when a divorced or separated couple shares the dependency deduction of the student on a year by year basis. One of the requirements for the credit is that it is allowed for a taxpayer, spouse or a DEPENDENT claimed on a tax return. Many times, a divorce decree controls the dependency deduction between couples without considering the implications to the benefit of education credits. Generally, the tax credit is most beneficial to the individual in the highest income tax rate. When a couple is electing to file a "married filing separate" return, NO credit is available on either return. Given the high costs of education today, it is important to consider the education tax credits in your tax planning and tax filing elections.

Documenting Loans from Corporations to their Shareholders by Karla Hopkins

In a recent tax court decision, the courts again ruled that a loan made to a shareholder by a corporation was a taxable distribution to the shareholder and not a loan. We are thus reminded that it is always important for proper documentation to support all transactions between corporations and their shareholders.

In this case, the shareholder was an employee and the sole shareholder. He was also the president and director. While there was a loan agreement, it was not signed until six months after its creation. Moreover, even though the note provided for a market rate of interest, interest was not actually charged at the market rate. In addition, the taxpayer did not make any principle payments on the note.

The Court considered the following factors in reviewing the validity of the loan transaction:

• Is the promise to repay evidenced in the note?
• Is interest charged?
• Is a fixed repayment schedule established?
• Is there any collateral?
• Were repayments made?
• Does the borrower have a reasonable prospect of repaying the loan?
• Did both parties conduct themselves as if the transaction was a loan?

This case points out the importance of the details in a loan transaction especially when it involves related parties. In the case of a loan between a corporation and a shareholder, failure to follow the terms and provisions of the loan will likely result in the loan being treated as a taxable distribution. This is even more likely to be true when there is no written agreement or evidence of a transaction at all. It may not be enough to just have a loan document, following the provisions of the document are key to the transactions too.

Tax Planning that Literally Can't Wait: Qualified Small Business Stock by Karla Hopkins

One of the provisions of the Small Business Jobs Act is the 100% exclusion from gross income of capital gains from the sale of certain qualified small business stock (QSBS). Generally this provision will allow taxpayers to pay no federal tax on up to $10 million in gain from the sale of certain QSBS. To qualify the stock has to be acquired after September 27, 2010, and before January 1, 2012. Taxpayers in general will be able to exclude up to $10 million in gain from gross income with no preference for AMT purposes. To be eligible for the exclusion, the taxpayer must hold the QSBS for more than five years. Thus, the earliest one can benefit from the 100% exclusion would be 2015.
How does stock qualify for the Exclusion?
For QSBS to qualify for the 100% exclusion, the following provisions must be met:
• The QSBS must be acquired after September 27, 2010, and before January 1, 2012.
• The QSBS must be held for more than five years
• The exclusion applies only to non-corporate taxpayers, including individuals and pass-through entities such as partnerships and S corporations
• The small business must be a domestic C corporation, and the stock purchased must be purchased by the investor upon original issuance from the corporation.
• The small business corporation generally must use 80% of its assets (by value) in a qualifying active business (which excludes certain types of businesses, such as financial institutions, farms, professional service firms, hotels and restaurants, and similar businesses) for substantially all of the investor’s holding period.
• Additional provisions relating to assets and active business activities exist to complicate the applicability of this provision but should be reviewed at the time of a sale of such stock

If the benefits of this provision are not available until 2015, why are we talking about it now? Since there is a specific time frame for when the stock is purchased and how long it is held, 2011 is a key year to purchase shares that would be eligible for this provision. The exclusion is designed for those who bear the entrepreneurial risk of a new company. Individuals or pass-through entities wanting to start up a new company or invest in new companies should consider taking advantage of the new 100% exclusion and acquire newly issued QSBS prior to the end of 2011. Employees or directors holding stock options in qualified small businesses should consider exercising the options before the end of the year as well.

Tax Considerations for Booster Clubs, by Carolyn Flaherty

In my household we are not yet focused on the upcoming holiday seasons. Instead, for us, 'tis the season of Pop Warner football playoffs. Our town is thrilled to see four of its youth teams advancing to the Super bowl this weekend. Here is where I insert a shameless, GO KP CHIEFS!! Last year we had not one, but two Pop Warner football teams advance to nationals in Orlando Florida! An organization to raise funds for the teams was quickly set up and the community came together to raise a commendable amount of money in record time so that all the boys were able to afford the trip.

To the point:
A familiar form of fundraising for athletics, bands and clubs is a booster club. Booster clubs are a great way to raise money and defray the cost of travel and much more. Particularly in a slumped economy, the help of a booster club can do a great deal to keep programs running smoothly. However, good intentions can cause unexpected and unpleasant tax consequences if the booster is not structured carefully.

Proper structuring of a booster club demands that first, the club establish an exempt purpose. To do so, the club must operate exclusively for charitable purpose. Moreover, they must show that they operate for public purpose verse private interest. Generally the IRS will recognize charitable purpose for financial assistance to amateur arts and athletics because it is assumed that the organizations are educational through their instruction and that they reduce juvenile delinquency. Operating for public interest demands that there be no private inurement and relates to how funds collected are disbursed.

What does the prohibition against private inurement mean?
First, a private shareholder or individual who has control of the entity's decisions can not directly benefit financially from the booster club's activities. Second, even unrelated or disinterested for-profit parties must not receive more than an insubstantial benefit. Insubstantial is defined as quantitatively incidental as well as an unintentional but necessary consequence to the booster club's charitable purpose.

In plain English:
If a booster club is set up to sponsor KP Pop Warner Football, and all athletes benefit from the activities of the club regardless of their involvement in said booster club; then the private benefit is incidental because it is a logical result of the organization's purpose. However, if funds are allocated to specific families based on their participation in fundraising; private benefit has been conferred to those members who participate.

Furthermore, if the club is made up of parent members and members are required to fundraise in order to play; the private benefit becomes intentional and not incidental. Under these circumstances, the club is simply a means of cooperative funding for member's children.

What is the tax implication of private inurement?
Not only does the booster club risk losing its exempt status as a result of private inurement; if fundraising activities are credited to specific athlete accounts, they could be treated as income to the athlete. Such income may be subject to payroll taxes or considered self employment income. If credits to the athlete account exceeds $600 in a calendar year, a 1099 Misc may be required.

Another consideration…
Booster clubs should be aware of unrelated business income. Income generated from the sale of advertising is generally unrelated to the club's exempt purpose. Organizations can avoid tax on unrelated business income if substantially all the work to garner said income is performed by uncompensated volunteers. Volunteers may be considered to be indirectly compensated if funds are credited to specific athlete accounts.

As always, it is wise to consult a tax advisor during the start up phase of your organization as well as upon which time you enter into new means of fundraising.

HOW TO RECEIVE A CHARITABLE DEDUCTION FOR GOOD DEEDS by Karla Hopkins

As the end of the year approaches, people tend to think charitably. Likely the charitable attitude is a result of the holiday season and for some a focus towards tax planning. When giving cash or property, you should itemize your donations and obtain a receipt from the organization. However, what about the invaluable gift of your time?

You can't deduct the cost of time and effort you spend on behalf of a charity, but that doesn't mean your good deeds can't create some tax deduction.
Track your out-of-pocket costs. Here are a few ideas.

If you use your car for charity, keep a log of the mileage, parking and tolls. You can deduct 14 cents per mile. Similarly, you can deduct the cost of a plane, train or bus ride for traveling to a charitable event.

You can deduct the full costs of long-distance telephone calls, faxes and cell phone charges made on behalf of a charity.

If you host a fundraiser or board meeting, you can deduct the entire cost of the catering expenses as a charitable deduction, within the limitations for meals.

Normally, you can deduct the cost of attending a fundraising dinner. For amounts exceeding $75 obtain written documentation from the charitable organization.

A deduction is allowed for the cost of uniforms used while performing charitable services as long as the clothing isn't suitable for everyday wear; (for example, Boy Scout or Girl Scout uniforms).

If you host a foreign exchange student in your home, you can deduct up to $50 per month for each month the student attends high school.

Individually these deductions may be small, but collectively they add up. Keep good records of each cost for tax time.

Thank you to our very own John Ratcliffe for the photo used in this blog and for donating his time to the Rodman Ride for Kids. Despite a spill that landed John over his handle bars and into a ditch with his bike, John finished the 50 mile ride for charity!

Create a Tax Deduction! By Karla Hopkins

If your parents own an appreciated home but do not have a mortgage, or do not benefit from the mortgage interest deduction, consider buying your parents' house and then rent it back to them at the going rate.

By doing this, your parents gain instant access to the equity they have built in their home (without moving), and you pick up some tax deductions.

Even if your parents still take a mortgage interest deduction, their tax bracket may be considerably lower than yours. If so, the deduction doesn't provide as much potential tax savings for them as it could for you and the family as a whole.

To avoid gift-tax complications, pay a fair price for the home. Support the price with a qualified, independent appraisal. Then enter a rental agreement at a fair rate. Courts have ruled that the fair market rental value can be reduced by 20% when renting to relatives and still qualify as a valid transaction.

Once you own your parents home, you are entitled to reap the tax benefits of owning rental property. This includes not only the mortgage interest and real estate tax deductions, but also operating expenses such as utilities, maintenance, insurance, repairs and supplies. In addition, you can claim depreciation deductions. These deductions offset the rental income received from your parents.

Eventually, when your parents can no longer live in the house, you can sell it, rent it to another family, or move into it. If you move into it and make it your principal residence for at least 2 years, you can sell it and shelter another $250,000 to $500,000 worth of capital gains, which is a true tax benefit!

More Tax Change? by Carolyn Flaherty

A quick review of the history of the United States income tax from the vantage point of personal income taxes, (not to mention the estate and gift tax, partnership & corporate taxation, etc.), reveals that the mind numbing technological revolution that has brought us from the advent of the personal computer in the 1970's to today's broad use of smart phones, tablets and touch screen technology in a mere 5 decades is occurring along side a less heralded tax revolution.

Many of you would be shocked to know that before 1913 our fine country was financed almost exclusively via tariffs on imported goods. In fact, the legality of federally collected personal income tax was largely questioned until the passing of the Sixteenth Amendment to the Constitution in 1913. The Sixteenth Amendment explicitly grants Congress the right and the power to collect tax on personal income.

Since 1913 the Tax Code has been reformed, and some would say complicated, at a stunningly frequent pace. Indeed in the past 10 years alone it is estimated that the Code has been revised approximately 4000 times. There are currently over 9000 sections to the Code. Furthermore, the instructions for the original Form 1040 were but one page and now total 174 pages!

Imagine: a brief 100 years has taken personal income tax from an almost unheard of concept in the United States to quite possibly the most common political agenda and debate in our country. In 1913 an amendment had to be passed to confirm the legality of the federal government to collect! Yet, less than 100 years later we lament that the only sure things in life are "death and taxes."

As a tax preparer, I indeed consider these rapid changes and the complicated Code to be job security. Moreover, if ever I doubted the necessity of my work, the Tax Code consistently reaffirms my worth to the public as a tax professional. However, when I became a public accountant I veered to the tax consulting side of our practice because I liked the feeling of being able to help clients. Offering tax planning in this environment of instability is increasingly difficult. Due to the uncertainty and the constant call for tax reform along with, for example, provisions that sunset after a decade and then are up for extension annually: we are forced to offer a shorter term verse long term plan for tax savings.

The concepts that will stand the tests of time are sound financial judgment and living within your means. These can be practiced regardless of the state of tax reform and is the advice I offer most often. Contribute the maximum to your 401K, set up flexible medical savings accounts, consider a 529 College savings plan, be charitable AND consult your financial advisor in conjunction with your tax advisor to consider current year end strategies that will maximize your overall tax and financial position.

Just for fun I have bulleted some facts about our United States personal tax history. Below that I have bulleted some of the most recently released changes that may affect you in 2012.

Just for fun:

• 1861: First personal income tax was imposed to finance the Civil War
• 1862: Bureau of Internal Revenue was created (predecessor of the IRS)
• 1872: The income tax was repealed
• 1913: Sixteenth Amendment was ratified to Constitution granting Congress the power to collect tax on personal income
• 1914: First income tax form (The 1040) was released
• 1915: The lowest tax bracket was taxed at a rate of 1% .The top bracket was 7% on income over $500,000
• 1950 : Tax rate for highest bracket peaked at 92% (for those with incomes greater than $400,000)
• 1952: Income tax peaked in the bottom bracket at 22.2%
• 1981: Largest tax cut in US History
• 1986: President Reagan signed into law the Tax Reform Act of 1986 starting an almost annual tradition of new tax acts.

A sampling of what's new in 2012:

• Personal exemptions increased to $3,800
• Standard deduction increased to $11,900 married filing jointly (MFJ), $5,950 Single and $8,700 head of household
• Tax bracket thresholds also increased for each bracket
• Maximum earned income credit increased to $5,891: Qualifying income limit to $50,270
• Foreign earned income deduction increased to $95,100
• Phase out levels for the lifetime learning credit now start at $104,000 MFJ and $52,000 for single filers
• The phase out for the deduction of student loan interest starts at $125,000 MFJ
• Monthly limit for qualified parking expenses provided by an employer is now $240

Meet our Staff: Andrea Hottleman

As a member of the PRR team for the past three years, our motto Professionalism, Respect and Responsibility is used each time I step into our office or a clients. I focus on auditing our not-for profit, 401K, partnership and corporate clients. The reason I gravitated towards this side of public accounting is because it gives you the opportunity to go to the client and explore their books from balance sheet to income statement. While at the client you are able to work with the owners, management and employees to gain insight into their performance throughout the past year. The client relies on our expertise to help solve issues or uncover issues that may not be seen by the owner, employee or manager who is involved in the day to day operations.

Prior to joining PRR, I spent over 11 years at a medium sized public accounting firm in Boston. Throughout my career, I prepared numerous individual, partnership, not-for profit and corporate tax returns. I also managed audits, review and compilations for HUD and MHFA projects, not-for-profits, partnership, 401K’s and corporate clients. For some of our small business clients, I would consult on business accounting software set up as well as prepare their quarterly payroll tax returns and 1099’s at year end.

My education is from Bentley University in Waltham, MA. I received a Bachelor of Science in Accountancy. Three years after graduation, I decided to go back to Bentley at night in order to obtain my Masters of Science in Taxation.

While away from PRR you may find me volunteering at the schools or at the soccer, football, or softball fields or on basketball courts. If you still have not found me, I may be watching a wrestling match, lacrosse or baseball game or working out at the gym.

PRR is the perfect fit for work and family balance.

Launch a Solo 401(K) Plan by Karla Hopkins

Most limits for retirement plans have not increased in years. However, small business owners can take matters into their own hands and create higher tax deferred deductions by setting up a solo 401(K) plan.

With the usual self employed retirement plans (SEP), the maximum deferral is the lesser of $49,000 or 25% of your net compensation. The maximum compensation that can be taken into account however is $245,000.

In contrast, an employee can make elective deferrals within annual limits and the employer may match part of the employee’s contribution. Therefore, a solo 401(K) plan offers even more.

Under a 401(K) plan, you can elect to defer up to $16,500 annually (or $22,000 if you are over 50). The key to the 401(K) plan is that the elective deferrals don't count towards the 25% cap as described above. So you can combine the employer contribution with an employee deferral for greater savings.

Here's an example. Let's say your wages are $125,000. The maximum SEP you can deduct is $31,250 (25% of your wages). If you had a solo 401(K) plan you could defer $16,500 in addition to the employer match of 25% of your salary ($125,000 x .25) or $31,250 for a total contribution of $47,750 (still below the $49,000 overall limit described above).

For a sole proprietor the 25% is reduced to 20% so that in the example above the total contribution allowed would be $41,500 ($16,500 plus $25,000).

A solo 401(K) plan can also be set up to allow loans and hardship withdrawals in the event you have a casualty. You can also roll over funds from other previous employer plans into your own 401(K) plan. Contributions are discretionary so that if you business is having a bad year, you can skip contributing entirely.

While this is a great tax planning tip, it is not a free ride; there are some downsides to a 401(K) plan. If the business has other employees, they may have to be covered by the plan too. There are moderate costs for running the plan that are generally paid to plan administrators. In the large investment companies like Fidelity, a small plan my be charged a one time setup cost of $100 and annual fees ranging from $50 to $250.

Even with the fees, it is a good option for long term retirement savings, especially if you do not have employees.

Cost Basis Elections and Reporting Requirements by Karla Hopkins

In October 2010, the IRS issued new mandatory regulations regarding the cost basis of stocks. Mutual funds are now required to report cost basis information to the IRS.

Effective January 1, 2012 mutual fund companies will begin their reporting, and to prepare for this they are currently sending investors election forms to dictate how the investor wants the mutual fund company to calculate the cost basis in their shares.

Due to the new regulations, shares in mutual funds will now be broken down into two categories. Shares purchased prior to January 1, 2012 are defined as non-covered shares. Mutual funds are not required to report cost basis to the IRS for shares purchased prior to January 1, 2012. These shares will be costed using the Average Cost Method unless you inform the mutual fund company to use a different method.

Shares acquired after January 1, 2012 are defined as covered shares. Mutual fund companies will now report the cost basis for all covered shares to both you and the IRS. When filing your tax return, YOU ARE REQUIRED TO USE THE
COST BASIS REPORTED ON YOUR 1099-B FOR YOUR COVERED SHARES.

The mutual fund company must select a default method for cost basis reporting and notify you of its selection. These notifications are currently being made by most mutual fund companies. You have the option to choose the same method as the fund's default or you may choose an alternate method. The election is for all future transactions for the mutual fund unless you revoke it.

The different cost methods are: FIFO, a standing order to sell the oldest shares in the account first; LIFO, a standing order to sell the newest shares in the account first; HIFO, a standing order to sell shares purchased at the highest cost first; LOFO, a standing order to sell shares purchased at the lowest cost first; LGUT, a method that evaluates losses and gains then strategically selects lots based on that gain/loss in conjunction with the holding period; SLID, the shareholder designates which specific shares to redeem when placing their redemption request; ACST, a method for valuing cost of covered shares in an account by averaging the effect of all covered transactions in the account.

For many investors, relying on the mutual fund company to provide some sort of cost basis, generally the average cost basis, has been the tax plan. While simplest, this is not always the most strategic, especially when selling high value mutual fund holdings. To keep the calculation in your own hands, the SLID (or specific identification), is the best election to make. Then, when you sell shares, you will notify the mutual fund company of the gain/loss that you expect.

What this change means to most investors is that they should now pay closer attention to their mutual fund purchases, which happen regularly if they reinvest dividends, so that they can identify their potential gains/loss upon future sales. You may also wish to review your cost basis election immediately prior to the sale of investments to determine that it is indeed to be accounted for on the basis that represents optimal tax impact.

Employee Classification by Karla Hopkins

The likelihood of your business being involved in a worker classification or employment tax audit has increased recently because the IRS is aggressively attempting to reduce the “tax gap,” (the annual shortfall between taxes owed and taxes paid). The IRS entered into agreements with state unemployment agencies in 29 states, including Massachusetts, to share the results of employment tax examinations. This means that if your company is audited by a Massachusetts state agency, the IRS will be notified of the results so that they may come in to review the company's employee-employer relationships. In addition, for the 2008 through 2010 tax years, the IRS plans to examine 6000 randomly selected employers’ Forms 941, Employer’s Quarterly Federal Tax Return. Remember, the IRS can go back three years (and sometimes more) during an examination.

Indeed the focus on classification has intensified such that The IRS launched a program that will enable employers to resolve past worker classification issues by voluntarily reclassifying their workers. The program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit. Full details, including frequently asked questions, are available on the Employment Tax pages of www.IRS.gov , and in Announcement 2011-64

Because the existing worker classification rules are complex and ambiguous, there is uncertainty surrounding their interpretation and application. Understanding the difference between an employee and an independent contractor is very important. If you are an employer, you are required to withhold and contribute a matching amount of FICA and Medicare taxes from your employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on Form 1099-MISC. Failing to make the right classification could cost you money.

The most often used test for classifying someone as an independent contractor is: Do the workers make substantial financial investments in their own tools, equipment, or a place to work, or undertake some entrepreneurial risks? If so, they are probably independent contractors. However, when you control and direct the workers who perform services for you as to the end result and how it will be accomplished, you are probably involved in an employer-employee relationship.

Unless there is a reasonable basis for treating your employees as independent contractors, failing to withhold income and employment taxes from their wages can result in severe penalties and interest, in addition to the back taxes owed. Your benefit plan may also be in jeopardy if any eligible employees have been misclassified as independent contractors. The misclassification means that these employees have been excluded from plan participation, and thus your retirement plan may lose its tax-favored status.

It is important when you enter into agreements with worker's to define their classification immediately and comply with the current tax laws. Documentation of duties and even having a written contract for services could protect you in the long run against a reclassification of an independent contractor to an employee.

For more information and clarification on employee vs. independent contractor classification visit irs.gov or contact your tax provider for assistance.

Mandated Health Insurance in Massachusetts by Carolyn Flaherty

Right, wrong or indifferent the citizens of Massachusetts are mandated to have health insurance by the 2006 Massachusetts Health Care Reform Act. The goal, as stated by the MA Department of Revenue is to "ensure that virtually all Massachusetts residents have affordable, comprehensive health insurance...". This is old news, right? Well, the answer is yes and no. The Act may have just had its 5 year anniversary, however the political figure and potential republican presidential nominee, Mitt Romney (who signed the Act into law), is bringing the topic back into the news forefront and he's not hollering it's praises from the rooftops.

Just how much does the average person know about the Act, how have they been impacted, and has MA healthcare reform been a success or a failure?

Whether the reform has been a success or a failure is largely subjective. The goal as stated is somewhat vague. Facts show that more than 98% of MA residents now have insurance and this includes 99.8% of all children. In fact MA has the lowest rate of uninsured people in the United States. That sounds a lot like success. However, we must note that before the reform took effect, 94% of MA residents already carried health insurance.

Another factor of the goal states "affordable, comprehensive health insurance." According to the independent group Massachusetts Taxpayer Foundation the program has been relatively affordable for the state; accounting for a net increase in spending of just 1% in 2010. Again, we must frame that 1% in reference to the fact that it represents approximately $1.8 billion. Note that in addition, the state receives federal aide for the program.

If the goal is referring to affordable for the private sector, the rate of private spending per insured member has been increasing double digits. For example, as reported by ABC News, the median health insurance premium for a policy holder in MA was $442 in 2009, which was a 21% increase from 2005 median premiums. Moreover, BCBS published a survey in April of 2011 estimating per capita health care spending in MA to nearly double by 2020. Also interesting and perhaps significant, bankruptcy filings due to medical costs increased by more than 1/3 from 2007 to 2009, (according to The American Journal of Medicine).

As to the "comprehensive health insurance," a BCBS survey stated that 88% of doctor's feel that the Act improved or did not affect the quality of their care. Massachusetts has always had exemplary medical facilities and therefore, it would seem that this remains true.

Whether you feel the reform is a success or a failure is your call, yet two out of three adults in the state support the law.

How has the average MA resident been affected? Remember, before the act went into play, 94% of us were already insured. Though I can not speak for all of Massachusetts, for me the direct impact has been making sure I file the 1099HC so I avoid penalty and in my tax practice, making sure I seek out those forms from my clients. Besides paperwork, I have noticed a trend of rapidly rising co-pays and premium costs that may or may not be related to the reform.

THE FACTS:
What does it mean if you do not have health insurance? Self insurance is not an option in MA and your assertion of infringement on your civil liberties is not a listed exemption. Exemptions from mandatory coverage must be applied through the Connector's office and a Certificate of Exemption indicated on Schedule HC. For more information visit: https://www.mahealthconnector.org/portal/site/connector/menuitem.a6bd9ea72595da2ea87b5f57c6398041/?fiShown=default

Exemptions:
• Affordability is determined and published in an annual schedule that can be found in the instructions to MA Form HC at http://www.mass.gov/Ador/docs/dor/health%20care/2011/sch_HC_wksht_tables.pdf

• Religious belief must be asserted by filing a sworn affidavit with your personal tax return.
• Hardship can be claimed even if the worksheets for Schedule HC show that the taxpayer could have afforded insurance. Hardship appeals are requested on the income tax return by completion of MA Schedule HC-A.

If you do not fall under one of these exemptions, a penalty will be assessed for EACH of the months you did not meet the requirement of creditable coverage. The Commissioner publishes annually a penalty schedule. The 2011 schedule can be found at the following link:

http://www.mass.gov/?pageID=dorterminal&L=7&L0=Home&L1=Businesses&L2=Help+%26+Resources&L3=Legal+Library&L4=Technical+Information+Releases&L5=TIRs+-+By+Year(s)&L6=2010+Releases&sid=Ador&b=terminalcontent&f=dor_rul_reg_tir_tir_10_25&csid=Ador

Note that penalties under the mandatory health care requirements are due as of the ORIGINAL due date of the return without regard to extension and that interest and penalties accrue in the same manner as applied to unpaid taxes.

CORPORATE PENALTIES - Carriers, employers or other sponsors of health plans are required to provide Form MA 1099-HC annually before January 31. Any who fail to provide the written statements to covered individuals will be assessed a penalty of $50 per individual up to $50,000 per year.

Home Mortgage Interest Deduction Limited by Karla Hopkins

Did you know that the home interest deduction taken on Schedule A of your personal income tax return is limited? There is one limit for loans used to buy or build a residence -- called "home acquisition debt." And there is another limit for loans not used to buy or to build a residence -- called "home equity debt." All loans, whether secured by your main home or your second home, are subject to the same overall limitations and are cumulative (i.e. debt must be aggregated to determine if you are limited).

As the cost of real estate rose over the last 10 to 15 years, and as people acquired second homes, many taxpayers face Home Mortgage Deduction Limitations. Another common scenario in the current real estate market is a taxpayer that has relocated, purchased a new home, and not sold their original house. Therefore, the taxpayer is faced with two mortgages and could easily exceed the debt limits discussed.

In addition, as more and more taxpayers use their home's equity to finance home improvements and other expenses, they are faced with an Alternative Minimum Tax Impact.


Home Acquisition Debt
In general, a joint filer may not deduct interest on more than $1,000,000 of home acquisition debt for their main home and secondary residence. Home acquisition debt means any loan whose purpose is to acquire, construct, or substantially to improve a qualified home.

For example, you borrowed $800,000 against your primary residence and $400,000 against your secondary residence. Both loans were used solely to acquire your residences. The loan amounts add up to $1,200,000. Since your loan amount exceeds the $1 million limit for home acquisition debt, your mortgage deduction is limited. Let's say both loans have a fixed interest rate of 6% and your total interest paid for the year was $72,000. You would only be able to deduct $60,000, which is the interest on the first $1 million of home acquisition debt.

Home Equity Debt
A joint filer may not deduct interest on more than $100,000 of home equity debt for your main home and secondary residence. Home equity debt means any loan whose purpose is not to acquire, construct, or substantially to improve a qualified home, or any loan whose purposes was to substantially improve a qualified home but exceeds the home acquisition debt limit. Your deduction for home equity interest may also be reduced even below the $100,000 limit if your indebtedness exceeds the fair market value of your home. This happens frequently during economic downturns such as we have recently faced.

For example, assuming you had no existing mortgage and you borrowed $300,000 in a home equity line of credit, and the amount you borrowed did not exceed the fair market value of your house. You used $150,000 to add a new family room to your house. You spent the remaining $150,000 to pay for college tuition. Half of the loan is treated on home acquisition debt (the amount used to substantially improve your home). The other half is treated as home equity debt (the amount not used to improve your home). You would be able to deduct interest only up to the $100,000 limit on home equity debt portion of the loan. Assuming you paid $21,000 interest on the loan, the amounts you can deduct would break down like this:
$10,500 - Fully deductible home acquisition debt (half the loan)
$7,000 - Deductible home equity debt (two-thirds of the home equity portion of the loan)
$3,500 - Non-deductible home equity debt (the interest paid on the home equity debt exceeding $100,000)
In addition, this taxpayer would have to report $7,000 as an AMT adjustment.

Furthermore, interest paid on home equity debt is an adjustment for Alternative Minimum Tax which was discussed in a prior Blog. You should understand whether you will be able to deduct interest on a home equity line of credit before your borrow.

For most taxpayers, figuring out the home mortgage interest deduction is straight-forward: add up the interest paid as reported to you on Form 1098, and put that total on your Schedule A. However, for others the computation can become much more complicated. It is always a good idea to check with a tax professional when you buy, sell, or finance property during the year.

Business Interruption Insurance: Protecting your Business by CarolynFlaherty

As a Wrentham resident where 5 days after hurricane Irene blew through town, approximately 20% of home owners and a significant percentage of business were still without electricity and many without water, the idea of business interruption insurance has been on my mind.

In fact, while visiting a fortunate local business that was up and running; I was conversing with the owner about an ice cream shop that likely lost all its product and whose doors were still closed. I mentioned that the shop was probably covered by business interruption insurance. The business owner I was speaking with did not even know such a thing existed. Which caused me to realize that perhaps many of the small business owners in the area were experiencing substantial financial loss.

Therefore, perhaps a day late and more than a dollar short for this go around, I thought I would take the time to explain a little bit about how to protect your business from loss of income.

While most business have property insurance policies that cover damage to their buildings and equipment, what about the profits lost should your business doors be shut due to damage, power outages etc.? In a catastrophic storm, a business could be closed for a significant period of time while pending repairs.

Interruption insurance covers estimated profits you would have earned had your property not been damaged by a covered disaster as well as operating expenses that are incurred while business is closed, (for example rent or electricity). Some policies even cover expenses incurred to operate from a temporary location, (referred to as "extra expense insurance"). Extra expense insurance is usually paid if it helps to decrease the business interruption costs.

Business interruption insurance can not be purchased as a stand alone policy, but is available as an add on to your property insurance policy or included in a package policy such as a business owner's policy. Rates and options vary based on the amount of coverage you select as well as your location, nature of business etc. Most policies require a 48 hour waiting period before coverage begins.

Taking the time to evaluate your insurance needs should be part of you annual financial “check up.” Consider all changes to your business and growth that may have occurred during the year to ensure you are adequately covered. And please consider business interruption insurance because not having this form of protection can compound an already unfortunate situation.

SHAREHOLDER LOANS TO A SMALL BUSINESS by Karla Hopkins

Business owners are often faced with providing financing to their businesses especially during difficult economic times. The intent generally, is for the company to pay the owner's monies back "at some point in the future" before the business terminates. However, sometimes the loan to the business cannot be paid back and becomes a bad debt. Bad debts can be either business bad debts which are deducitble against other income or, nonbusiness bad debts which can be deductible only in certain specific circumstances.

A business bad debt occurs when the debt is related to the lender's trade or business. Case law has established that a corporation's business is not always the business of the owner simply because of the corporation-shareholder relationship. Being an employee, however, is a trade or business so if the business owner is compensated as an employee, there may be an opportunity for the bad debt to be fully deductible.

The owner/employee must show that the main purpose for making a loan to their business is to protect their EMPLOYMENT. Unlike a loan from a shareholder which is generally classified as investment related, an employee loan could be considered to be made to protect the employee's trade or business, i.e. their paycheck.

The following four items indicate that protecting a paycheck was the primary purpose for a loan by a shareholder/employee.

• The employee's net pay was much larger that his investment in the company
• The employee had minimum other sources of income indicating dependence on the salary from the company
• The time spent in an employee role was substantial
• The value of the shareholder's investment in the company was insignificant when the loan was made

When shareholder loans are a regular form of fincancing for a business, it is beneficial to review the position of the debt in terms of collectibility, and purpose on an annual basis.

Get your systems ready for Hurricane Irene by Carolyn Flaherty

Fitting in one last ride on a major swell isn't how most of us gear up for a hurricane. However, that is exactly what a surfer on North Carolina's Outer Banks did on Aug. 24 before the anticipated arrival of Hurricane Irene, (picture by Reza Marvashti / AP).

For the rest of us, we may be filling propane tanks, buying batteries, candles, stocking up on some non-perishables and bringing in lawn furniture. However, if you are a business owner, you should also consider preparing your systems. We are a paperless organization, which simplifies our disaster recovery plan. However, we are still taking steps to backup our server and ensure employees have their lap tops and client data secure. We would like to take the time to remind our clients and the community at large to do the same.

For an up to date forecast and insights on Irene; visit MSNBC at the below link:

http://www.msnbc.msn.com/id/44270712/ns/weather/?GT1=43001

We are glad to tell our clients that their records are safe and wish everyone a safe weekend.

How is PRR Different from Other Firms by John Ratcliffe

In business differentiating yourself from the competition is an important factor in winning business. Therefore, much time is dedicated to the rhetoric of branding, marketing and differentiating. It is one thing to talk the talk and another to walk the walk. I truly feel our firm is much different than other small firms.

Our largest distinguishing factor is our staff. Most of the staff has been with the firm since it started in 2000 and the majority of those people have been together much longer than that in one of the two firms that combined to make PRR. Most of our workforce began their careers with large international firms where they gained valuable knowledge, skills and an excellent work ethic. However, they eventually found that they wanted a different lifestyle closer to home, primarily to start a family. Working for PRR affords them the opportunity to balance a family life and a professional career.

Our people came for the promise of life quality and they stay because we deliver on our promises. Everyone appreciates the flexibility our firm provides but realizes that the clients need to be served and work needs to get done. As a result, we all work together as a team to meet these goals.

In addition to longevity with our firm, you will find that our staff has acquired valuable professional experience prior to joining PRR. Furthermore, almost all of the staff are certified public accountants, some with master's degrees and all who keep current by maintaining continuing education hours annually. Our personnel learned specialized skills, brought those to PRR and then applied their proficiencies to other more general and diverse projects. Therefore, as a team, we collaborate to quickly understand a client’s situation and offer sound expert advice.

While other firms typically staff accounting and audit engagements with people who have less than two years experience; our workforce is seasoned and requires minimal instruction. With trained and knowledgeable people, we are able to hurdle the learning curve that so often requires substantial time and disruption to the client’s employees. Our approach is comparatively seamless, particularly because we strive to schedule jobs with the same staff year after year.

The diverse professional background of our staff and the services we are therefore able to provide also set us apart. It is rare to see a firm our size offer the expanse of services we do. Through the skills of our staff we are able to provide extensive accounting, auditing, tax and management advisory services.

For example Elaine Renzi and myself have broad experience in audits for non-profits including organizations that receive federal funds. I also manage the firm's audits of broker dealers reporting to FINRA and have amassed considerable technology systems knowledge. Glenn Anderson is our management advisor consultant and is extremely talented at digging into your books detail. Karla Hopkins is our tax partner and has extensive experience in all aspects of taxation including multi-state taxation. Laticia Michelson is multi-talented practicing in all areas including taxation, auditing and management advisory services. Carolyn Flaherty is our partnership specialist and also a talented writer. Andrea Hottleman is involved in our accounting and auditing practice but also holds a masters degree in taxation. We are a PCAOB registered firm and Members of the American Horse Council. Our staff is always eager to take on new assignments that challenge them professionally.

Another factor that separates us from our competition is our commitment to utilizing the latest technology to service our clients. This past year we launched a client portal to allow for secure exchange of data between ourselves and our clients; we rolled out a social media campaign before many firms had considered it, (follow us on your favorite social platform: we are on Linked In, Facebook and Twitter); we were at the forefront of paperless engagements while many firms are just starting to adopt, and we have developed a communication structure that allows us to quickly respond to clients. We take pride in finding innovative ways to make the client experience more efficient and enjoyable.

Finally, we all take the team approach very seriously. The atmosphere at PRR is a caring environment. We do not compete with each other, but work to make the firm better as a whole. The staff willingly assists with each other's assignments and supports each other. We all ensure that when one member of the team is unavailable for personal or professional reasons, their clients are serviced and cared for as if they were their own; sort of our own "no client gets left behind" policy! When you do business with any one member of PRR, you gain access to the whole team and all our expertise.

To learn more about our firm check out our website at www.prrllc.net.

When is Entertainment "Ordinary & Necessary?" by Karla Hopkins

Most business owners deduct expenses for entertaining clients, customers, or employees. Have you ever wondered what the letter of the law is when it comes to these deductions? Below are the requirements that you should consider when taking and documenting an entertainment deduction:
You can deduct entertainment expenses only if they are both ORDINARY AND NECESSARY AND meet ONE of the following tests:
• Directly-related test
• Associated test

An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.

Directly-Related Test
To meet the directly-related test for entertainment expenses you must show that:
• The main purpose of the combined business and entertainment was the active conduct of business,
• You did engage in business with the person during the entertainment period, and
• You had more than a general expectation of getting income or some other specific business benefit at some future time.

It is not necessary to devote more time to business than to entertainment. However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. You do not have to show that business income or other business benefit actually resulted from each entertainment expense.

Clear business setting - If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. The following situations are examples of entertainment in a clear business setting:
• Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products.
• Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer).
• Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained.

Expenses not considered directly related - Entertainment expenses generally are not considered directly related if you are not present or in situations where there are substantial distractions that generally prevent you from actively conducting business. The following are examples of situations where there are substantial distractions:
• A meeting or discussion at a nightclub, theater, or sporting event.
• A meeting or discussion during what is essentially a social gathering, such as a cocktail party.
• A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts.


Associated Test
Even if your expenses do not meet the directly-related test, they may meet the associated test.
To meet the associated test for entertainment expenses, you must show that the entertainment is:
• Associated with the active conduct of your trade or business, and
• Directly before or after a substantial business discussion.

Associated with trade or business - Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. The purpose may be to get new business or to encourage the continuation of an existing business relationship.

Substantial business discussion - Whether a business discussion is substantial depends on the facts of each case. A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit.

The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. It is not necessary that you devote more time to business than to entertainment. You do not have to discuss business during the meal or entertainment.

Meetings at conventions - You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. However, your reason for attending the convention or meeting must be to further your trade or business. The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting.

Directly before or after business discussion - If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion.

50% Limit - In general, you can deduct only 50% of your business-related meal and entertainment expenses. The 50% limit applies to employees or their employers, and to self-employed persons.

The 50% limit applies to business meals or entertainment expenses you have while:
• Traveling away from home (whether eating alone or with others) on business,
• Entertaining customers at your place of business, a restaurant, or other location, or
• Attending a business convention or reception, business meeting, or business luncheon at a club.

What Entertainment Expenses Are Deductible?
Entertainment - Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips.

Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families.

A meal as a form of entertainment - Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. A meal expense includes the cost of food, beverages, taxes, and tips for the meal. To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided.

Trade association meetings - You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations.

Entertainment tickets - Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers.

What Entertainment Expenses Are Not Deductible?
Club dues and membership fees - You cannot deduct dues (including initiation fees) for membership in any club organized for:
• Business,
• Pleasure,
• Recreation, or
• Other social purpose.
You cannot deduct dues paid to:
• Country clubs,
• Golf and athletic clubs,
• Airline clubs,
• Hotel clubs, and
• Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions

The IRS does pay attention to meals and entertainment expenses so it is important for taxpayers to understand the rules regarding what is deductible and what is not and also to maintain adequate records of the cost and business purpose of all meals and entertainment expenses.

Avoid Paying Taxes Twice on Reinvested Dividends by Karla Hopkins & Carolyn Flaherty

Many taxpayers get tripped up on this issue and end up unnecessarily paying tax on the same earnings twice. The key to avoiding double taxation on reinvested dividends is to keep track of the tax basis of your mutual fund investments. Your initial basis is what you pay for shares and your basis increases with each subsequent investment and each time dividends are reinvested in additional shares, (most mutual funds are set to automatically reinvest your dividends).

Some taxpayers neglect to increase the basis of their investment for dividends reinvested over time and therefore pay tax when the dividend is issued and again when the shares are sold, (when the reinvested dividends are not accounted for, the basis used to calculate tax is lower than it should be and therefore the taxable gain claimed is higher).

Many mutual fund companies now track an average tax basis for investors, however maintaining your own records can give you more flexibility to control your tax gains and losses. Average cost is only one method that can be used to determine your cost basis upon sale of shares. You can also specifically identify shares; choose the oldest shares in a "first in first out" method or newest shares, ("Last in first out"). Once you select a method to identify shares you must be consistent in its application. Specific identification gives you the most flexibility but also requires the most record keeping.

The flexibility of specific identification can be valuable for tax planning. For example, in a year that you have other gains, you may wish to offset the gains with losses and vice versa. If you sell a portion of the mutual fund, choosing those shares with the highest basis would lower your gain and selling those with lowest basis will increase your gain.

The general period of time that the IRS can audit your return is three years. However, you must be able to support amounts claimed on your return. Therefore, you must keep records until the actual liquidation of your investment without regard to the three year audit period. In other words, maintain records from the date of your original investment until the date you liquidate all shares in a mutual fund and then for an additional three year period in case you are selected for audit. Documentation and organization is imperative.

We suggest that you create an investment folder for each mutual fund and at a minimum keep the year-end statement for the fund that includes the share activity, purchases, sales and reinvestments for the whole year. Better still, maintain and update a spreadsheet or personal financial package like Quicken with your investment records. This way, in 10 years when you are liquidating shares, it is not overwhelming to determine your cost basis. Moreover you will have the information available to ascertain, with the assistance of your tax advisor, the most tax effective method for cost identification.

Inherited IRA's by Karla Hopkins

When an owner of an IRA dies, the monies in the IRA must be distributed to the owner's beneficiaries. Post-death distributions made to beneficiaries are subject to the general income tax treatment of all IRA distributions. Therefore, maximizing the deferral period that could be available for the distribution of an IRA can be an important tax savings tool.

The options available for deferring post-death distributions depend on the beneficiary's relationship to the deceased owner and whether the death occurred before or after the decedent had began their minimum required distributions (age 70 1/2). There is greater flexibility if the owner dies before reaching 70 1/2.

IRA beneficiaries are divided into two categories; a surviving spouse or all other beneficiaries (non-spousal).

A nonspousal beneficiary is either a "designated beneficiary" or a beneficiary of a decedent's will. A nonspousal beneficiary does not have the option of treating an IRA as their own. Therefore, the beneficiary may not make contributions into the account or roll the account into another IRA account. The title of the account must remain in the decedent's name throughout the entire distribution period.

If an IRA owner dies before reaching 70 1/2 the beneficiary that is not a "designated beneficiary" must withdraw the IRA over a five year period of time. If the beneficiary is a "designated beneficiary" they have the option to take distributions out over their own life expectancy.

A spouse has two options for an inherited IRA. The first is identical to the above rules for a nonspouse. The second is to treat the IRA as their own and redetermine the distribution period based on their own life expectancy which could potentially be significantly longer than the decedent's.

If an IRA owner dies after reaching 70 1/2 and has begun their required distributions, the IRA that is inherited is not afforded any flexibility regarding the starting date for the minimum distributions. The rules maximize the deferral period by allowing the longest life expectancy to be employed in the distribution period.

If the beneficiary is the spouse, the distributions must continue based on the longer of the surviving spouse's life expectancy or the deceased owner's life expectancy as of the year of death from the Single Life Expectancy Table. The five year rule of distribution is not available.

If there is no designated beneficiary, distributions continue using the deceased owner's life expectancy in the year of death using the Single Life Expectancy Table which is shorter than the Uniform Life Table. The five year rule of distribution is not available.


If there is a nonspouse designated beneficiary the required distributions continue over the longer of the fixed life expectancy of the designated beneficiary or the life expectancy of the deceased over a shorter Single Life Expectancy Table. The five year rule of distribution is not available.

Understanding the IRA distribution rules can be an important tax planning step. Not naming a beneficiary presents missed opportunities to defer distributions over longer life expectancies. Certain estate planning measures will be critical to extending the required distribution period. The most important is naming the beneficiary which is especially crucial when the owner dies before before the required distribution date. In addition to the above alternatives regarding the distribution period, there may be opportunities to delay the start date of a distribution cycle.

We recommend that you take the time to review your beneficiary options for your IRA accounts periodically to ensure that you and your beneficiaries will receive the most tax advantaged options for distributions.

Early Retirement Distributions by Carolyn Flaherty

During difficult economic times such as those we have been experiencing in recent years, it is not uncommon for people to obtain funds by borrowing from or cashing out their retirement accounts. Based on your personal financial circumstances, there may be no choice in the matter of tapping into these assets. However, there are tax consequences in addition to the obvious dilemma of diminishing savings for your future.

The facts:

• Distributions from a retirement account are taxable
• Any payments from a retirement account before you have reached age 59 and 1/2 are considered early or premature distributions and therefore are subject to an additional 10% tax
• Early distributions are required to be reported to the IRS
• Unless specifically instructed, distributions will not necessarily withhold for expected state and federal taxes. This can result in an unexpectedly large tax bill with potential for interest and penalty on April 15th. If you are withdrawing due to economic difficulty this will be an especially unpleasant outcome.

Is any portion of the distribution non-taxable?

• Non-deductible contributions to a retirement plan are not taxable to you upon distribution (we thank the government for not double dipping)
• Distributions that are rolled into another qualified plan within 60 days are not taxed. Note therefore, that if your need for cash is brief and you know with absolute certainty that you can replenish the cash into another plan within 60 days: an early distribution may provide a means to obtain temporary funds.
• The portion of an early distribution from a ROTH IRA that represents your contributions is not taxable, (again: no double dipping even if you are executing an early withdrawal).

The exceptions:

The government allows for certain specific exceptions to the application of the 10% additional tax BUT NOT to the income tax. The exceptions are listed below.

• Purchase of a first home
• Certain medical expenses
• Certain educational expenses
• Your disability
• Distributions after you reach age 59 1/2

Note that on the flip-side, upon reaching the age of 70 and 1/2, you MUST take minimum mandatory withdrawals from your individual retirement accounts. The first must be taken by April 1 of the year after you turn 70 and 1/2 and again in December of the same year. Your minimum withdrawal is determined by a formula based on your account values and life expectancy. The financial service firms that manage your retirement accounts will report the minimum distribution amount to you and to the IRS every year. Your minimum distribution changes every year. Failure to take the minimum distribution will result in a tax penalty of 50% of the amount that you did not withdraw.

For additional information on retirement distribution issues: visit IRS.gov to find IRS Publication 575, Pension and Annuity Income, and IRS Publication 590, Individual Retirement Arrangements, or contact your tax advisor.

Going Paperless by John Ratcliffe

In the age of Iphones, Ipads, instant messaging, text messaging, email, video streaming, cloud computing etc. our society demands information in real time. Most of our children have grown up during this evolution. So the need to access data anytime, anywhere is not just a convenience it is expected and considered a critical business function.

Our firm began the paperless journey in 2005 primarily to address a few areas of concern as follows: efficiency, client service and disaster recovery. Before we began the process we identified these as the key areas that we would benefit most from our efforts and then began researching solutions. Your needs may vary based upon your business type and size, but the overall benefits of the paperless concept are relatively standard.

For our firm the first area that we felt we wanted to address was our accounting and auditing engagements. We chose to focus on these activities because doing so actually touched upon each of our areas of concern.

Before paperless, the process involved an inordinate amount of paper required for each engagement including copies of client documents, checklists and worksheets. Each time we went to a client site we would lug in large briefcases of paper and leave with even more. Sometimes we even had a trunk full of paper! Then all of this information would be collated and manually referenced with tick marks and page references: an "accounting" work of art!

When a client requested a historical workpaper we would first have to determine where the client binder was being stored, (on site in our offices or in the offsite storage units rented to house all our paper). We would then have to dig thru the binders, take a copy out and either mail or fax the document to the client. The response time was usually more than a day depending upon the location of the files and who was available to retrieve it.

The process from start to finish of the audit and accounting engagements was labor intensive and inefficient. Even more disconcerting, although we had all this paper, we had only one copy of the client workpapers in our storage. What happened if documents were lost or damaged by fire or flood?

Fast forward six years…
Efficiency: We no longer go to a client with a large briefcase of paper but simply our laptops. The workpapers and data are electronically organized and the days of staff spending hours at a copy machine, red pencils, tick marks and the droning sound of an adding machine are history.

Client Service: Today if a client calls requesting information the data is usually available within an hour or sooner, (minutes even) depending upon where we are. We can not only transmit the data quickly but also securely, (there are no longer workpapers sitting out on a general fax machine). We can now satisfy the need and expectation of clients to access data anytime, anywhere.

Data Security: Most of our data resides in electronic format on our file servers that are backed up daily and archived offsite. We retain multiple copies of the backup and have built redundancy in the storage of the data. All client data is required to be kept in an encrypted format and is to be removed from the laptops once we are back in the office.

Our engagements have become more efficient, our client service enhanced and we can sleep better at night knowing that if a disaster were to hit our business would not experience a major disruption. And, as time does actually equal money; we are saving in labor hours as well.

So what does this mean for your business? Identify the areas that concern you the most and design your process around that. Some people think that getting a scanner is all that is required to go paperless. Actually, a scanner is only one component of the entire process. In my opinion, the most important part of the process is making sure you have a good disaster recovery plan that is tested on a regular basis. As for hardware and software requirements, I suggest the following:

1) Scanner - depending upon the volume of paper you will digitize, I suggest a production level scanner with a sufficient scanning tray to handle stacks of documents.
2) Document storage - also depending upon the volume of paper you will digitize, I suggest you purchase a server with enough capacity and redundancy built in to handle five times your current storage requirements. We were pleasantly surprised as to how little space our data required if they were stored in Adobe format.
3) Backup - have multiple backup media and build redundancy into the process. These days utilizing online backup services such as Mozy, Iron Mountain and others is something you should seriously consider. The key is to not rely on just one form of media and test your process regularly.
4) Document management software - depending upon your process, it is a good idea to consider some form of document management software to organize and retrieve your data. Not only will it be easier to find but most document management software allows you to build in an archive date to remove data from your system based upon your record retention policy. There are many systems out there and some are industry specific.
5) Virus software - if you make the leap to digital you certainly want to make sure your data is virus free. Depending upon the size of your business an enterprise version of the virus software might best suite your needs.
6) Network Firewall - the more data that is accessible in digital format the more important it will be to keep that data safe from outsiders. Invest in a good network firewall and spend the time properly configuring it for your business. Appliances such as SonicWall and Cisco offer reasonably priced options with excellent customer support.
7) Remote access - what good is all this data if you need to be in the office to get to it? Look into software that will allow you to remotely access your data. If you have a mobile workforce this will enhance productivity and quality of life.
8) Adobe Software - we utilize Adobe Standard as one of our main tools. This version allows you greater flexibility with your documents including one of my favorite features which is the ability to type into an existing Adobe document (filling in forms being my favorite).

As you can see there are many things to consider as you move to a paperless (or more likely less paper) environment. The key is to remember that it is a process that involves research and planning. I can assure you that once you have made the leap you will be asking yourself why you didn't do it sooner. Pavento, Ratcliffe, Renzi & Co., LLC is available for guidance on developing a paperless system.

DATA SECURITY by John Ratcliffe

On October 30, 2009 the Massachusetts Office of Consumer Affairs and Business Regulation filed its final amended regulation for 201 CMR 17.00 (aka "The Massachusetts Data Security Regulation"). The regulation requires persons (including out of state persons) who "own or license personal information about a resident of the Commonwealth" to comply with strict requirements to safeguard such personal information. Information includes:

• social security numbers
• drivers license or state-issued identification numbers
• financial account numbers, credit or debit card numbers, (with or without any security code that would permit access to a resident's financial account).

The regulation does not discriminate between a small business and a large business but must be implemented by all who store, transmit or have access to the aforementioned personal information. The regulation was required to be implemented in 2010.

In anticipation of the proposed regulation we at Pavento, Ratcliffe, Renzi & Co., LLC completed our implementation in 2009 and continue to refine the process. In my opinion regardless if you meet the criteria it is a good business practice to implement some of the key areas of the regulation, if for no other reason than to allow you to sleep better at night. There is not a week that goes by that you do not hear about another data security breach.

So for the small business what does the regulation entail? The first step in the process is to look at the data you maintain both in paper and electronic form to determine if are required to implement the data security regulation. Once you have identified the data, you must design procedures to ensure that data is secure. Most businesses have both paper and electronic records. Here are some areas that I feel are key areas to review:

1) Paper file storage and data destruction policies
2) Paper files in employee possession both inside and outside of the office
3) E-mail policies
4) Network password policies
5) Network security policies
6) Network firewall and related policies
7) Electronic file transmission policies
8) Electronic data storage and achieving policies
9) Laptop and Desktop security policies (passwords and encryption)
10) Smart phone data and e-mail policies

Next you begin the process of implementing a plan. Address the areas of highest risk first. As an example, if you allow remote access to your network and have an outdated firewall appliance, consider upgrading that first.

Then look at what types of data are being transmitted via e-mail. Data transmission is an area that everyone in our firm is very cautious about as tax returns include social security numbers. We have two ways that we transmit files 1) we utilize an email encryption service which is used for any transmission of files that meet the criteria that we have set forth as sensitive data; 2) we maintain a client portal with multi-layer security to allow for a secure exchange of data. Our clients seem to prefer the portal over the e-mail encryption as the portal does not slow their e-mail down with large file transmissions.

As you go through the process of implementing a solution for each area that impacts your business, document the process. Once you have all areas documented, write a formal data security plan and update it frequently as your situation changes.

Finally, the most important step in any plan is to monitor and test the policies you have implemented. As an auditor I cannot stress enough the importance of this step.

Whatever you decide to do is a personal business decision. Doing something is better than doing nothing and may very well prevent you from being the next company in the news! Pavento, Ratcliffe, Renzi & Co., LLC is available for guidance in the development of your data security plan.