Without proper retirement/succession planning, the firm is left directionless. And, it is not only planning for the succession of the managing partner, but for other key partners and non-partners in the organization. Planning for retirement also becomes even more important when the retiring partner is a founder or a key rainmaker of the firm. Often, these individual don’t want to leave the firm and hang around too long.

Over the past twelve months I have been speaking with firm leaders about leadership in general and succession planning. While there is not just one way to have a successful retirement plan, there are some basic elements that you need to incorporate. And, while you may have some of the following items in your partnership agreement, it is important to have a clearly articulated retirement policy to avoid confusion or negative feelings when the time comes.

What’s In Your Retirement Plan?

Retirement Age

The most important issue to determine is the retirement age. A few firms require partners to step down from the partnership at age 60. Others, especially the smaller and mid-size firms, have a mandatory retirement at 65 or 66. The actual age is not as important as actually having one in your agreement. Setting the age can be a sensitive issue in smaller firms because the owner may feel that the younger partners are forcing him/her out. The issue is so important that it cannot be ignored.

Now retirement from the partnership does not mean retirement from the firm. The retired partner gives up his/her ownership interest. Then, depending on the desires of the firm, the partner can take on one of several different roles, from senior partner, business development team leader to mentor.

Many larger firms have adopted an early retirement age in order to make room for younger accountants to move up the ranks. Also, while some partners are vibrant at age 60 or 65, others may have lost a lot of their desire to continue to grow the practice. It should be up to the firm and not the individual partner to make any exceptions to their general retirement guidelines.

Finally, when you have a specific age for retirement, you are better able to plan for client transition.

Retirement Notice

It used to be common for a retiring partner to give a 6 or 12 month notice. Today, I am seeing more agreements requesting a 1 to 2 year notice and prohibiting a partner from retiring during the first 4 months of the year. For several years firms have been creating retirement calendars. This is a simple spreadsheet which shows the estimate retirement date and retirement benefit of each partner in the firm. Firms usually update and discuss the retirement calendar as a part of their annual retreats. This helps the firm in planning client transitions as well as projecting retirement expenses. Most firms have a cap on the amount they can pay out each year to retired partners and having a retirement calendar can highlight future cash flow problems.

Retirement and Deferred Compensation Agreements

If you are going to ask a retiring partner to transfer his or her client base or cut back on hours, make sure you are not asking them to do something that will eventually hurt their retirement payments. For example, a partner’s deferred compensation is based on the average of the last three years before retirement. During this time you ask the partner to transition clients which will reduce his/her compensation since your compensation plan rewards for a partner’s book of business. Most likely the partner will not transfer clients during this period. In order to avoid such conflicts, you may have to lock in the retirement amount a few years earlier in order to get the partner to transfer the client base.

Early Retirement

I don’t know if it is right or not, but I discourage smaller firms from letting partners retire at too early an age. Reason being, it can be very detrimental to a firm to lose the intellectual capital, the relationships and the referral sources that a partner has. In addition, early retirement can impose a financial burden on the firm. If a partner is fully vested in retirement benefits after 10 or 15 years of service, such partner might be able to retire at 50 or 55. To avoid this problem you can either defer payment of retirement benefits until age 60 or early retirement would trigger a “claw back” which would drastically reduce the retirement benefits.

Client Transition

Partner retirement and client transition should go hand-in-hand. Hence, partners who fail to transition all or part of their client base should have some portion of their retirement benefits reduced or held back. Client transition is rarely a fast process; it can take up to 2 or 3 years to be done right and be effective. The larger the client the more complex the transition process becomes and actual client involvement in the process becomes critical. (The side bar outlines some of the activities you need to undertake to make the transition)

Compensating Retired Partners

Many times, retired partners will continue to do work for the firm. Again, it should be up to the firm to determine what the work will be and how the partner will be compensated. There are basically three ways of doing this. First, for billable work, the partner is paid a percentage of the work he or she performs based on the cash collected. This amount is usually 30% to 40%.

Second, if the partner is doing non-billable work, he or she is usually paid a fixed amount per hour. Third, for business development the partner may be paid a percentage of the fees the firm earns for the year.

Partner Retirement Calculations and Benefits

Many firms today are moving from a deferred compensation benefits based on equity to a multiple of compensation (somewhere between 2 and 4 times). As smaller firms grew over the last 20 or 30 years partners with a large equity position, tended to have an exorbitant retirement benefit. For example, Your CPA Firm started 25 years ago and partner Y holds 25 percent equity. The firm is now $10,000,000 and partner Y is expecting $2,500,000 paid over 5 years. The firm has never reviewed its agreement. While the firm has good profits, 34% or$3,400,000, it is now forced to pay out almost 15% of its profits to just one partner. If the firm based its retirement benefit on a multiple of compensation (3 times) and partner Y’s average compensation was $650,000 per year, the firm would have a liability of $1,950,000. The key is to review the retirement formula to make sure the firm can afford it.

In addition to the deferred compensation benefits, firms will payout the partner’s accrual basis capital account over a five year period. While deferred compensation payments normally do not carry an interest faction, the capital account payments do.

Other retirement benefits may include a continuation of health care benefits, an office with administrative support and even a small monthly payment after the deferred compensation payment has been made.

Final Thoughts

Don’t be like the ostrich that sticks its head in the sand hoping that the problem will go away. I can ensure you that developing a retirement policy will be an emotional event in the firm. Each partner will be thinking “how is this going to affect me?” depending on their age and their own personal financial position. But if you really are interested in planning for the future, this is one area that cannot be ignored. By doing it now you will enhance the value of the firm and the likelihood that it will remain strong and independent. Retiring partners can be great ambassadors for the firm. Treat them right. Some day you will become one too.

__________________________
August Aquila is a well-known speaker, author and consultant to the accounting profession. He has advised firms ranging from $1m to over $55m on succession and retirement planning. He can be reached at aaquila@aquilaadvisors.com or 952.930.1295. For more information visit: www.aquilaadvisors.com.
This article is reprinted with the publisher’s permission from CPA PRACTICE MANAGEMENT FORUM, a monthly journal published by CCH, a Wolters Kluwer business. Copying or distribution without the publisher’s permission is prohibited

Focusing on Business Development During Tax Season

The accounting industry is experiencing significant changes.  Mergers, acquisitions, growth and survival strategies have forced firms to change the way they approach business.  One solution is to implement a robust, year-round approach to business development.  Growing revenue is no longer the sole responsibility of a few connected, charismatic Partners.  Staff members are encouraged to do their share by prospecting, cultivating relationships and helping close new business.  Accounting firms depend heavily on every employee assuming a more aggressive, client-facing role to drive revenue.

Industry leaders agree a successful business development program must be part of the firm’s strategic plan and be followed with vigilance by all members of the firm.  One of the most challenging aspects of this proven strategy is maintaining activity during peak periods.  Some firms have made the decision to employ dedicated business development professionals to focus on driving sales efforts.  However, most firms expect a drop in sales activity during tax season, as the office completes work earned during past efforts.  Ironically, it is during this time when clients and prospects are highly engaged and interested in discussing solutions to help them, their families and their business.  Therefore, most firms are tasked with the question: How can we keep the firm focused on business development during tax season?

The following tactics are utilized by successful accounting firms of all sizes across the U.S.

Kick-off Meeting: Create excitement and interest for the new year by organizing a retreat to share new ideas and expectations.  Review specific & measureable goals that the firm intends to achieve during the year and discuss how everyone can play a role in the firm’s success.  Including all members of the firm will naturally foster an environment where colleagues will exceed expectations by creating personal accountability for the organization’s success.

Mentor Program: Your firm is comprised of diverse individuals.  Some are comfortable with the idea of engaging new clients and there are those who would rather put their head down and work.  Couple those individuals and challenge them to develop a plan of attack for a territory or industry.  Review the plan, set expectations, and hold them accountable for results.

Pre-Season Audits: You firm spends a lot of money on your software programs.  Use the system to generate audits to identify new opportunities and talking points when meeting with clients.  Most systems can generate audits to identify opportunities in real estate, estate planning, state credits, specialty tax areas, and retirement planning to name a few.

Forced Activity: The personality of your team requires diversified business development techniques to keep them engaged and focused.  Some firms set attendance quotas for networking events, meetings, and lunch appointments leading up to and through tax season.  Some leaders believe, “what gets measured gets done.”  Teach them the value of each client interaction and share the characteristics of a successful meeting.  Keep track of their progress and stay involved.

Reward & Recognition: Have fun and appreciate the effort as well as success stories along the way.  Encourage the team to recognize each other’s work instead of solely relying on the Partners to communicate to the group.  There are hundreds of ways to support your employees as they endeavor new ideas and techniques.  Ask your team how they prefer to be rewarded or recognized, as not everyone is motivated by money or public displays.

CPE and Seminars: Investigate where gaps may exist and make CPE during this time of year as relevant as possible.  Many firms host consulting firms offering refresher courses on customer-focused selling techniques as well as specialty tax solutions that may be outside the scope of the practice’s expertise.

Client Checklists: Checklists comprised of standard items usually found in personal, business related activities and changes to tax codes create an opportunity to engage a client before meeting with them.  This exercise encourages your client to review areas of interest prior to meeting so both parties are prepared and invested in the meeting.

Referral Programs: Your firm delivers excellent results, although it does not mean your client is going to refer you business.  Insist every client- facing employee ask about friends, family and business partners that can benefit from your expertise.  The answer to every question not asked is “no.” Everyone can use more business and your client understands that – they just need to be reminded.  Undoubtedly, referrals are the most untapped resource of most businesses.  Don’t be afraid to ask.

Brian Gilboy is a Director with Engineered Tax Services and can be reached at www.bgilboy@engineeredtaxservices.com and help accounting firms drive business through strategic relationships.

By   L. Gary Boomer

Accounting firms generally are not who you think of when you mention “innovation”, yet many firms excel at innovation and there is a pattern to their success.  Innovation is directly linked to growth and not an epiphany like many think; but rather a process that combines hindsight, vision and insight.   The accounting profession is going through significant changes and I am often told by firm leaders they just don’t have the next generation of leaders in their firms.  In many cases there is validity to their statement and a better understanding of innovation and how firms get into this situation can help firms take the necessary steps to balance between “discovery” and “delivery” skills. Discovery skills focus on new opportunities, trends and creativity while delivery focuses on execution.  You need both, but the tendency is to focus on delivery.

Mature and typically declining firms are dominated by people with excellent delivery skills, but often lack the proper balance of discovery skills.  Typically one or more firm founders were entrepreneurial and tended to hire people for their delivery skills and not their discovery skills.   As a result, many partners and managers don’t know how to think about discovery or give enough value to the importance of innovation.  Accounting programs teach people delivery skills while most experiences and on-the-job training also focuses on delivery and execution.  In fact, many of the discovery skills are viewed as nonproductive – more about that later.  I believe innovation or lack thereof can explain some of the frustration and what firms must do in order to develop the next generation of innovative leaders.

Let’s look at two different types of innovation and then how the most successful firms are modernizing their practices to meet the needs and wants of their clients. Accounting majors are taught the rules and regulations of the profession in school and throughout their careers.  This is not a negative, but rather a fact as their perception is often different than those with different training and aptitudes.  Upon graduation, most accountants going into public practice start in audit and/or tax.  This has been the traditional approach and is the primary reason most innovation in firms is directional innovation.  Directional innovation tends to improve a service in fairly predictable steps with a well-defined dimension or goal.  The majority of innovation is directional and is accomplished through increasing levels of expertise and specialization (delivery skills).  This is a low risk approach and one with which many CPA’s are comfortable.   There is nothing wrong with directional innovation, yet it is limiting due to the fact most of the participants are looking at the problem from the same perspective.

Darwin John, former CIO at the FBI, once said “if two of you have the same opinion, then we don’t need one of you”.  This may be a bit extreme, but the point is that for real innovation (discovery) to occur it requires multiple perspectives.  This is often called intersectional innovation where multiple disciplines meet in the attempt to solve a problem or improve a solution.  From my experience in the CPA profession, two areas within firms that have been responsible for innovation over the past 20 years are firm administration and technology.  Leaders in these areas have been attempting to bring the silos together and improve performance through improved communications, efficiency and effectiveness.

One step in entrepreneurial innovation, and the one leadings firms are focusing on, is intersectional innovation or client centric innovation.  It not only involves the client, but his multi-discipline advisors.  This can be difficult due to egos and personalities, but the CPA is the most trusted business advisor and should take his or her role seriously by acting as the quarterback when it comes to innovation and improved client services.  While many CPAs were trained to be rugged individualist (focus on delivery) and solve the client’s problems on their own or with a small team, that approach no longer meets the needs of a majority of clients.

Today, clients are looking for faster, better, cheaper and easier solutions forcing firms to be innovative and sensitive to clients’ wants and needs.  The capturing of transactions is becoming a commodity with new technology and the ability to aggregate and integrate information via cloud based solutions.  In the past tax return preparation has involved a significant amount of time (fee) in aggregating data while technology has automated the calculation and processing of the return.  In other words, the CPA is now caught in a situation where the services they are offering are diminishing in value (commoditization).  Part of this is due to technological innovation and part is due to the pricing strategies used by the majority of firms (hours times dollars-labor theory of value).

We are living in a connected world and someone is making those connections.  As the trusted business advisor it should be you, the CPA, and your firm.  The people making these connections tend to be professionals who excelled in one field, but learned from others.  This describes many CPAs and why they are the most trusted business advisor.  Formal education increases the probability of attaining creative success to a point and then actually reduces the odds.  A key to prolonged success throughout ones career is lifelong learning and multiple experiences.  It makes sense to spend time on a variety of projects if you wish to develop fresh and groundbreaking ideas.  The value comes from being able to spot trends and then integrate what you already know.  This requires curiosity and an interest in a variety of things.  Innovators don’t produce because they are successful, but they are successful because they produce.

Diversity promotes innovation while too much expertise can create barriers to innovation.  Innovation requires a balance.  More good ideas come when working in a group than when working independently.  The big question becomes: what can and should firms do to promote innovation at the intersection?  As I said earlier in the article, innovation occurs with vision, hindsight and insight.  By looking at the current generation of great firm leaders we see several characteristics that allowed them to be innovative.  Let’s looks at a list of the most important discovery characteristics.

1. The ability to connect and associate different perspectives (clients, multiple advisors, trends, technology and etc.)
2. The ability to question the status quo.
3. The ability to hold self and others accountable.
4. The willingness to participate in “safe haven” meetings with peer leaders.
5. The ability to manage, not avoid risk.  The quantity of new ideas improves the quality.  Create the environment to promote, not stifle innovation.

This list may not seem important to those who focus only on the delivery side.  Firms must be cautious not to swing the pendulum too far toward the delivery or discovery skills.  Both skills are required, important and cannot be ignored.  Success today requires a team.  The team should involve younger members who are capable and expected to challenge the status quo or strategy which has often been developed and implemented by senior leadership.

The fact is most large organizations generally fail at disruptive innovation because top management has been selected for their delivery skills.  While it is the managing partner or CEOs role to lead the innovation it is an extremely difficult assignment.  Delivery executives do not like having the strategy constantly challenged nor do they appreciate change.  Does your firm reward and promote discovery skills?  If the answer is no, you have your answer as to why you don’t have the innovative leaders for the future.  Now is the time to identify and develop leaders with the skills and willingness to focus on intersectional innovation.  The future success of your firm depends upon innovation.

Here are five areas where innovation will produce significant results.  Granted they may not fit every firm, but most firms will find three or more of these innovative ideas profitable.

1. Billing and collection policies – use technology to improve cash flow (ACH payments & Credit Cards).  This requires different thinking and change management.  Too many firms are allowing clients to treat them as interest free or “cheap” banks.  You can turn this around with improved engagement letters that specify payment terms leveraging monthly bank drafts.
2. Tax return preparations processes – avoid loops and focus on one-way workflow.  There are better ways to train than sending work back to the preparer.  You can use technology to grade performance and report errors.  Current workflow software has its roots with outsourcing companies.  If Federal Express can track packages electronically, firms should be able to track work in an efficient manner reducing cycle time.
3. Client accounting in the Cloud – firms can provide transactional as well as value added services such as bill payment, payroll, controller, HR, IT and CFO related services on a monthly basis.  Private labeled software that can be centrally updated and supported will allow firms to take back control of accounting.  It will also allow your firm to become hardware agnostic.  It works the same on Mac as on a Windows based PC via a browser.
4. Use portals to aggregate client data for auditing and accounting as well as tax return preparation.  Avoid false starts and wasted time.  Portals provide security, are inexpensive and clients like them.  Most of the resistance I see is within the firm.
5. Conduct client focus groups with marketing, tax and technology expertise present.  This will provide innovation at the intersection from multiple perspectives.  Listen to the client and provide the services he/she wants.  Utilize firm leaders with discovery skills.

Innovation is part of a firm’s culture and DNA.  It requires leadership and the willingness to manage risk.  Not every idea is a great idea, but the quantity of ideas determines quality.  Successful firms balance discovery and delivery skills.  Does your firm have the discovery skills necessary to meet your clients’ demands in a rapidly changing world?  Provide your people with the time and resources to innovate.  Based upon recent studies, most firms are less than 50 % chargeable.  What better use of the non-chargeable time than innovation, training and new business development?

Author:

L. Gary Boomer

L. Gary Boomer is CEO of Boomer Consulting, Inc., an organization that provides consulting services to leading accounting firms in the areas of  Leadership & Management, Client Development, Talent Development, Technology and Compensation.  Gary is also an ETS Board Advisor.

Gary is recognized in the accounting profession as the leading authority on technology and firm management. For over a decade, he has been named by Accounting Today as one of the 100 most influential people in accounting. He is also a member of IPA’s 10 most recommended consultants.

A Practical Guide to Perfecting Your Tax Research Techniques and Assessing Reasonable Tax Return Filing Positions

By Peter J. Scalise, B.S., M.S.

Introduction

In order to maximize your accounting firm’s overall efficiency, effectiveness, and productivity in connection to researching and resolving a tax issue and determining the sustainability of the tax return filing position, the appropriate tax research processes must be meticulously designed, implemented, and executed. The subsequent five comprehensive steps will guide you in establishing an all-inclusive tax research effort on behalf of your entire client base while properly ascertaining the likelihood of success should a tax position(s) taken on a tax return be challenged by the Internal Revenue Service (hereinafter the “Service”) upon examination.

Tax Research Methodology

The first step in the tax research process is to establish all of the facts and circumstances provided by your client in order to determine which tax laws(s) apply to your client’s fact pattern. At this initial stage, it is imperative not to omit nor overlook any of your client’s facts and circumstances whether appearing material or immaterial. Always be guided by the axiom that facts and circumstances appearing to be immaterial individually may, in fact, be material in the aggregate.

The second step in the tax research process entails determining all of the tax issues affecting your client’s specific facts and circumstances and any and all mitigating factors. Normally, complex tax issues evolve through several stages of development. For instance an experienced tax professional, based upon his or her prior knowledge of the tax laws, can usually determine most of the initial pertinent issues in terms of general tax laws. However, after performing an initial search of the authorities to answer the initial issues, a tax professional often discovers that one or more additional specific technical questions of interpretations must be resolved before the initial issues can be fully addressed. Consequently, at this stage, a tax professional may also encounter the need to obtain additional facts from the client. Accordingly, the tax research process may have to move back from step two to step one.

The third step in the tax research process entails identifying the specific authorities to support all of your client’s tax issues while appropriately weighing authorities that may be contrary to your supporting position. Generally, this process begins with consulting statutory authority (e.g., the Internal Revenue Code) and quickly expands to encompass administrative authority (e.g., Proposed Treasury Regulations, Temporary Treasury Regulations, Final Treasury Regulations, Revenue Rulings, Revenue Procedures, Private Letter Rulings, Technical Advice Memorandum, General Counsel Memorandum,  Circular 230, Internal Revenue Manual, Internal Revenue Bulletins, IRS Field Service Advice Memorandum, IRS Determination Letters, and IRS Notices) and judicial authority (e.g., decisions by the U.S. Tax Court, U.S. District Court, U.S. Court of Federal Claims, U.S. Circuit Court of Appeals, U.S. Court of Appeals for the Federal Circuit, and the U.S. Supreme Court).  In addition, at times, you the tax professional may have to consult the legislative history (e.g., the Public Laws and Congressional Committee Reports from the House of Representatives and the Senate) of a particular Internal Revenue Code section to fully address what Congress’s intent was in passing a particular bill. Lastly, you may also want to consult the voluminous range of editorial interpretations (e.g., Tax Treatises, Tax Journals, etc.)  available to assist in the interpretation a particular tax issue.  However, it must be duly noted that editorial interpretations are generally impressible sources of authority before the Service and the judicial system.  For clarification purposes, the subsequent synopsis will elaborate upon the statutory, administrative, and judicial interpretations previously cited:

Statutory Authority

The Internal Revenue Code

All federal level tax statutes passed by Congress into law are compiled and published in Title 26 of The United States Code. As it should be recalled, Title 26 of The United States Code contains the specific statutes that authorize the Service to collect taxes for the federal government. Generally, the tax research process begins with consulting the Internal Revenue Code and quickly expands to encompass administrative and judicial authorities based upon the complexity of the tax issue under analysis.

Administrative Authority

The Treasury Regulations

The Treasury Regulations provide the official interpretations of the Internal Revenue Code by the Treasury Department and have the force and effect of law. The most common forms of Treasury Regulations include:

• Proposed Treasury Regulations (i.e., binding only on the IRS and not the taxpayers);
• Temporary and Final Treasury Regulations (i.e., binding on both the IRS and the taxpayers); and
• Preambles (i.e., treated just like legislative histories to demonstrate congressional intent and may underlie either type of the aforementioned treasury regulations regardless of status as Proposed, Temporary, or Final).

Revenue Rulings

A Revenue Ruling is an official interpretation by the Service of the tax laws. Initially, Revenue Rulings are published in the weekly Internal Revenue Bulletin. The same rulings later appear in the permanently bound Cumulative Bulletin, a semi-annual publication of the Government Printing Office. Revenue Rulings hold less weight than the Treasury Regulations because they are intended to cover only specific fact patterns. Regardless, Revenue Rulings can provide valid precedent but only if your client’s facts and circumstances are substantially identical.

Revenue Procedures

A Revenue Procedure is a statement of procedure that affects the rights or duties of taxpayers or other members of the public under the Code. Similar to Revenue Rulings, Revenue Procedures are less authoritative than Treasury Regulations. However, Revenue Procedures should be binding on the Service and may be relied upon by taxpayers.

Private Letter Rulings

Private Letter Rulings (hereinafter “PLR”) are issued directly to taxpayers who formally request and pay for advice about the tax consequences applicable to a specific business transaction. Such PLR request have been employed frequently by either taxpayers themselves or the taxpayer’s representatives (e.g., a taxpayers’ representation through a CPA Firm or Law Firm) to assure themselves of a preplanned tax result before they consummate a transaction and as a subsequent aid in the preparation of the tax return’s filing position. When the IRS issues a PLR it is understood that the PLR is limited in scope and application to the taxpayer making the request.

Technical Advice Memorandum

A Technical Advice Memorandum (hereinafter “TAM”) is a special after-the-fact ruling that may be requested from the taxpayer or the technical staff of the Service. For instance, if a disagreement arises in the course of an audit between the taxpayer or the taxpayer’s representative and the revenue agent, either side may request formal technical advice on the issues(s) through the District Director. Under certain circumstances, TAM’s can be used as a basis for the issuance of a Revenue Ruling and can also be subsequently published as a Private letter Ruling.

General Counsel Memorandum

General Counsel Memorandum (hereinafter “ GCM”) are legal memorandum that are prepared by the IRS Chief Counsel’s Office. GCM’s analyze proposed Revenue Rulings, Private letter Rulings, and Technical Advice Memorandum. GCM’s that were issued after 1981 constitute substantial authority for purposes of the penalty assessed for the substantial understatement of income tax.

Circular 230

Circular 230 is an IRS publication that sets for the requirements and responsibilities of professionals (e.g., Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries) admitted to practice before the Service.

Internal Revenue Manual

The Internal Revenue Manual (hereinafter “IRM”) is an official compilation of policies, procedures, instructions, and guidelines for the organization, function, operation and administration of the Service. It is not legally binding and the policies are not mandatory. The IRM guidelines do not confer any rights on taxpayers.

IRS Field Service Advice

IRS Field Service Advice (hereinafter “FSA”) are taxpayer specific rulings furnished by the IRS National Office in response to requests made by the taxpayers or IRS Officials.

IRS Determination Letters

A Determination Letter is issued by the IRS at the taxpayer’s request to outline the Service’s position on a particular transaction that has already been completed. Generally, Determination Letters are issued only when a determination can be made on the basis of clearly established rules in the statute or regulations.

IRS Notices

When prompt guidance concerning an item of the tax law is needed, the IRS publishes notices in the Internal Revenue Bulletin. These notices are intended to be relied upon by the taxpayers to the same extent as a Revenue Ruling or Revenue Procedure.

Judicial Authority

U.S. Tax Court

The U.S. Tax Court is an independent 19 judge federal administrative agency that functions as a court to hear appeals by taxpayers from adverse administrative decisions by the Service.

U.S. District Court

The U.S. District Court hears civil actions against the United States for the recovery of any tax alleged to have been erroneously or illegally assessed or collected by the Service. Trial by jury is available at the preference of either the petitioner or defendant.

U.S. Court of Federal Claims

The U.S. Court of Federal Claims is a Washington D.C. based appellate-level court in which a taxpayer may sue the government for a refund of overpaid taxes.

U.S. Circuit Court of Appeals

The U.S. Court of Appeals is one of thirteen courts including the District of Columbia and the Federal Circuit Courts, to which appeals from a trial court, such as the U.S. Tax Court, are directed.

U.S. Court of Appeals for the Federal Circuit

The U.S. Court of Appeals for the Federal Circuit hears appeals from the U.S. Court of Federal Claims.

U.S. Supreme Court

The U.S. Supreme Court is the highest appellate court in the federal court system and in most states. The U.S. Supreme Court, under its certiorari procedure authority, reviews the constitutionality of a tax law and a small number of tax decisions by the Court of Appeals.

The fourth step in the tax research process entails the resolution of your client’s tax issues after identifying, analyzing, and interpreting all of the applicable authorities. It cannot be overstated that you should have provided, as needed, reasonable statutory, administrative, and judicial support to demonstrate that your position could be upheld if challenged by the Service upon examination and that you exercised due diligence and acted in good faith. Furthermore, at times, positions taken on tax returns may need to be disclosed on Form 8275 entitled “Disclosure Statement” or Form 8275-R entitled “Regulation Disclosure Statement” depending upon the complexity and controversial nature of the tax issue. Noting, by disclosing positions on your client’s tax returns you may be able to avoid paid preparer penalties should your position be disallowed and avoid the application of the six year statutory period for assessment under I.R.C. § 6501(e).

From a risk management perspective, in order to mitigate or avoid income tax return paid preparer penalties pursuant to I.R.C. § 6694 (i.e., penalties that are assessed on both paid tax return preparers and tax advisers that are deemed paid tax return preparers due to their consulting on matters that constitute a substantial portion of their client’s tax returns even if they were not engaged to prepare nor review the tax return), a “More-Likely-Than-Not” standard should be satisfied. The subsequent standards of the applicable levels of opinions should be scrupulously analyzed when assessing your tax return filing position:

• “Will” Standard: Generally, a 95% or greater probability of success if challenged by the IRS. A “Will” opinion generally represents the highest level of assurance that can be provided by an opinion;
• “Should” Standard: Generally, a 70% or greater probability of success if challenged by the IRS. A “Should” opinion provides a lower level of assurance than is provided by a “Will” opinion, but a higher level of assurance than is provided by a “More-Likely-Than- Not” opinion;
• “More-Likely- Than- Not” Standard:  A greater than 50% probability of success if challenged by the IRS. The “More-Likely-Than-Not” standard is the highest level of accuracy required for purposes of avoiding the accuracy-related penalties under I.R.C. 6662A;
• “Substantial Authority” Standard: Typically, greater than a “Realistic Possibility of Success” standard and lower than “More-Likely-Than-Not” standard (i.e., 40% probability of success);
• “Realistic Possibility of Success” Standard: Approximately a one-in-three or greater possibility of success if challenged by the Service;
• “Reasonable Basis” Standard: Significantly higher than the “Not Frivolous” standard (i.e., that is, not deliberately improper) and lower than the “Realistic Possibility of Success” standard. The position must be reasonable based on at least one tax authority that can be cited as valid legal authority;
• “Non-Frivolous” Standard: Approximately a 10% chance of being upheld upon examination by the Service and accordingly under no circumstance should a tax professional ever render services with this level of comfort; and
• “Frivolous” Standard: Approximately a percentage less than a 10% chance of being upheld upon examination by the Service and accordingly under no circumstances should a tax professional ever render services with this level of comfort.

It should be duly noted that each of the aforementioned standards above has a relevant meaning to both the taxpayers and tax professionals when evaluating a tax position and the related disclosure requirements. Noting, the percentages listed for “More-Likely-Than-Not” and “Realistic Possibility of Success” are specifically provided for and discussed in the treasury regulations. In contrast, the percentages for “Substantial Authority”, “Reasonable Basis”, “Non-Frivolous”, “Frivolous” have been developed based upon their relative importance in the hierarchy of standards of opinion as primarily provided for in congressional committee reports. Moreover, while not scientifically calculable, the percentages are still practical in demonstrating the relative strength of one level as opposed to another level.

The fifth and final step in the tax research process entails communicating the conclusion to your client. Your client, of course, must ultimately make the final decision concerning what course of action to take, even though the client’s decision is guided by and often dependent upon the conclusions reached by you, the tax professional. It is strongly recommended that this tax advice be rendered to your client in a written format, as opposed to verbal communication, and preferably in a formal tax advice memorandum format (i.e., Facts & Circumstances Section; Issue(s) Section; Analysis Section; and Conclusion Section) meticulously discussing the applicable statutory, administrative, and judicial authority to appropriately document your due diligence in assessing the tax issues(s) and resolving them satisfactorily to reach a strong tax return filing position (i.e., “More-Likely-Than-Not”, “Should”, “or “Will” filing positions). Finally, caveat language in the form of a disclaimer should be documented within the tax advice memorandum for any areas of the tax law that were not within the scope and application of your tax research services (i.e., the scope and application of this tax advice memorandum analyses the federal-level tax consequences only and does not provide any advice or analysis in connection to any multi-state tax consequences nor any international tax consequences).

Conclusion

By following the preceding all-inclusive steps in the tax research process you should be able to render your research services to your entire client base in a more efficient, effective, and productive manner while adequately weighing risk management concerns in connection to tax return filing positions. As a final reminder, the guidance contained in this article should be applied with due professional care including seeking further professional advice from a subject matter expert should it be deemed warranted based upon both the complexity and contentious nature (i.e., a Tier 1 IRS Audit Directive issue; taking a tax position contrary to a Treasury Regulation on Form 8275-R, etc.) of the tax matter under review.

About the Author

Mr. Peter J. Scalise serves as the National Tax Practice Leader and Executive Managing Director for Engineered Tax Services, the preeminent national professional services firm that specializes in engineered based tax consulting services. Prior to joining ETS, Peter served the BIG 5 CPA Firm industry for over 15 years as a National and Regional Tax Practice Leader. Peter also serves on the Board of Directors and Board of Editors for The American Society of Tax Professionals; is the Founding President and Chairman of The Northeastern Region Tax Roundtable; and the highly renowned National Tax Columnist for The Tax Professional’s Update journal.

Join ETS as Spoonsor of the Mardi Gras on the Avenue with AIA New Orleans – February 16, 2012.

For further information and to register – http://www.aianeworleans.org/displaycommon.cfm?an=1&subarticlenbr=41

Are you interested learning a little about the 179D energy tax deduction, view this short video, click  this link.   http://youtu.be/76hlY4Ws6vc

How can a CPA help his client understand and take advantage of the same hiring credit/tax credit used by Walmart and other large employers?

Even though your client may not expect you to know everything about this credit known as the Work Opportunity Tax Credit or WOTC, he will certainly appreciate your bringing it to his attention instead of him having to bring it to yours.

The following paragraphs show how to communicate the concept and explain a solution path in a way that saves tax for your client and time for you.

$200 per new hire. Grossly simplified, that’s a working number to give any client hiring several employees per year. If you remember nothing else, remember that. Here are the details…
One eligible employee hired allows the employer to claim a maximum of $2,400 in Federal tax credits using the WOTC.

Usually 10% of all new hires in certain positions (retail, manufacturing, clerical, etc.) are eligible and allow the employer tax credit for each eligible hire. For some retailers like Walmart and Kmart or large manual labor based companies, it can be 20% to 30% and create millions in federal tax savings.

The second thing that should immediately be communicated to the client is that it is unrealistic for him to expect you or his H.R. department to coordinate this credit, even if they currently claim zone credits using internal resources alone. This chart below might help you communicate…

Zone Based Credits
State and Federal
Retroactive and prospective
Moderate difficulty to optimize
Depends on where company is
Depends on where employees live
Claim in conjunction with WOTC

WOTC Credits
Federal only
Prospective only
Great difficulty to optimize
Depends not on where company is
Depends not on where employees live
Claim in conjunction with zone credits

Let’s take the example of Patty, a Controller for an automotive dealership located in an Enterprise Zone.

Although she had personally claimed state enterprise zone credits because the local redevelopment agency promoted their use heavily, she was unaware for several years that the federal WOTC existed or could be claimed on many of the same employees she was claiming state tax credits for.  Additionally, she was unaware that even if certain new employees were not eligible for state hiring credits, they could still be certified for WOTC, thus creating Federal tax credits on top of the State tax credits.

Of only seven people she hired last year, four were eligible for WOTC, allowing Patty to claim over $8,112 in federal tax credits.

Since WOTC can be claimed by all employers regardless of size, location, or business type, and now that you have a chart to help you communicate the basic concept to your client, let’s dive into the particulars that every CPA should grasp.

The WOTC is administered by the U.S. Department of Labor and reduces the federal income tax liability for hiring employees meeting certain criteria.  Of the many ways to qualify, here’s a short check list:

1) Living in Targeted Employment Areas: This most common way of qualifying employees can include empowerment zones, enterprise zones, renewal communities, and rural renewal counties.

2) Unemployed and Disabled Veterans: Those unemployed six of the twelve months before hire or service-connected disabled vets hired within one year of discharge.

3) Vocational rehabilitation referrals: Individuals who have been referred by a rehabilitation agency or an approved employment network.

4) Ex-felons: A convicted felon who is hired within the year of the conviction or release date.

5) Supplemental Nutritional Assistance Program (SNAP) recipients: Any 18- to 39-year-old who is a member of a family that’s received SNAP benefits in the six-months prior to hire.

6) TANF recipients: Someone who is a member of a family that has received Temporary Assistance for Needy Families benefits for any nine of the eighteen months prior to hire.

7) Supplemental Security Income (SSI) recipients: Any person who has received SSI benefits within the 60 days prior to hire.

8)Qualified Summer Youth: Youth residing in an Enterprise Zone or Renewal Community and who haven’t previously been employed by the same employer.

Credit per employee is generally calculated on the first $6,000 of the first year’s wages. The credit is usually capped at $1,200 for part-time or summer employees and at $2,400 for full-timers, but there are greater credits for some classes of veterans and TANF recipients. Credits exceeding current year liability may be carried either back one year or forward 20 years.

Because IRS Form 8850 must be complete in every detail and postmarked within 28 days of hire date it is critical to outsource it to experts.

Should your client choose to pursue this, it would be a great help to them if you advise they use tax credit specialists who can guarantee in writing that at least 90% of all new hires will be screened effectively and that the specialists be capable of coordinating and optimizing the claim of tax credit with you, the CPA.

This Article was written by Kirk Conole.

Kirk Conole
DCI Solutions
www.dcisolutions.net

kconole@dcisolutions.net

12400 Ventura Blvd. #326
Studio City, CA 91604
(888) 395-0809
(760) 809-8734 mobile

(760) 752-1711fx
http://www.linkedin.com/in/kirkconole

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It is a myth that bonus depreciation allows you to take your new lighting as a one year depreciation. To get bonus depreciation the assets must have a life of less than 20 years. By IRS definition the general lighting for a building has a life of 39 years.

More important is that if you give this advice to a client, and the IRS catches this tax error, in addition to them paying penalties and interests fifty percent of your fees from this client may be forfeit to the IRS by you. The next thing the IRS will do is to ask you for your client list to see who else might have taken these deductions.

Protect yourself and your client and work with ETS to comply with the tax code and keep everyone safe. ETS provides the 3rd party certifications that are required to meet the EPAct guidelines.

The background on Bonus Depreciation and Lighting Lives are below.

Bonus Depreciation:
The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% first-year bonus depreciation (26 USC § 168(k)) provision for eligible renewable-energy systems acquired and placed in service in 2008. This provision was extended (retroactively for the entire 2009 tax year) under the same terms by The American Recovery and Reinvestment Act of 2009, enacted in February 2009. Bonus depreciation was renewed again in September 2010 (retroactively for the entire 2010 tax year) by the Small Business Jobs Act of 2010 (H.R. 5297).

In December 2010 the provision for bonus depreciation was amended and extended yet again by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). Under these amendments, eligible property placed in service after September 8, 2010 and before January 1, 2012 qualifies for 100% first-year bonus depreciation. For 2012, bonus depreciation is still available, but the allowable deduction reverts from 100% to 50% of the eligible basis.

To qualify for bonus depreciation, a project must satisfy these criteria: the property must have a recovery period of 20 years or less under normal federal tax depreciation rules;

• The original use of the property must commence with the taxpayer claiming the deduction;
• The property generally must have been acquired during the period from 2008 – 2012; and
• The property must have been placed in service during the period from 2008 – 2012.

If property meets these requirements, the owner is entitled to deduct a significant portion of the adjusted basis of the property during the tax year the property is first placed in service. As noted above, for property acquired and placed in service after September 8, 2010 and before January 1, 2012, the allowable first year deduction is 100% of the adjusted basis. For property placed in service from 2008 – 2012, for which the “placed in service date” does not fall within this window, the allowable first-year deduction is 50% of the adjusted basis. In the case of a 50% first year deduction, the remaining 50% of the adjusted basis of the property is depreciated over the ordinary MACRS depreciation schedule. The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies.

The IRS bifurcates assets in to two categories, 1245 and 1250, in essence separating assets into buckets based on their lives. Lighting by IRS definition is a 1250 category asset and has an accounting life of 39 years. To qualify for accelerated depreciation (and the one year bonus depreciation) the asset must have a life of 20 years or less.

The links are below:
http://www.irs.gov/businesses/article/0,,id=134687,00.html
http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US06F&re=1&ee=1

Lighting Categorization:
• Electrical – Light Fixtures – Interior 1250 Includes lighting such as recessed and lay-in lighting, night lighting, and exit lighting, as well as decorative lighting fixtures that provide substantially all the artificial illumination in the building or along building walkways. For emergency and exit lighting, see Fire Protection & Alarm Systems. Building or Building Component – 39 Years Electrical

• Light Fixtures – Interior – 1245 Light fixtures, such as neon, track lighting, or grow lights which are decorative in nature and not necessary for the operation or maintenance of the building. If the decorative lighting were turned off, the other sources of lighting would provide sufficient light for operation or maintenance of the building. If the decorative lighting is the primary source of lighting, then it is section 1250 property. Personal Property With No Class Life – 7 Years

Bonus Depreciation:
The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% first-year bonus depreciation (26 USC § 168(k)) provision for eligible renewable-energy systems acquired and placed in service in 2008. This provision was extended (retroactively for the entire 2009 tax year) under the same terms by The American Recovery and Reinvestment Act of 2009, enacted in February 2009. Bonus depreciation was renewed again in September 2010 (retroactively for the entire 2010 tax year) by the Small Business Jobs Act of 2010 (H.R. 5297).

In December 2010 the provision for bonus depreciation was amended and extended yet again by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). Under these amendments, eligible property placed in service after September 8, 2010 and before January 1, 2012 qualifies for 100% first-year bonus depreciation. For 2012, bonus depreciation is still available, but the allowable deduction reverts from 100% to 50% of the eligible basis.

To qualify for bonus depreciation, a project must satisfy these criteria: the property must have a recovery period of 20 years or less under normal federal tax depreciation rules;

• The original use of the property must commence with the taxpayer claiming the deduction;
• The property generally must have been acquired during the period from 2008 – 2012; and
• The property must have been placed in service during the period from 2008 – 2012.

If property meets these requirements, the owner is entitled to deduct a significant portion of the adjusted basis of the property during the tax year the property is first placed in service. As noted above, for property acquired and placed in service after September 8, 2010 and before January 1, 2012, the allowable first year deduction is 100% of the adjusted basis. For property placed in service from 2008 – 2012, for which the “placed in service date” does not fall within this window, the allowable first-year deduction is 50% of the adjusted basis. In the case of a 50% first year deduction, the remaining 50% of the adjusted basis of the property is depreciated over the ordinary MACRS depreciation schedule. The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies.

For 1911 ONLY and for selected leased properties ONLY, there is a limited time benefit that is listed below. Engineered Tax Services recommends you have some confirmation of your renovations completed to verify that only qualifying properties were taken as a write-off.

Qualified Leasehold Improvement Property. An improvement to an interior portion of nonresidential real property (whether or not depreciated under MACRS) by a lessor or lessee under or pursuant to a lease may qualify for bonus depreciation. The improvement must be placed in service more than three years after the building was first placed in service (i.e., the building must be more than three years old). The lessor and lessee may not be related persons. Expenditures for (a) the enlargement of a building, (2) any elevator or escalator, (3) any structural component that benefits a common area, or (4) the internal structural framework of the building do not qualify ( Code Sec. 168(k)(3)).

From EPAct to Abandonment and Utility rebates, the economics of a lighting retrofit have never looked better. To achieve these benefits there are some tax and compliance issues that you need to address. The EPAct tax deductions and the 1245/1250 analysis require a level of tax and engineering expertise.

Note: 179D Energy Efficient property does not qualify for Bonus Depreciation.

If you have a question about this article or would like to discuss your tax lighting deduction options, please contact the Author, Don McDougall.

Don McDougall is a Director with Engineered Tax Services, a firm specializing in capturing tax incentives available through EPAct 2005.

For further information, contact
Don McDougall Director Engineered Tax Services, Inc.

PH: 1.213.280.2266

E: dmcdougall@engineeredtaxservices.com

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Welcome 2012! As the New Year rolls around, it’s always a sure bet that there will be changes to the current tax law and 2012 is no different. From health savings accounts to retirement contributions here’s a checklist of tax changes to help you plan the year ahead.

Individuals

The current tax rate structure ranging from 10% to 35% remains the same for 2012, but tax bracket thresholds increase for each filing status. Standard deductions and the personal exemption have also been adjusted upward to reflect inflation. For details see Tax Brackets and Exemptions
for 2012 below.

Alternate Minimum Tax (AMT)
Alternate Minimum Tax (AMT) limits decrease for all taxpayers at $33,750 for singles, $45,000 for married filing jointly, and $22,500 for married filing separately.

“Kiddie Tax”
For taxable years beginning in 2012, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $950. The same $950 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”. For example, one of the requirements for the parental election is that a child’s gross income for 2012 must be more than $950 but less than $9,500.

For 2012, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $1,900, the same as 2011.

Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.

For calendar year 2012, a qualifying HDHP must have a deductible of at least $1,200 for self only coverage or $2,400 for family coverage (unchanged from 2011) and must limit annual outof- pocket expenses of the beneficiary to $6,050 for self-only coverage (up $100 from 2011) and $12,100 for family coverage (up $200 from 2011).

Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs), the Archer MSA created to help self employed individuals and employees of certain small employers and the Medicare Advantage

MSA, which is actually an Archer MSA as well, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and both MSAs require that you are enrolled in a high deductible health plan (HDHP).

Self-only coverage.

For taxable years beginning in 2012, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,100 (up $100 from 2011) and not more than $3,150 (up $150 from 2011), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,200 (up $150 from 2011).

Family coverage.

For taxable years beginning in 2012, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,200 (up $150 from 2011) and not more than $6,300 (up $250 form 2011), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,650 (up $250 from 2011).

Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or less at the end of 2012, the limitation is $350. Persons over 40 but less than 50 can deduct $660. Those over age 50 but not more than 60 can deduct $1,310, while individuals over age 60 but younger than 70 can deduct $3,500. The maximum deduction $4,370 and applies to anyone over the age of 70.

Adoption Assistance Programs
For taxable years beginning in 2012, the amount that can be excluded from an employee’s gross income for the adoption of a child with special needs is $12,650. In addition, the maximum amount that can be excluded from an employee’s gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for other adoptions by the employee is $12,650 (down from $13,360 in 2011).

The amount excludable from an employee’s gross income begins to phase out under for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.

Taxpayers adopting children are eligible for both the adoption credit (see below) and the adoption assistance exclusion of adoption expenses paid for through an employer’s adoption assistance plan. However, the same adoption expense cannot qualify for both the adoption credit and the adoption assistance exclusion.

Foreign Earned Income Exclusion
For taxable years beginning in 2012, the foreign earned income exclusion amount is $95,100, up from $92,900 in 2011.

Estate Tax
For an estate of any decedent dying during calendar year 2012, the basic exclusion amount is $5,120,000, up from $5,000,000 in 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011. The maximum tax rate remains at 35%.

Individuals – Tax Credits
Adoption Credit
For taxable years beginning in 2012, the credit allowed for an adoption of a child with special needs is $12,650. For taxable years beginning in 2012, the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $12,650. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.

Child Tax Credit
For taxable years beginning in 2012, the value used to determine the amount of credit that may be refundable is $3,000.

Earned Income Credit
For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children. In addition, for taxable years beginning in 2012, the earned income tax credit is not allowed if certain investment income exceeds $3,200.

Additional Child Credit
The $1,000 per-child additional child tax credit has been extended through 2012. The credit will decrease to $500 per child in 2013.

Individuals – Education
Hope Scholarship – American Opportunity, and Lifetime Learning Credits
The maximum Hope Scholarship Credit allowable for taxable years beginning in 2012 is $2,500.
The modified adjusted gross income (MAGI) threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Interest on Educational Loans
For taxable years beginning in 2012, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $60,000 ($125,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $75,000 or more ($155,000 or more for joint returns).

Individuals – Retirement
Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000. Contribution limits for SIMPLE plans remain at $11,500. The maximum compensation used to determine contributions increases to $250,000 (up $5,000 from 2011 levels).

Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

Saver’s Credit
The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

Businesses
Standard Mileage Rates
The rate for business miles driven is 55.5 cents per mile for 2012, unchanged from the mid-year adjustment that became effective on July 1, 2011.

Section 179 Expensing
For 2012 the maximum Section 179 expense deduction for equipment purchases is $139,000 (down from $500,000 in 2011) of the first $560,000 (down from $2 million in 2011) of business property placed in service during the year.

Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, for tax years beginning in 2012 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $125 (down from $230 in 2011). The monthly limitation for qualified parking is $240 (up from $230 in 2011).

Work Opportunity Credit
The work opportunity credit has been expanded to provide employers with new incentives to hire certain unemployed veterans. Businesses claim the credit as part of the general business credit and tax-exempt organizations claim it against their payroll tax liability. The credit is available for eligible unemployed veterans who begin work on or after November 22, 2011, and before January 1, 2013.

While this checklist outlines important tax changes already in place for 2012, additional changes in tax law are more than likely to arise during the year ahead.

This article was provided  courtesy of Lou Fuoco, CPA , of the Fuoco Group.

Contact Lou at 561.626.0400 or cpa@fuoco.com

Fuoco Group Certified Public Accountants and Business Advisors

772 US. Highway One, Suite 200

North Palm Beach,  FL  33408

Offices in North Palm Beach, Boca Raton,  New York City and Long Island

www.fuoco.com

Introduction

The IRS has issued new Temporary Treasury Regulations on December 23, 2011 that governs when costs are required to be capitalized or deducted as repair and maintenance costs. The new regulations replace the previously issued proposed regulations that were issued in March of 2008.As a reminder, Proposed Treasury Regulations are binding only on the IRS and not the taxpayers. In contrast, Temporary and Final Treasury Regulations are binding on both the IRS and the taxpayers. To that end, with this latest issuance of Temporary Treasury Regulations the onus has been shifted onto taxpayers to ensure compliance as these regulations have the force and effect of law.

Scope & Application of the New Regulations

The Treasury Department and the IRS issued temporary regulations (hereinafter “Regulations”) that provide guidance on amounts paid to improve tangible property (i.e., commonly referred to in the industry as the repair regulations). The Regulations also provide guidance on amounts paid to acquire or produce tangible property, as well as guidance regarding the disposition of property. The Regulations are generally effective for taxable years beginning on or after January 1, 2012.

It is highly expected that sometime in the first quarter of 2012 the IRS will issue additional administrative guidance in the form of revenue procedures containing transition rules for changing to methods described in the Regulations.

Units of Property Measurement
The guidelines within the Regulations for ascertaining the proper unit of property for the most part are tantamount to the Proposed Regulations, including that a building and its structural components are a single unit of property.

However, one noteworthy difference is that the Regulations now provide that the tests to determine if property has been improved must also be applied to structural components of a building (i.e., a rooftop) and building systems. It should be duly noted that the Regulations define building systems to include the subsequent attributes:

 heating, ventilation and air conditioning (HVAC) systems;
 plumbing systems;
 electrical systems;
 escalators;
 elevators;
 fire protection and alarm systems;
 security systems; and
 gas distribution systems.

In addition, the Regulations provided expanded procedures for determining the unit of property in situations where property is leased and also provided special rules for determining improvement costs in lease situations.

Overview of Betterments Analysis: A Facts & Circumstances Test
The guidelines in the Regulations for establishing whether amounts result in a betterment of a unit of property, and consequently would result in capitalization of costs, are essentially an amount to the Proposed Regulations. Nevertheless, one noteworthy difference is that the Regulations specifically provide that an amount results in a betterment to a building if it results in a betterment to a structural component or a building system. The Regulations include additional examples than those contained in the Proposed Regulations to illustrate the application of the betterment rules.

Pursuant to the Regulations, three fact situations concerning costs incurred by retail stores that the Regulations label as:
(1) “building refresh”;
(2) “building refresh” with “limited improvement”; and
(3) “substantial remodel.”

The examples determine that:
(1) none of the building costs are required to be capitalized in the building refresh example;
(2) some of the building costs are required to be capitalized in the building refresh with limited improvement example; and
(3) all of the building costs are required to be capitalized in the substantial remodel example.

These three aforementioned examples demonstrate the general rule in the Regulations that a determination of whether costs result in a betterment depends upon the facts and circumstances related to the expenditures.

Restorations of a Unit of Property
The rules in the Regulations for ascertaining whether an amount is paid to restore a unit of property, and consequently would result in capitalization of costs, are basically tantamount to the Proposed Regulations with limited, but noteworthy exceptions. Certainly consistent with the rules in other portions of the Regulations, the rules specifically provide that an amount is paid to restore a building if it restores a structural component or a building system. Moreover, the regulations significantly change the rules in the Proposed Regulations for determining whether the costs result in a replacement of a major component or a substantial structural part of a unit of property. The Proposed Regulations defined replacement of a major component or substantial structural part to mean either:
 costs that comprise 50 percent or more of the replacement costs of the unit of property, or
 replacement of 50 percent or more of the physical structure of the unit of property.

In contrast, the Regulations provide a facts and circumstances test for establishing whether a major component or substantial structural part is replaced. The Regulations also provide that a major component or substantial structural part includes:
 “a large portion” of the physical structure of the unit of property, or
 a part or combination of parts that perform a discrete and critical function in the operation of the unit of property that is more than “a minor component.”

No Plan of Rehabilitation Doctrine
Consistent with the Proposed Regulations, the Regulations do not provide for a plan of rehabilitation doctrine as described in judicial interpretations. In its place, the Regulations incorporate the I.R.C. § 263A standard for the treatment of repair and maintenance costs performed during an improvement, and require capitalization of all indirect costs that directly benefit or are incurred by reason of an improvement. The Preamble to the Regulations provides that the plan of rehabilitation doctrine is obsolete to the extent that the court created doctrine provided different standards for determining whether an otherwise deductible indirect cost must be capitalized as part of an improvement. As a reminder, Preambles should be treated like legislative histories to demonstrate congressional intent and may underlie either type of the aforementioned treasury regulations regardless of status as Proposed, Temporary, or Final.

Safe Harbor Analysis
The Regulations provide a routine maintenance safe harbor rule. If, at the time the unit of property is placed in service, it is reasonably expected that the maintenance activities will be performed more than once during the class life of the unit of property, the maintenance is deemed not to improve the unit of property. Nevertheless as it should be duly noted, the Regulations specifically provide that the safe harbor does not apply to work performed on buildings.

Applying the Scope & Application of the New Regulations on your Tax Return
Please contact an Engineered Tax Services Professional today for questions in connection to the full scope and application of the new Regulations and how to determine the impact of the new rules on your methods of accounting for when to capitalize costs to tangible property and when to deduct the amounts as repair and maintenance costs.

For further information, contact Peter Scalise,  National Tax Practice Leader, Executive Managing Director

PH: 917.822.0275

email: pscalise@engineeredtaxservices.com