Tax Implications of the Health Care Act

-   The July 2012 Supreme Court ruling upholding what's collectively referred to as the "Affordable Care Act" (ACA) or "Health Care Act" has resulted in a number of changes to the US tax code. As such there are a number of tax implications for individuals and businesses. With that in mind, let's take a closer look at what it might mean for you.

Individuals

Individual Mandate
Starting in 2014, US citizens and legal residents not qualified for Medicare or Medicaid must obtain minimum essential health care coverage for themselves and their dependents or pay a tax penalty that varies based on income level. In 2014, the basic penalty for an individual (no dependents) is $95, with substantial increases in subsequent years--$325 in 2015 and $695 in 2016, indexed for inflation thereafter.

Refundable Tax Credit
Effective in 2014, certain taxpayers will be able to use a refundable tax credit to offset the cost of health insurance premiums so that their insurance premium payments do not exceed a specific percentage of their income. Qualified individuals are those with with incomes between 133 percent and 400 percent of the federal poverty level. A sliding scale based on family size will be used to determine the amount of the credit. In addition, married taxpayers must file joint returns to qualify.

FSA Contributions
FSA (Flexible Spending Arrangements) contributions are limited to $2,500 per year starting in 2013 and indexed for inflation after that.

New Rules for HSAs and Archer MSAs
Tax on non-qualified distributions from HSAs and Archer MSAs that are used to cover the cost of over the counter medicine without a script will increase to 20 percent starting in 2011. Medical devices, eyeglasses, contact lenses, copays, and deductibles are not affected, nor is Insulin even if it is non-prescription.

Medicare Part D
Medicare Part D, the tax deduction for employer provided retirement prescription drug coverage, will be eliminated in 2013.

Increase in AGI Limit for Deductible Medical Expenses
The deduction is currently 7.5 percent of AGI, but next year, in 2013, that increases to 10 percent of AGI. The 7.5 percent threshold continues through 2016 for taxpayers aged 65 and older, including those turning 65 by December 31, 2016.

Health Coverage of Older Children
The cost of employer provided health care coverage for children (through age 26) claimed as dependents on tax returns is excluded from gross income.

Medicare Tax Increases for High Income Earners
Starting in 2013, there will be an additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly).

Also starting in 2013, there is a new Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,00 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts and self-employed individuals are all liable for the new tax.

Exemptions are available for business owners and income from certain retirement accounts, such as pensions, IRAs, 401(a), 403(b), and 457(b) plans, is exempt.

Businesses

Small Business Health Care Tax Credit 
Small businesses and tax-exempt organization that employ 25 or fewer workers with average incomes of $50,000 or less, and that pay at least half of the premiums for employee health insurance coverage are eligible for the Small Business Health Care Tax Credit. For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective beginning Jan. 1, 2014. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively.

Additional Tax on Businesses Not Offering Minimum essential Coverage
Effective in 2014 an additional tax will be levied on businesses with 50 or more full-time equivalent (FTE) employees that do not offer minimum essential coverage. Employers with fewer than 50 FTE employees are exempt from the additional tax.

Excise Tax on High Cost Employer-Sponsored Insurance 
Effective in 2018, a 40 percent excise tax indexed for inflation will be imposed on employers with insurance plans where the annual premium exceeds $10,200 (individual) or $27,500 (family). For retirees age 55 and older, the premium levels are higher, $11,850 for individuals and $30,950 for families.

Excise Tax on Medical Devices
Effective January 1, 2014, a 2.3 percent tax will be levied on manufacturers and importers on the sale of certain medical devices.

Indoor Tanning Services
A 10 percent excise tax on indoor tanning services went into effect on July 1, 2010. The tax doesn't apply to phototherapy services performed by a licensed medical professional on his or her premises. There's also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.

If you need assistance navigating the complexities of the new health care act, don't hesitate to call us. We are your financial partners, and we are here to help. Give us a call today.

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

How to Read an Income Statement (Intuit)

If you’re just starting a business, standard financial reports, like Income Statements, Balance Sheets, and Cash Flow Statements can seem daunting. But once you’ve mastered the terms and the math it’s easy to see how these statements dovetail neatly to track your company’s fiscal health.

Let’s start with the Income Statement, more commonly known as a Profit & Loss Statement (or P&L), which provides a high-level view of your company’s ability to make money. We’ve provided a sample P&L [PDF format] for you to use as part of this post. Either print it out or open it in a new window to follow along as we run through the basics.

Article originally published on Intuit by Kristin Ewald - 02//2012

The Math: Income – Expenses = Profit (or Loss)

What it tells you:

• How much money came into your company during a specific period
• How much money the company spent to generate that income
• How much profit (or loss) the company has after it pays its expenses

We’ll walk through the line items top to bottom, and translate the terms as we go. The most recent entries are always to the left of the prior-period entries, which enable you to compare year-over-year numbers, looking for trends at a glance.

Revenue – Income statements begin by listing the company’s income from the sale of products or services for a specific time period, usually annually, but it could be quarterly or monthly if you are just starting out. This amount may also be called “Sales” or “Gross Sales.”

   Less: Returns and Allowances - If you sell goods, this line item reports total returned and discounted merchandise, which is subtracted from gross sales.

   Less: Cost of Goods Sold – The amount spent to buy or make the goods sold, such as the cost of raw materials and labor in manufacturing products that you sell. It’s figured using this formula: Beginning Inventory + Products Purchased – Ending Inventory = COGS. Service businesses will not have this line item.

Equals: Gross Profit – What’s left after deducting the direct costs of buying or producing your goods and services. Also called “Margin.”

The next section on the P&L lists expenses for the same accounting period, which will be subtracted from Gross Profit.

   Less: General and Administrative Expenses – Costs related to operating your business, such as rent, utilities, telephone, employee salaries, repairs and maintenance, insurance, and leasing equipment. Research and development costs may be included here, or reported as a separate line item.

   Less: Sales and Marketing Expenses - Amounts spent to market and sell your products and services, such as advertising, trade shows and sales commissions. These two categories are sometimes combined and reported as Selling, General and Administrative Expenses (or SG&A).

   Less: Depreciation and Amortization - The amount of the cost of assets like computers, copy machines and furnishings for general wear and tear that is written off over a period of time, commonly three to five years. Proper accounting rules require companies to spread the cost of depreciable assets over their expected useful life.

Intangible assets, which have no physical properties, such as patents, copyrights, trademarks, should also be expensed (or “amortized”) over a period of years.

Equals: Operating Income – The amount left after all expenses have been deducted from Gross Sales. This income, generated by the day-to-day operation of your business, is a key indicator of your company’s financial health. Comparing operating income year-over-year, or quarter-over-quarter, tells how much you are spending to earn a profit. Also called “Operating Earnings.”

The next set of line items identifies miscellaneous sources of income and expenses that are not directly associated with running your business.

Nonoperating Income – Income not related to the day-to-day operations of the company, such as, interest earned on investments, or the gain on a sale of an asset.

   Less: Nonoperating Expenses – Expenses not related to the day-to-day costs of running the business, such as interest on money borrowed, legal fees or restructuring costs after a layoff. The net result is your income before taxes have been deducted.

   Less: Income Tax – Taxes on income after any investment tax credits have been subtracted is reported as a single line item expense.

Equals: Total Net Income – The company’s bottom line, or profit after all the above expenses have been deducted. If the number is negative (shown in parentheses) the company experienced a loss for that reporting period. Also called “Net Earnings.”

Mastering this basic blueprint will give you a picture of your profitability in any given period. And it doesn’t hurt to have generally accepted financial statements up-to-date when banks, accounting professionals and potential investors are evaluating your company.

Article originally published on Intuit by Kristin Ewald - 02//2012

Security Tax Services LLC

North Sound                                    South Sound

2802 Wetmore Ave, Suite 212         33530 1st Way S, Suite 102

Everett, WA 98201                          Federal Way, WA 98003

425.339.2400                                  253.237.0751

fax 425.259.1099                            fax 253.237.0701

www.SecurityTaxServices.com

How to Read a Balance Sheet (Intuit)

-   Can your business continue to fund its own growth? Your company’s balance sheet can answer that question at a glance.

Whereas an income statement reports sales and expenses during a set period of time, and a cash-flow statement charts the flow of money in and out of your business, your balance sheet summarizes your company’s financial health on a specific date.

Article originally published on Intuit by Kristin Ewald - 03//2012

Let’s break down a typical small-business balance sheet and define each section. We’ve provided a sample Balance Sheet [PDF format] for you to use as part of this post. Either print it out or open it in a new window to follow along as we run through the basics.

What a Balance Sheet Tells You: Assets = Liabilities + Owner’s Equity

That includes a measure of:

• What the business owns (assets)
• What the business owes (liabilities)
• The company’s net worth on a specific date

Assets

A summary of what your business owns is generally divided into three categories, Current Assets, Fixed Assets, and Other Assets.

• Current (or Liquid) Assets: This is cash and assets that will likely turn into cash during the current business year. It’s what you generally use to pay operating costs.
• Cash: The total amount of money on hand (your most liquid asset).
  
  
• Accounts Receivable: The amount that your customers owe you after buying your goods or services.
  
  Less: Reserve for Bad Debts: This is the total amount you expect to write off when customers default (generally calculated based on bad debts during previous reporting periods).
• Inventory: If you sell products, you will likely have inventory. This line item represents the total amount that you have on hand at that particular time. If this number is growing faster than your revenue, you may not be managing your inventory efficiently.
• Prepaid Expenses: Expenses you have paid in advance, such as a year’s worth of insurance.
• Securities: Securities include money-market accounts and other investments that you plan to sell within the year.
• Notes Receivable: This is the amount owed for goods or services that isn’t paid on a regular schedule.
• Fixed Assets: Fixed assets include vehicles, furnishings, equipment, buildings, and land used for the business and that will not be sold. Generally, these assets decrease in value over time. For that reason, depreciation is factored into your total.
  
  Less: Accumulated Depreciation: Depreciation is the amount allowed for wear and tear, based on an established formula.

• Other Assets: These are things you own that are neither fixed nor current assets that can be converted to cash. Intangible assets, which have no physical manifestation, such as goodwill, patents, copyrights, and trademarks fall into this category.

• Total Assets: This is the total cash value of all the assets that your business owns. This amount should remain higher than your total debts in order for the company to prosper.

Liabilities

Liabilities are debts that the business owes. They fall into two categories: Current and long-term liabilities.

• Current Liabilities: These are amounts due to be paid within a year, such as accounts payable (amounts you owe suppliers and employees), sales and payroll taxes, income taxes, and amounts due on short-term business loans, such as a line of credit.
• Long-Term Liabilities: These are amounts due over a period longer than a year, such as long-term loans, leases or mortgages, deferred taxes, and future employee benefits.
• Total Liabilities: This is the total value of all the company’s debts. A healthy business will usually show a number here that is less than its total assets.

Owner’s Equity

Also known as Capital or Net Worth, this amount represents what would be left for the owner(s) if all the company assets were sold and total liabilities were paid.

• Total Owner’s Equity: The total amount that owners and creditors have invested in the company.
• Net Profit to Date: This is your total sales revenue, after expenses, for the current year. The amount is found on the company’s income statement (bottom line).

Together, your company’s liabilities and owner’s equity must equal your total assets for the balance sheet to be considered “balanced.”

New business owners can benefit from creating quarterly balance sheets to track trends. Comparing results over several quarters (and hopefully years) will help you spot strengths and weaknesses in your business and make smart decisions about how to invest and grow your company.

Article originally published on Intuit by Kristin Ewald

Security Tax Services LLC

North Sound                                    South Sound

2802 Wetmore Ave, Suite 212         33530 1st Way S, Suite 102

Everett, WA 98201                          Federal Way, WA 98003

425.339.2400                                  253.237.0751

fax 425.259.1099                            fax 253.237.0701

www.SecurityTaxServices.com

Homes being lost over back taxes (Everett Herald)

Local governments, strapped for cash, are seizing homes over back taxes, then selling them to speculators, a consumer group warns in a new report.

Article originally published on HeraldNet by Daniel Wagner, Associated Press - 07/10/2012

The elderly and other vulnerable homeowners are losing their homes because they owe as little as a few hundred dollars in back taxes, according to a report from a consumer group.

Outdated state laws allow big banks and other investors to reap windfall profits by buying the houses for a pittance and reselling them, the National Consumer Law Center said in a report being released Tuesday.

Local governments can seize and sell a home if the owner falls behind on property taxes and fees. The process helps governments make ends meet at a time when low property values and the weak economy are squeezing tax revenue.

But tax debts as small as $400 can cause people to lose their homes because of arcane laws and misinformation among consumers, says John Rao, the report's author and an attorney with NCLC.

The consequences are "devastating for individuals, families and communities," Rao said. He said states should update laws so speculators can't profit from misinformed homeowners and people who have difficulty managing their finances.

The rules for property tax sales can be confusing, especially to elderly people who can't keep track of their finances and people in minority-heavy communities that were targeted by subprime lenders. Here's how it works:

•The government files a public document called a tax lien saying that it can seize the property if the taxes remain unpaid.

If the taxes aren't paid, the government auctions the lien to investors. Past investors include JPMorgan Chase, Bank of America and people who respond to Internet get-rich schemes, the report said. Homes typically are sold at steep discounts.

For a limited time, the homeowner may buy back the home by paying to the investors the purchase price of the lien, plus interest, fees and other costs. That's possible because investors haven't bought the home itself -- they have purchased the tax lien, which gives them the right to seize the home later.

If the owner fails to pay all the costs, investors can sell the home at a big profit compared with the cost of buying the tax lien.

The report said state governments should make it easier for homeowners to retake their homes after tax lien sales. It said they should limit the interest and penalties investors can charge and increase court oversight.

It also called on local governments to let people pay back taxes or fees to investors on an installment plan, and to increase notice to homeowners and make sure they understand their rights.

Tax lien sales differ from most foreclosures, which happen when people fall behind on mortgage payments. In many states, homes sold because of tax debts can be sold for only the amount of back taxes owed.

That means a $200,000 home might fetch only $1,200, the report said. In the process, homeowners can lose thousands of dollars in home equity that they have built up by making monthly payments.

It is difficult to put a figure on the number of homes sold in tax lien sales because the information is spread among thousands of local governments, Rao said.

A JPMorgan unit estimated in 2009 that about $5 billion worth of tax liens are sold to investors each year, according to a transcript of remarks made at a government meeting in Kansas City, Kan.

Rao said he believes the actual number is much higher. He said Florida alone sold $2 billion worth of tax liens in 2008.

JPMorgan and Bank of America both said they have stopped buying and bundling and reselling tax liens but still hold tax liens that they already owned and manage them for others.

For elderly people, home equity might represent their only retirement savings. Many older Americans draw down the equity in their homes over time through reverse mortgages and other loans that use home equity as collateral.

People who got subprime mortgages before 2008 also face challenges staying current on property taxes. Subprime lenders are less likely to bill borrowers for the property taxes and then pay the taxes directly to the government. Instead, borrowers are expected to keep track of their taxes and pay them without help from the mortgage company. People with higher-quality mortgages tend to pay taxes and insurance to their mortgage companies as part of their monthly bills.

The report is the first comprehensive study of each state's policies and procedures for tax lien sales. An early copy was obtained by The Associated Press.

Article originally published on HeraldNet by Daniel Wagner, Associated Press - 07/10/2012

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

Injured or Innocent Spouse Relief: The Facts

-   You may be an injured spouse if you file a joint tax return and all or part of your portion of a refund was, or is expected to be, applied to your spouse's legally enforceable past due financial obligations. Here are some facts about claiming injured or innocent spouse relief.

1. To be considered an injured spouse you must have paid federal income tax or claimed a refundable tax credit, such as the Earned Income Credit or Additional Child Tax Credit on the joint return, and not be legally obligated to pay the past-due debt.

2. Special rules apply in community property states. Give us a call for more information about the factors used to determine whether you are subject to community property laws.

3. If you filed a joint return and you're not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation, which may be filed electronically with your original tax return or by itself after you receive an IRS notice about the offset. If you need assistance with this, please call us.

4. If you are claiming innocent spouse relief you must file form 8857, Request for Innocent Spouse Relief. This relief from joint liability applies only in certain limited circumstances. However, in 2011 the IRS eliminated the two-year time limit that applies to certain relief requests.

Are you an injured or innocent spouse? Call us. We'll make sure you get the relief you are entitled to. We are your financial partners, and we are here to help.

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

STS QuickBooks Tips - Backup or Portable Company File? How to Decide

When you think about it, it's pretty amazing that Intuit is able to pack the lion's share of your financial data into one giant company file. It certainly makes it easier to separate from QuickBooks and move when necessary.

There are actually three options for saving and relocating that file. You know about backups, since you should be producing them religiously. You generate them so that if QuickBooks -- or your computer itself --- stops working or your file becomes corrupt, you can re-create the entire environment. Portable company files are more limited, and are best used when you want to save your file to a temporary location and/or email it to someone else.

You would only use an Accountant's Copy, of course, when you want us to check your progress. We'll work with you on setting this up.

Figure 1: Once you save and send off an Accountant's Copy, you can't work on transactions created before the dividing date. 

The Critical Backup

We can't emphasize this enough: Losing your financial data can be the beginning of the end of your company. You won't know what you're owed, so you'll be unable to collect. You'll miss vendor payments. Payroll will be impossible to reconstruct, and you won't be able to submit payroll taxes. And how will you know what your income tax obligation is?

It can happen to you.

QuickBooks simplifies this process. Click File | Create Backup You'll be asked whether you want to back up locally -- to a network folder or thumb drive, for example – or to the cloud, using Intuit Data Protect (fees apply). If you select the local preference, click on Options to designate a location in this window:

Figure 2: Choose from options in this window to create a backup profile. 

Click OK, then Next. QuickBooks will ask when you want to save your backup copy and offer scheduling options. When you're done, click Finish.

Warning: If you're using Intuit Sync Manager, there are special rules about copying the company file. Let us help you handle this safely.

Just the Facts

Portable company files are more compact than backup files, so they can be easily e-mailed as attachments or copied onto another computer. But they don't contain everything that backups do. They lack, for example, letters, logos, attachments, images and templates. Don't use this option if changes will be made, since they can't be merged back into the file.

Be sure to create a current backup before you begin to move your file.

To save a portable company file, click on File | Create Copy (you can do this to copy any kind of file, actually). This window opens:

Figure 3: Click File | Create Copy to access any of QuickBooks' three options. 

Select Portable company file and click the Next button. In the following window, you'll browse to a location for your file. QuickBooks will already have entered the name and will save your data in .qbm format. Click Save, then OKwhen QuickBooks tells you it must close and reopen your file first. Click OK again when you're told that the file has been created.

Opening the File Elsewhere

When you're ready to open the file at another location, click File | Open or Restore Company In the window that opens, select Restore a portable file. The Open Portable Company File window opens; make sure that the file's location is displayed in the Look in: field. Click Open. QuickBooks then asks where you want to restore the file.

The following step is critical. Rename your file unless you want to overwrite your current company file. You can add a date or some other identifying information like a version number.

Click Save. QuickBooks will convert your portable file to a standard company file with a .qbw extension.

QuickBooks makes it easy to create copies of your data, but an error here can threaten your company's future. We can help ensure that that doesn't happen. We are your QuickBooks ProAdvisors  & financial partners, and we are here to help. Give us a call today.

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

Ten Things to Know About Capital Gains and Losses

-   Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account.

When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss. Here are 10 facts you should know about how gains and losses can affect your federal income tax return.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2. When you sell a capital asset, the difference between the amount you sell it for and your basis -- which is usually what you paid for it -- is a capital gain or a capital loss.

3. You must report all capital gains.

4. You may only deduct capital losses on investment property, not on personal-use property.

5. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.

7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2012, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain. These rates are set to expire on December 31, 2012. Starting in 2013 the maximum rate is scheduled to increase to 20 percent (10 percent for taxpayers in the 15% bracket).

8. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10. In 2011, a new form was introduced (Form 8949, Sales and Other Dispositions of Capital Assets) to calculate capital gains and losses and list all capital gain and loss transactions. Subtotals are then carried over to Schedule D (Form 1040), where gain or loss is calculated.

Give us a call us if you need more information about reporting capital gains and losses. We are your financial partners, and we are here to help. Give us a call today.

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com