BusinessWest

For This Firm, It’s Been 26 Years of Success — and Counting

Rick Burkhart said that the stacks of books on shelves in his conference room were as much historic artifacts as some of the trappings of his early days in accounting. “I started when we were still using green visors and quills,” he joked.
But while the tools of the trade have changed, the commitment and drive to function within the intricate roles of both accounting and building professional relationships therein remain the same. And after 26 years in business, Burkhart, one of the principals of Burkhart & Pizzanelli, P.C., an accounting firm in West Springfield, said this is what drives him and his fellow CPAs.
Joining Burkhart at the table to talk with BusinessWest recently were Deborah Penzias and Julie Quink, two CPAs at the firm. Between the three, they represent close to 70 years of making the numbers work.
All three said that they knew very early on that this is what they wanted to do with their lives. Burkhart himself offered this level of dedication as one of the hallmarks of his associates at the firm. With eight total CPAs, and a support staff almost that size, he said this is one of the larger accounting firms in the area. Though its client base reaches into companies with revenues in the tens of millions, B&P still enjoys relationships with many personal-income clients.
Those books on the shelves are a mute testament to how much this industry is in a constant state of evolution. Software has replaced the ledgers — Penzias laughed and said that, in 13 years at the firm, “I’ve never touched one” — but shifting regulations also keeps the bar set high.
“The big audit failures like WorldCom and Enron, all of those have led to new requirements for us,” Quink said. “Whether they’re good or not, from our perspective, those are things that we need to follow, that are checked in peer review, to make sure that we’re all always following standard procedures.”
With the cruelest month for many rapidly approaching, the three CPAs told BusinessWest how B&P’s size keeps it connected to the full spectrum of clientele in this area. And while the tools may have changed, their pride in their industry has not and will not. For this group of CPAs, the work doesn’t end on April 15, although certainly the wave is starting to crest.
“I marvel when I talk to accountants who leave on vacation for a week after tax day,” said Burkhart. “I don’t know how they do that! For me, I’m happy to begin fulfilling all those promises we made to people from the last few months — ‘I’ll get to that right after tax season.’
“But that’s what we’re here for,” he continued. “In fact, these are relationships with our clients that I look forward to all year long.”

Capital Gains
Burkhart reflected on his own career history and said, “I’ve always enjoyed this work immensely — working with business owners and taxpayers, and people who need help with financial matters.”
At UMass Amherst in the 1970s, he said, all business students were required to take surveys in finance, marketing, management, and accounting, and the numbers got him hooked. After almost a decade working in a small firm with his associate, Sam Pizzanelli, he said the two decided to buy the business. Shortly after, the two took on Tom Pratt as a partner CPA.
That early interest in accounting is a common refrain. Quink joined B&P in October, but said that she started working for KPMG two decades earlier. “I decided that a big firm like that wasn’t for me, so I left for a smaller operation.”
“Accounting was the only thing I was really good at in school,” she said with a smile. “And I love dealing with people. A misconception might be that we’re just numbers-oriented people. We’re not. It’s about developing relationships with people, and helping with their business and financial matters.”
Penzias, at B&P since 1998, said that some gentle encouragement came from her dad. “He said I could be a computer genius, an optician, or a CPA. I opted for column C. I had taken a bookkeeping course in high school, and I thought, this is interesting — everything balances out. I like that concept.”
The business has grown to its present size, Burkhart said, not from mergers or buyouts of other accounting firms, but from referrals and word of mouth. “Looking down the list of CPAs that are here,” he said, “we all have many, many years of experience. Not to say that we’re against hiring new people and training them up, but it just so happens that our team consists of highly experienced and seasoned accountants.
“An all-star team?” he asked rhetorically, smiling. “We certainly think so.”
And he isn’t alone. Penzias said that the firm just underwent peer review from the Mass. Society of CPAs the prior week. “We passed with flying colors,” she said. “They were very complimentary of our work papers.”
Quink said B&P’s size is an asset in serving such a wide spectrum of clients. “We’re small enough to give a mom-and-pop small business the attention that they need, but also big enough that we can assist larger clients,” she explained. “We have clients in the $100,000 revenue and less category, and upwards of $30 million to $50 million in revenue.
“The size of the company isn’t important for us,” she continued. “You see the issues are very similar, just on a larger scale for the bigger companies.”

Taxing Times
In addition to their own professional software replacing the tomes on the walls, Burkhart said the proliferation of home-use tax software has changed the game for his industry.
“And it’s not necessarily a bad idea for many people,” he said. “Both the type you can purchase, like Turbo Tax, or those that are made available for free, particularly through the IRS, serve people adequately and sometimes very well.”
But there are personal-income taxpayers who have issues and complexities that are beyond the answers found in software, requiring knowledge of the Internal Revenue Code, the complex regulations and procedures that are beyond a point-and-click solution. “For those taxpayers, we can add value to the equation,” he said. “Really, the taxpayers that we tend to serve aren’t good candidates for using off-the-shelf software.”
That component to the industry is but a slight line-item detail in contrast to the larger concerns of finance and accounting. “The one thing that you know for certain,” Quink said, “is that the standards and tax rules will always change.”
Perhaps the most increasingly difficult forecast for accounting is the very technology that has made much of their industry easier. The reference books are gone and replaced by software, and the Internet and e-commerce have ushered in an entirely different landscape on the state-tax level.
“We tend to think that everything relates to the federal filing system and then the state ‘stuff’ is ancillary,” Burkhart said. “But the reality is that the major issues taking place right now are on the state level, especially with regard to that sales-and-use tax. An enormous amount of commerce is going on untaxed, and the states are understandably working hard to find how they can capture that revenue. It ends up becoming a very complex situation for us and all accountants.”
Looking beyond his calendar to the red-letter date approaching, Burkhart said that, as the industry changes, so too will his firm at some point in the future. “I’m 58 years old, and I’m beginning to think hard about succession. Though there is a lot of consolidation in this industry, our philosophy is that we, the partners, would like to see folks here now work up into our seats. We feel a great deal of loyalty to our team.”
But, he added, “our aim is to continue for the indefinite future.”
All three shrugged off the idea that the next few months must be the most difficult for a CPA. “If I’m not busy now, I’m sad, actually,” Penzias said. “It’s the nature of the work. That’s the way the cycle has always been.”
That personal connection to their clientele will always be important at B&P, all agreed. Burkhart said that it’s not uncommon in his industry for a developing firm to walk away from its personal-finance clientele.
“For us, from a revenue point of view, that sector represents maybe 10%, maybe, on the high side,” he said. “And from the number of clients, it represents roughly 50%.
“But,” he added, “I’ve been doing people’s tax returns for a long time. If I look through the list of my clientele that I work with, some of these people I’ve known for years — 20 years, maybe even longer. You become friends with those people, and you look forward to seeing them in the wintertime. It’s part of your life cycle, almost a part of who you are.”

What Is the Alternative Minimum Tax, and Who Will Be Paying It?

Created in 1969, the alternative minimum tax, or AMT, was the result of a public outcry to congress that the rich and wealthy were not paying their fair share of taxes. Based on testimony by the secretary of the Treasurer, 155 individuals with an adjusted gross income above $200,000 didn’t pay any tax on their 1967 income-tax returns.
Accordingly, the AMT was designed as a safeguard to keep those individuals from slipping through tax loopholes. The AMT is a tax system that is calculated in parallel with an individual or corporation’s ‘regular’ tax. The higher of the two tax calculations is the one that must be paid. We will focus on AMT as it applies to the individual.

How the AMT Is Calculated
To calculate the AMT, all ‘preference’ items are added back to regular taxable income to arrive at AMT income. Then an AMT exemption is deducted from the AMT income to determine the AMT taxable income.
Preference items include state and local income taxes, sales and property taxes, accelerated depreciation, deductible medical expenses, miscellaneous itemized deductions, certain tax-exempt income, certain credits, incentive stock options, personal exemptions, and the standard deduction. These preference add-backs are items that many families who own their homes in high-income-tax states use as deductions on their regular income-tax return.
Why You May Have to Pay It
Based on the above information, there are certain taxpayers who are more likely to pay the AMT.
Large families fall into the AMT because they must add back all of their exemptions for AMT purposes. A family with a filing status of married filing jointly with four children, for example, get six personal exemptions for regular tax purposes. These six exemptions must be added back to calculate the AMT.
State and local taxes paid are also taken into consideration when determining whether the taxpayer is subject to the AMT. State and local income taxes paid are a deduction for regular tax and must be added back to calculate the AMT. The add-back includes not only state income tax, but also property taxes and excise taxes paid. From 2004 through 2007, residents of California, Connecticut, the District of Columbia, Maryland, Massachusetts, New Jersey, and New York paid the most ATM. These are all high-income-tax states.

What Does This Mean to You?
As it stands now, the exemption for 2011, for a married couple, is $74,450 (other filing statuses have different exemption amounts). The exemption is scheduled to revert back to the 2000 exemption amount of $45,000 for a married couple in 2012. That is 40% less than what it was. If this happens, then the amount of income that can be shielded from the AMT will be less, and more people will be pulled into the AMT. That would amount to an estimated 25 million additional taxpayers paying AMT.
The good news (if there is such a thing with taxes) is that Congress usually extends the increased AMT exemption amount. Congress tends to postpone dealing with difficult issues until it has to. So we may not know until the end of 2012 if there is going to be a patch that spares the additional 25 million taxpayers from the AMT in 2012.

How Can You Avoid the AMT?
It is difficult to plan to avoid the AMT because the regular and AMT tax systems run parallel with each other, leaving you to pay the greater of the two.  Sometimes reducing one tax could increase the other tax. The best advice would be to look at your overall tax picture and start from there. You will need to know what items could cause you to be caught in the AMT and the relationship between your regular tax and the AMT. From there, you can implement a strategy that is right for you. You should review your plan if anything changes in your life or with the tax law.
One item that a taxpayer can control based on timing is the payment of estimated state income-tax payments and real-estate taxes. Since taxes paid are preference items and are added back to calculate the AMT, it may not be best to prepay those taxes prior to the end of a particular year. If you are subject to the AMT in that year, you won’t receive a tax benefit from paying early (say, in December). However, if you wait until after year end, you may have the opportunity to deduct your tax payment in the following year.
On the opposite side, if in one year you have a significant item of income resulting in a large state tax amount due with your return the following April, you will likely be subject to AMT in the year of payment since the tax will be disproportionately large compared to your income. Therefore, prepaying may be advised. Again, planning and understanding your own situation are key to determining what the best course of action is.
As always, it is best to plan and then plan some more to help reduce your overall tax bill. Calling your tax professional is a good way to start, and avoid paying more taxes than you should.

Sean Wandrei is a tax manager with Meyers Brothers Kalicka, P.C. His technical concentrations are in multistate taxation as well as real-estate entities; (413) 536-8510.

Effective Tax Planning Is a Saving Grace

April is generally regarded as ‘tax time,’ but experts say that tax planning is a year-round exercise, if people want to do it right. With that in mind, year end is a time to look at strategies that can minimize your tax burden and put an effective game plan in place.

As the end of 2011 approaches, now is a good time to start year-end tax planning to minimize your individual and business tax burden. Generally, year-end tax planning involves considering at least two years — in this instance, 2011 and 2012. With tax changes on the horizon, you should consider the likelihood of future changes. Tax planning is a dynamic process and is best accomplished with forethought and assistance from your tax adviser.
Before going into more specific, detailed planning tips, here are two basic principles that can help guide your overall thinking:
• If you expect your tax rate will be higher in 2012, you may benefit from accelerating income into 2011 and deferring deductions into 2012; and
• If you think your tax rate might be lower next year or will be unchanged, consider deferring income to 2012 and accelerating deductions into 2011.
Remember, the focus is on yours or your company’s marginal tax rate. That is the highest rate at which your last, or marginal, dollar of income will be taxed. Even though overall tax rates may rise in the future, if your income will be substantially lower in 2012 than in 2011, your marginal tax rate may decrease because of our graduated tax-bracket system.
In this article, we will focus on tax-planning opportunities that involve actions you can take during the remainder of 2011. This article does not include every tax-planning opportunity that may be available to you, and it is advised that tax projections confirm planning strategies.
First, some business tax-planning strategies.

Retirement Plans for Your Business
Retirement plans have significant tax advantages. Employer contributions are deductible from the employer’s income, employee contributions are not taxed until distributed to the employee (for plans other than Roths), and investments in the program grow tax-free or tax-deferred. Further, the tax law offers a small incentive of a $500-per-year tax credit for the first three years of a new SEP, SIMPLE, or other retirement plan to cover the initial setup expenses.

Depreciation
Certain enhancements to business-depreciation provisions are scheduled to expire on Dec. 31, although President Obama has proposed an extension through 2012.
Section 179: A $500,000 expensing election limit applies to qualifying property purchased and placed in service during 2011. As a result, many businesses will receive an immediate tax writeoff for the cost of most new and used tangible personal property. Unless Congress acts to further extend the higher limit, it will drop to about $134,000 in 2012. Companies that purchase more than $2 million of qualifying property during 2011 have their deduction amount reduced, dollar for dollar, for purchases in excess of $2 million.
Bonus depreciation: Property that does not qualify for an immediate tax write-off under the expensing election may qualify for an increased first-year depreciation deduction under bonus depreciation rules. Unlike the Section 179 deduction, there are no restrictions on the amount of qualifying property, and there is no taxable-income limit. The deduction is 100% of the cost for new property purchased and first placed in service during 2011. Unless Congress acts to extend the bonus depreciation (now proposed by the president), it will not be available for 2012.

Cost Segregation
Buildings and other real estate generally do not qualify for bonus depreciation or the expensing election. However, a cost-segregation study may be able to identify qualifying property within the overall project, which can often significantly increase your deduction.

Research and Development Tax Credit
Many business owners in nearly every industry are unaware that federal and state research and development (R&D) tax-credit programs exist that may reward their day-to-day efforts aimed at producing an improved product. Consider consulting an R&D expert. This credit applies to more than manufacturers.

Health Insurance Tax Credit
To encourage smaller businesses to offer medical insurance coverage for their employees, the law offers a tax credit to offset all or part of the cost. If your business qualifies as a small employer, meaning fewer than 25 employees and average annual wages of less than $50,000, you could be eligible for a credit of up to 35% of non-elective contributions you make on behalf of your employees for medical-insurance premiums. The credit requires minimum non-discriminating contributions and varies based on the numbers of employees and average compensation.

Credit for Hiring New Employees
Businesses that hire workers who are members of certain target groups, such as disabled veterans, food-stamp recipients, and ex-felons, can claim a credit up to 40% of the first $6,000 of wages paid to each such employee.

Losses from Pass-through Entities
If the business entity is operating as a partnership, LLC, S corporation, or trust, and the business will incur a loss in 2011, you may need to plan ahead to be sure the owners can take advantage of that loss on your personal tax return. These rules can be complicated, and you should consult with your tax adviser; there are steps you can take to deduct passive losses or increase your basis.

Paying Corporate Dividends
Profits of traditional C corporations (those that have not elected S-corporation pass-through status) are taxed twice: once when earned by the corporation, and again when distributed as a dividend to the shareholders. Many have seen the current 15% tax rate on qualified dividends as an opportunity to pay out accumulated earnings at relatively low tax rates. It is likely that the tax rate on dividends will increase in the future, so you may wish to discuss with your tax adviser the possibility of distributing profits to lock in the current 15% rate.

Compensation and Billing
Compensation earned in 2011 can sometimes be paid in early 2012, and the business may be entitled to the tax deduction in 2011. If your business operates on the cash method, you can delay (within reason) sending out bills for 2011 work until late in the year, so payment comes in 2012. Alternatively, you can offer a discount to a client who prepays if you are trying to increase 2011 income.

Next, we’ll consider some personal tax strategies.

Capital Gains and Losses
• Long-term capital gains from the sales of assets with a holding period greater than one year are taxed at 15%;
• Short-term capital gains are taxed as high as 35%;
• Sales at a loss can reduce other capital gains;
• Excess capital losses can be deducted to offset up to $3,000 of other income, with the balance carried forward. When selling to recognize a loss, be careful of the wash-sale rules; and
• Consider any capital-loss carry-forward that may be available to you in 2011.

Installment Sales
Selling an asset at a gain and collecting the proceeds in future years may allow you to defer part of the income until the years in which you receive the payments. Consider the fact that you will be financing the sale yourself and may face the risk of collection problems.
Also, consider the possibility that capital-gains tax rates could be higher in future years when you collect the payments because those gains are taxed at the rates in effect the year the gains are recognized. You may wish to elect out of the installment-sale method in the year of sale to lock in the 15% rate.

Credit-card Payments
Paying tax-deductible expenditures — including charitable contributions — with a credit card secures the deduction, even if you do not actually pay the credit card company until the following year.

Suspended Passive Activity Losses
If you own a passive activity with a suspended loss, and you do not have sufficient passive income in 2011 to allow you to deduct the suspended loss, consider disposing of the activity before Dec. 31.

Appreciated Assets Given to Charity
Consider fulfilling your charitable goals by contributing appreciated assets instead of cash. You can deduct the fair market value of long-term capital gain property, such as stock, contributed to charity, and you avoid paying taxes on the appreciation.

Tax Credits for Home Improvements
A tax credit for qualifying home improvements may be available for improvements placed in service during 2011 but not in 2012. The credit applies to energy-efficient improvements such as insulation, exterior windows, and heating and air conditioning systems. You will need to complete your purchase before Dec. 31 to qualify for the credit in 2011. The new energy-efficiency tax credit is a 10% credit, up to a lifetime maximum of $500. The prior cap had been up to $1,500, so check to see whether you have claimed this credit in prior years.

Income-tax Prepayments
If your estimated tax payments and withholding are not high enough to avoid penalties, increase payments. Even better, if you receive wages, IRA distributions, annuity payments, or other payments, have the additional taxes withheld because withholding is deemed to be ratable throughout the year.
If you have a fourth-quarter state estimated tax payment due Jan. 15, 2012, consider making the payment late in December if you need additional itemized deductions in 2011.

Alternative Minimum Tax
An increasing number of middle-income earners, especially retirees, are subject to the AMT. High itemized deductions (other than charitable contributions), high personal exemptions, and large capital gains, among other items, can trigger the AMT. Be sure to consider the effect of AMT in your year-end planning. For example, if you know you’ll be in AMT, prepaying state taxes or real-estate taxes will not give you any benefit.

Your Retirement Plans
Roth IRA Conversion: Roth IRAs have a number of advantages over traditional IRAs, including no tax when the money is withdrawn. Consider the following:
• The conversion results in taxable income;
• The benefits of tax-free withdrawals in the future may be greater than the current tax you will pay;
• There is no longer an income limitation prohibiting high earners from converting; and
• If you are expecting a business loss or have high itemized deductions in 2011 that could offset the income effect of the conversion, your tax consequences may be minimized.

Additional Taxes Coming in 2013
Some future tax changes have already been enacted but have yet to take effect:
• Effective Jan. 1, 2013, a new Medicare Hospital Insurance (HI) tax applies to high-income individual taxpayers:
— The tax is 0.9% of earned income in excess of $200,000 for single filers ($250,000 for joint returns); and
— A 3.8% tax applies to investment income (including dividends, annuities, royalties and rents, etc.) for the same individuals.
Consider talking with your tax adviser about strategies for minimizing this tax.
• In 2013, the threshold for the itemized deduction for unreimbursed medical expenses is increased to 10% of adjusted gross income from the current 7.5%. You may want to plan for unreimbursed medical procedures in 2011 or 2012 to maximize your tax benefit. There is a break for older taxpayers. If an individual or spouse is age 65 or older, the threshold remains at 7.5% of adjusted gross income through 2016.

Finally, let’s discuss some estate- and gift-tax planning strategies.

Estate Planning
The estate- and gift-tax exemption amount for 2011 is $5 million — essentially $10 million for a married couple. Again, there is uncertainty in the future about where the estate-tax exemption and tax rates will end up. And with the recent changes, it is a good idea to review your plan to ensure it is up to date.
Because the estate and gift tax exemptions were recently reunified, now may be an appropriate time to make gifts to take advantage of the $5 million/$10 million lifetime exemption. Making large gifts under the exemption amount removes not only the value of these gifts from your estate, but also future appreciation of the gifted assets.

Gift Tax
The annual gift-tax exclusion for 2011 remains at $13,000 per person. If you are married, you can gift up to $26,000 per donee per year by using the gift-splitting rules, without any federal gift-tax ramifications. Gifting reduces your taxable estate and may be important in an effective estate plan.

Conclusion
When Congress dealt with the Bush tax cuts at the end of 2010, the effect was to delay a ‘permanent’ decision for another two years. These provisions, originally enacted in 2001, reduced marginal tax rates for all taxpayers, provided relief from the marriage penalty, increased child tax credits, expanded education-related tax benefits, and phased out the estate tax.
The current laws, including the recently enacted estate-tax changes, are now set to expire, or sunset, on Dec. 31, 2012. If Congress does not act, most of these tax benefits will disappear, and taxes will automatically increase to pre-2001 levels on Jan. 1, 2013. Although we have covered a number of topics in this article, we undoubtedly did not address every issue relating to your specific situation. Tax projections are recommended to determine your greatest tax savings.

Kristina Drzal-Houghton, CPA, MST is the partner in charge of Taxation at Holyoke-based Meyers Brothers Kalicka, P.C.; (413) 536-8510.

Understand the Many Ways It Can Impact Your Bottom Line

Everybody knows that the government is out of money and needs to raise cash. However, do you understand the financial impact that the 2010 health care legislation will have on your family?
This isn’t just about everybody being required to carry health insurance. It is much more. The government is using this legislation as a revenue builder, and you will be paying the bill. So what will your cost be?

Individual Mandate
The new federal law requires that non-exempt individuals must maintain qualifying health-insurance coverage for themselves and their dependents or face a tax penalty after 2013. Similar to Massachusetts law, those without qualifying health coverage will be required to pay a tax penalty. The federal penalty will be the greater of: (a) $695 per year, up to a maximum of three times that amount, or $2,085, per family, or (b) 2.5% of household income over the threshold amount of income required for income-tax-return filing.
The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee; or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment.
Exemptions will be available for a variety of reasons, including but not limited to, financial hardship,  those without coverage for less than three months, illegal aliens, prisoners, those for whom the lowest cost plan option exceeds 8% of household income, and those with incomes below the tax-filing threshold (in 2011 the threshold for taxpayers under age 65 is $9,500 for singles and $19,000 for couples).

Premium Assistance Tax Credits for Purchasing Health Insurance
A refundable tax credit is available to certain individuals who are not eligible for Medicaid, employer-subsidized health insurance, or other acceptable health coverage, and who get health insurance by enrolling in a qualified health plan through a state-run insurance exchange for tax years after 2013. While the credit generally will be payable directly to the insurer, individuals can elect to purchase health insurance out of pocket and then claim the credit on their Form 1040.
Based on the information provided to the exchange, the individual receives a premium-assistance credit based on income, and IRS pays the premium-assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium-assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an exchange, the premium payments are made through payroll deductions.
The premium-assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) who are not eligible for Medicaid, employer-sponsored insurance, or other acceptable coverage.

Higher Medicare Taxes on
High-income Taxpayers
High-income taxpayers will be subject to a tax increase on wages and a new levy on investments as well.

Higher Medicare Payroll Tax on Wages
Under current law, wages are subject to a 2.9% Medicare payroll tax with employees and employers paying 1.45% each. Self-employed people pay both halves of the tax, but are allowed to deduct half of this amount for income-tax purposes. While the payroll tax for Social Security applies to earnings up to an annual ceiling ($106,800 for 2011 and increasing to $110,100 for 2012), the Medicare tax is levied on all earnings without limit.
Under the provisions of the new law, which goes into effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital-insurance tax, but single people earning more than $200,000, and married couples earning more than $250,000, will be required to pay an additional 0.9% (2.35% in total) on the excess over those base amounts. Self-employed individuals will pay 3.8% on earnings over the threshold.

Medicare Payroll Tax Extended to Investments
As part of the revenue-generation aspect of the new laws, beginning in 2013, a Medicare tax will, for the first time, be applied to net investment income. A new 3.8% tax will be imposed on such income of single taxpayers with adjusted gross income above $200,000, and joint filers over $250,000. Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than most property held in a trade or business) reduced by properly allocable deductions to such income.
The new tax is intended to apply only to income in excess of the $200,000/$250,000 thresholds. For example, if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax ($300,000 minus $250,000).
Additionally, while not directly applicable to individuals, this new tax is also applicable to estates and trusts. In such situations, the tax is 3.8% of the lesser of (a) undistributed net investment income, or (b) the excess of AGI over the dollar amount at which the highest estate- and income-tax bracket begins.

Threshold for Medical-expenses Deduction Raised
Under current law, taxpayers can include in their itemized deductions unreimbursed medical expenses for regular income-tax purposes (not AMT) only to the extent that those expenses exceed 7.5% of the taxpayer’s AGI.
As noted, the new law raises the threshold for itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. However, it should be noted that the threshold for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Reimbursement Limited for Some OTC Medications
Qualified medical expenses, which are expenses that can be reimbursed tax-free through a health reimbursement account (HRA), health flexible savings account (FSA), health savings account (HAS), or Archer Medical Savings Account (MSA), no longer include over-the-counter medicines (except for insulin, which continues to qualify), unless prescribed by a doctor, effective for tax years beginning after Dec. 31, 2010.

Increased Penalties on Non-qualified Distributions
from HSAs and Archer MSAs
The penalty tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses has been increased to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

FSAs Limited to $2,500
An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. It allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses, but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will be capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent Coverage in Employer Health Plans
Effective as of March 30, 2010, the new law extended the general exclusion for reimbursements for medical-care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 (whether they qualify as a dependent or not) as of the end of the tax year.
This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for voluntary employee benefit associations (VEBAs) and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise Tax on Tanning Services
The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed, but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized Adoption-credit and Adoption-assistance Rules
For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011. The employer-provided adoption-assistance exclusion is also increased by $1,000.

Bottom Line
These are some of the highlights of the 55-page health care legislation that was signed into law by President Obama on March 30, 2010. It affects every American citizen to varying financial degrees and phases, in different aspects, at various timeframes. If you have questions about how it will affect your family, it would be wise to consult with your tax advisor.

Bruce M. Fogel, Esq. is a partner with Bacon Wilson, P.C. in Northampton. He is a member of the firm’s estate-planning, elder, real-estate, and business departments. He has extensive experience in matters relating to income, gift, and estate taxes, and he focuses on the tax implications of all legal transactions. He also co-hosts the “Taxes and Assets” radio show on WHMP-AM; (413) 584-1287;
bfogel@baconwilson.com

Or, a Primer on How to Make Friends with Your Auditor

Summer has passed, and it’s time to focus on the balance of the year, which includes preparing your fiscal records for your accountant. Generally, the focus at year end is tax-motivated — keeping your money in your pocket rather than Uncle Sam’s. Another focus for many, however, is getting information together for their auditor.
While preparing for an audit can seem arduous, there are many benefits of having an audit. An auditor can help you analyze and better understand your company’s financials and show you where improvements within your company can be made. An audit assesses any risks to your company, as well as the efficiency and quality of your company’s processes. One of the most important benefits of an audit could be the realization of fraud and illegal activities taking place within your company.
Recognizing and optimizing the benefits of an audit can help your company become more efficient and more profitable. This article will describe the steps involved in preparing for an audit, and how to optimize the value of an audit for your company.
Many organizations must prepare for a year-end audit at the end of each fiscal year. Whether your business is public, private, or nonprofit, you may be required to have an audit performed on your company. This requirement can be government-required (such as for nonprofit organizations). It can also come from a variety of other groups, such as investors, financial institutions, or a board of directors.
‘Audit’ is not a word many business owners want to hear, but with preparation and focus, an audit can go smoothly and prove to be a valuable exercise.
The best time to start preparing for the audit is right after the auditors leave at the beginning of the year. A significant focus of an audit is on internal controls and the organization’s policies and procedures. Sometimes your auditor may, either verbally or in writing, make suggestions to better segregate duties or create a step of review. Discuss with your fiscal director how best to implement those suggestions.
Due to these changes and possibly due to changing staff levels, the flow of information in your company may change subtly in ways that will require your policies and procedures manual to be updated. Providing your auditor with updated procedures is important because he or she needs to assess risk and ascertain that things are actually happening as intended.
Soon after Jan. 1, begin to close your books for the current fiscal year. Transactions should be posted to the year in which it occurred, including receivables and sales, inventory purchases, cost of goods sold, and operating costs. You also must reconcile all sub-ledgers to make sure they are accurate with your trial balance. Performing reconciliations for all balance-sheet accounts to accurately prepared schedules and third-party statements (bank statements, loan and vendor statements) is a large part of preparing your books for year end.
If you are finding that significant adjustments are necessary at this time, look back to the monthly closing process and see where procedures need to change. A monthly close is a mini-year end, and reconciliations should be performed in a timely manner. If this isn’t happening, the reports being used are inaccurate, and decisions are being made based on wrong information.
Normally your auditors will provide you with a list of the items they need for the audit. Gathering together the entirety of this list and having it in one place for the auditors the first day they walk in has a few benefits. Saving your auditor time from having to ask for things they’ve already asked for makes him or her more efficient, which can mean a lower fee. The auditor will need your time and attention during the audit, so it’s less stressful for you if you don’t also have on your agenda to pull together items they need throughout the day. More preparation can make the audit process easier for you and your company.
Auditors will be looking for a variety of information before they begin the audit. This information will include company bylaws, corporate charters, state registrations, formal policies, a procedure manual, and loan and lease agreements. Annually you must provide to your auditors any new loan or lease agreements and minutes from shareholders or board of directors meetings through the date of your audit. Any information explaining events during the fiscal year that could potentially have an impact on the financial statements must also be provided to your auditor.
Inform your employees when the audit will begin and how long the audit will last. Indentify which employees will be working with the auditors side-by-side on a day-to-day basis. You must make sure that these employees have an open schedule during the audit period. There also must be a workspace prepared for the auditors based on their needs.
Your responsibilities during the audit process are just as important as the steps taken leading up to the audit. Be prepared to explain your procedures for any of the following processes: payroll, cash receipts, accounts receivables/sales, computer systems and software, and how you identify and implement controls to minimize fraud risks. Set aside time during the audit to ask questions of the auditor or to answer any questions the auditor may have.
An audit of cash can provide a business with validity and accuracy of the cash flow within the company, as well as provide a better understanding of where errors may occur and tests to make sure they are not occurring.
Accounts receivables is frequently the largest asset a company can have. An auditor looks at all levels of accounts receivable to help you better understand the risks that could occur and the red flags to look for to prevent these risks.
Inventory audits are designed to keep track of a company’s products and merchandise. This procedure often leads to the influencing of future policies and decision-making within companies.
For your income and expenses, the auditor will typically prepare an expectation of what your income and expense balances should be. This will be based on your organization and your discussions with the auditor. Be prepared to explain fluctuations for accounts that may fall outside of these expectations. Audits performed on income and expenses are some of the most necessary of all.
Income or revenue is required to be recorded for tax purposes. If not properly kept track of, your tax return could be misleading causing larger problems in the long run. An audit of expenses ensures that internal controls are being followed, the reasonableness of your expense costs, and timeliness of the invoice to ensure reliability of the expense. Expense audits also ensure that vendors are real businesses and exist, as well as the accuracy of all contracts, invoices, and signatures.
An audit should be a positive and productive experience. When your staff and the auditors work together, you will save money, the audit will be completed efficiently, and the transaction or requirement that created the need for the audit can be fulfilled. You and your staff will also be in a greater position to understand the financial, data-system, and workflow-process needs of your firm, which will enable you to better plan for future challenges and capitalize on future opportunities.

Donna Roundy is a senior audit manager with the Holyoke-based certified public accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.

A chart of the region’s accounting firms

AccountingFirmsBW1111a