As part of our professional outreach, and in connection with our Dental CPA niche practice, we volunteer at events such as the Kansas Dental Foundation’s Kansas Mission of Mercy (“KMOM“) event.  This past Thursday and Friday, Jim Zenk attended as a volunteer–his first-ever KMOM event.  On Thursday, he helped set up.  On Friday, he served breakfast & made coffee for patients.  Later, he ushered patients from the extraction area to post-op.  “It was an amazing experience,” says Zenk, “to see so many people helping so many others–and to see it all take place in the building shell of a former Wal-Mart!”

Check out the “before” and “after” pictures Zenk took with his mobile phone, last Thursday.

BEFORE

AFTER

What do individual income tax returns and Orthodontic care for kids in need have in common?

Tax returns provide the threshold for qualification at Smiles Change Lives, a KC-based non-profit that provides orthodontic care to qualifying kids.

Qualified applicants must:

·         Be 10-18 years of age

·         Have good oral hygiene

·         Have crooked teeth or misaligned jaws

·         Not currently wear braces

·         Have a household taxable income at or below 200% of the federal poverty guidelines.

·         Be willing to pay a one-time program fee of $500

Check out the press release.

All of us at Cornerstone appreciate your business and our working relationship with you.  If you have any questions or want additional information for any of the topics in this edition of our E-bulletin, please do not hesitate to give us a call.

Cornerstone CPA Group, P.A.

Individuals

IRS Refund Delays

The IRS has warned us that refunds may be delayed a week due to their new anti-fraud safeguards.  The IRS gives a range of refund receipt as 10 – 21 days from the date of submission.

E-file Acceptance Emails

We are providing a new service this year!  We are setting up our system to send out an e-file acceptance email when your return is accepted by the taxing authorities.  From that, you will have record of the exact date of acceptance.

Due Date is April 17, 2012

The due date for individuals (and partnerships) is April 17^th this year.  Once again, there is a Washington D.C. holiday on Monday, April 16^th that is pushing the federal due date back another day.  Kansas and Missouri are following the federal deadline.

New Form 8949

All capital asset transactions are now to be reported on the new Form 8949 with Schedule D.  For sales of securities, your broker should have basis on the Form 1099-B you receive.  We must now report your security sales based on the distinction of 1) sales with basis shown by broker, 2) sales without basis shown by broker, 3) sales not shown on Form 1099-B, and 4) sales with no Form 1099-B issued.  A separate Form 8949 is required for each type.

Net self-employment income

Self-employed health insurance premiums no longer reduce self-employment income for purposes of calculating self-employment taxes.  If you are self-employed and your spouse works for you, give us a call.  We can discuss some alternatives.

IRS Areas of Interest

Over the years, we see what the IRS is interested in as it relates to your taxes.  Areas that pique their curiosity are areas such as large charitable donations, the office in home deduction, rental losses, deducting business meals, travel/entertainment, and claiming your auto in your business.  Some other areas of interest are: businesses that are really hobbies, and of late, the IRS is very interested in whether you have a foreign bank account.  We have also seen an uptick in
inquiries regarding whether Form 1099s were issued properly – with stiff penalties if they weren’t.  Finally, the IRS is especially interested in finding out whether you are properly reporting people working for you – are they outside contractors or should they actually be employees?

All of the above are valid when documented properly.  Always keep your documentation, receipts, and other information that will back up any claim of deduction you may have.  Additionally, if you have questions on how you are reporting independent contractors or employees, give us a call.

Businesses

IRS Releases 2012 Standard Mileage Rates

The 2012 business mileage rate will continue to be 55.5 cents for business miles driven, the same as the adjusted mid-year rate.

IRS may be interested in your Quickbooks/Peachtree files

IRS agents are starting to request Quickbooks and Peachtree backup files from businesses under audit.  The taxpayer must provide electronic records upon request.  From these electronic records, the IRS can look at dates of transactions/entries, who performed the entries, and subsequent changes to the entries in an attempt to uncover errors or weaknesses.  At this time, the software companies have not released an “audit copy” as an alternative to a full back up file.  We will keep you posted on this as it develops.

IRS Changes Rules on Repairs vs. Capitalization

The IRS just released temporary regulations regarding repairs and maintenance vs. property that needs to be capitalized.  Virtually any business that buys tangible property will be affected by these temporary regulations.  These temporary regulations are in place for the 2012 tax year.  Below are some highlights of the new rules.

New definition for materials and supplies.  Materials and supplies is tangible property that is not inventory and falls within any of these categories:

1)      It is property that is a component acquired to maintain or repair another unit of tangible property.

2)      Items reasonably expected to be consumed in (or with a useful life of) 12 months or less.

3)      Items that cost $100 or less

4)      Items that have already been published by the IRS as being materials and supplies

“Placed in service” date matters.  Under the temporary regulations, if the materials and supplies rule above doesn’t apply, a taxpayer must capitalize
amounts paid for items and for work performed after the property is acquired, but before it is placed in service.  An example in the regulations is that of a company that buys a building for its business use.  Before placing the building in service, costs incurred include repairing the cement steps, refinishing wood floors, patching holes in walls, painting, etc.  The company must capitalize these costs as costs of acquiring the building because they were performed prior to it being placed in service (Regulation 1.263(a)-2T9d)(2)).

“Unit of Property” Defined – important for determining repair vs. capitalized asset.  “Unit of Property” for buildings has been defined in the new regulations and will affect how expenses are expensed or capitalized.  Under the new regulations, a building and each of its structural components is considered one “unit of property” – the building.  Amounts are treated as improvements to a building if they improve the building structure, its components, or any designated building system.

What are structural components?  Structural components of a building consist of walls, partitions, floors, ceilings, paneling, tiling, windows, and doors.  For example, if a taxpayer replaces the entire roof, it is an improvement to the building and must be capitalized.

What is a designated building system?  For our clients, the items that will most impact them are:  HVAC systems, plumbing systems, electrical systems, fire protection (sprinklers) and alarm systems.  For example, if a taxpayer makes an improvement to the HVAC, then that expense is an improvement and must be
capitalized (T.D. 9564).

Important note – any improvements to a building system must be capitalized as part of the building – using the building’s depreciable life.  The flip side to this
is if something is disposed of as part of an improvement, the taxpayer can claim a loss on the disposition of that structural component.

Nonbuilding routine maintenance safe harbor.  Routine maintenance costs are not treated as improvements and are currently deductible.  Examples include: inspection, cleaning, testing, and replacement of parts with comparable and commercially available/reasonable replacement parts.  However, if the replacement parts are a significant upgrade, that may require capitalization.

Building Improvements – Lessees.
If a taxpayer is a lessee (tenant) of all or a part of a building, its unit of property is that part of a building/structural component subject to the lease.  In general, a taxpayer who is a tenant must capitalize what it pays to improve a unit of leased property.

Building Improvements – Lessors.
A lessor must capitalize amounts 1) that it pays directly to improve a unit of leased property where the lessor owns the improvement; 2) that it pays indirectly through a construction allowance to the lessee; or 3) that the lessee pays to improve a unit of leased property, where the lessee’s improvement constitutes a substitute for rent (Reg. 1.263(a)-3T(f)(1)(iii)(A)).

With the holidays recently past, make certain your bookkeeper properly recorded the cost of your holiday party.  It should be treated as 100% tax deductible.

Generally, meals and entertainment expenses are only 50% tax deductible.  Only meals that are directly related to or associated with the active conduct of your business are deductible. Further, there must be a valid business purpose for each meal. Meal expenses for employee meetings, owner meetings, and generally all meals during business travel are only 50% deductible for tax purposes.  Importantly, if any portion of business travel is personal in nature, a portion of the meals should be considered completely nondeductible.

Did you know, however, that the following meal expenses are 100% tax deductible?

1. Company Picnic or Holiday Party — so long as the expenses primarily benefit employees other than certain highly compensated employees.

2. Office Snacks — Coffee, soft drinks, bottled water, donuts and similar snacks.

3. Meals provided on the employer’s premises to more than half the employees, for the employer’s convenience — If you’re providing meals to employees to keep them working late or on weekends (assuming they do not normally work weekends), it is for your convenience.

A “best practice” is to have two general ledger accounts for meals and entertainment–one for 50% tax deductible meals, another for 100% tax deductible meals.  Make sure your bookkeeper is correctly tracking your expenses to garner all permissible tax deductions.

High net worth Kansas residents have an opportunity to pay their 2011 Kansas income tax for as little as 80 cents on the dollar, according to results of tax credit auctions at the [Baxi Tax Credit Exchange][1].  The State of Kansas, through its Angel Investor Tax Credit Act, permits certain high net worth individuals (aka “accredited investors[2]”) to purchase tax credits from sellers, and use such credits on their personal income tax returns.  Such credits are often listed for sale on the [Baxi website][3]–an online marketplace for buying and selling transferrable state tax credits.

Angel Investor Tax Credits are created when accredited angel investors invest in companies certified by the Kansas Technology Enterprise Corporation ([“KTEC”][4]).  If an investor has no Kansas tax liability, he/she can sell the credit to another accredited investor.  According to KTEC’s [website][5], an accredited investor is any natural person whose individual net worth, or joint net worth with that person’s spouse exceeds $1,000,000, or any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

This opportunity applies only to individuals.  Corporations are ineligible.  Individual shareholders of S-corporations, however, can benefit.  Further, this opportunity applies only to Kansas residents.  While nonresidents of Kansas may purchase the credits, there is no tax benefit in doing so.  When a Kansas nonresident individual claims a credit on a Kansas return, this merely reduces the amount of Kansas tax paid, and therefore reduces the amount of credit for taxes paid to other states that a Kansas nonresident can claim on his/her resident state individual tax return.  In other words, it pretty much ends up being a wash.

If you are a Kansas resident meeting the [accredited investor standards][6], you should consider the opportunity to purchase Kansas Angel Investor Tax Credits to use on your 2011 tax return.  Buyer beware, however.  There are nuances[7] to the tax law, and you’ll want to make sure you meet all the qualifications and can benefit from the credits.  Be sure to first consult your tax advisor.

Attention dentists:  What do the numbers on your firm’s Profit & Loss (“P&L”) statement tell you?  Are you reading these statements provided by your CPA?  A quick study of your P&L can reveal how your business stacks up, compared to your peers.  Below are suggested metrics, according to two prominent authors in Dental Economics magazine.

Personnel costs: This is all non-owner, non-associate costs.  In addition to payroll, this includes payroll taxes, fringe benefits, retirement plan contributions and health insurance, as well as any temporary staffing costs.  [Allen Schiff][1], a dental CPA in Maryland, suggests that such costs range between 24 and 28 percent of collections.  Ken Runkle[2], author of an article in the January 2011 issue of Dental Economics entitled, “The Business of Dentistry: Building a Great Practice Means Building a Great Business” claims the number should be between 20 and 25 percent.

Lab Costs:  Schiff suggests 8% of collections, Runkle suggests 10%. Further, Runkle suggests that dentists should charge patients about 5 times lab cost.

Supplies: Schiff suggests 6%; Runkle, 5%.

Facilities & Equipment:  Both Schiff and Runkle appear to agree that 5% of collections is appropriate for rent.  Schiff also suggests that the remaining costs: depreciation, interest on equipment loans, equipment rental, and personal & real property taxes should be kept to 5% of collections, as well.

Business Expenses: advertising, bank charges, continuing education, dues & subscriptions, insurance, office supplies, uniforms & laundry and utilities.  These, in total, should not exceed 11%, per Schiff.  Examined separately, the following parameters are suggested, as a percent of collections:

Advertising and Marketing: 1-2%

Office Supplies: 2%

Professional fees (i.e., accounting & legal): 1.5-2%

Owner’s Compensation: 35% of collections

How does your practice compare?  Are you in-line with industry averages?  If you are underperforming, are you working with a dental CPA to help you get your numbers in line?  Reach out to us at Cornerstone. We can help.