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 If you own a small business, you have until March 15, 2012, to choose S corporation status for this year. In order to become an S corporation, you'll need the unanimous approval of all shareholders.The principal advantage of an S corporation is that you avoid paying double taxes. In a traditional C corporation, profits are taxed at the corporate level and then they're taxed again when paid to individual shareholders as dividends. In an S corporation, there are no taxes on earnings at the corporate level. Instead, profits or losses flow directly through to the shareholders. They pay taxes only once, when they report their share of earnings on their individual tax returns.Another advantage: Doing business as an S corporation can be attractive in the early, unprofitable years of a start-up business. That's because operating losses flow through your personal taxes, perhaps offsetting other taxable income.There are some trade-offs for these tax benefits, though. If you're an owner-employee and own more than two percent of the company, you'll receive less favorable tax treatment for some fringe benefits. There are also ownership limitations. The company can have only one class of stock, there can't be more than 100 shareholders, all of the shareholders must be U.S. citizens or residents, and the corporation must meet other restrictions.Despite these drawbacks, doing business as an S corporation can still offer some tax planning advantages. If you can meet the ownership requirements, it might be well worth considering an S corporation election. Contact our office for an in-depth analysis of the pros and cons for your company.

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March 15 - 2011 calendar-year corporation income tax returns are due. This includes C Corporations and S Corporations.  Deadline may be extended to September 17, 2012 if you file an extension by March 15th.March 15 - Deadline for calendar-year corporations to elect S corporation status for 2012.April 2 - Deadline for payers who file electronically to send copies of 2011 W-2s to the Social Security Administration.April 2 - Deadline for payers who file electronically to file 2011 information returns (such as 1099s) with the IRS.

Use it or lose it

If your flex plan at work allows a 2½ month grace period for using the pre-tax dollars you set aside for 2011, be aware that a final deadline is approaching. You have until March 15, 2012, to use the funds you set aside for 2011 or you forfeit any leftover dollars.If you also have a Health Savings Account (HSA), you are limited to what expenses you can use your Flex Spending Account (FSA) for.  Please check your plan to make sure that you are using the funds for expenses that qualify.  Remember that the “Use it or lose it” rule only applies to FSA, not HSA.

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Your broker statement for 2011 reported the basis in the stocks you acquired last year. This basis reporting requirement expands in 2012 to include mutual fund shares and stock acquired in a dividend reinvestment plan. The cost basis for these investments is included in reports that brokers send to the IRS. The IRS will compare this information with the basis you report on your tax return when you sell the investment.  As a result of this change you will notice that the Schedule D looks different and there is a new Form 8949.Most brokerage firms were required to send out their statements by February 15th.  Please review your statements to see if the brokerage firms expect to be sending amended forms.

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middle age couple meeting with their financial advisorTo increase transparency for the more than 72 million 401k plan participants, the US Department of Labor issued new regulations regarding fees paid to advisors by the plan participants and sponsors.  The intent of the new regulations is for plan participants to be better equipped to make informed decisions about their investment choices.  Considering that many plan participants believe they pay nothing for the services provided in their 401(k) plan, the new quarterly disclosures will be quite an eye-opener for those future retirees.Beginning in 2012, plan fees and expenses are required to be disclosed to participants in dollars and cents.  Often, the fees associated with a participant’s account are a function of some complex formula.  Fees are sometimes paid out of earnings and not easy to identify or quantify.  Now, quarterly statements will very plainly disclose the fees from a participant’s account.  Department of Labor Employee Benefits Security Administration Assistant Secretary Phyllis C. Borzi  was quoted in a news release dated October 14, 2010 as saying “We are giving workers the tools they need to make the best possible decision about investing the nearly $3 trillion held in their 401(k)-type plans.  Now they will have information about different investment options to help them make wise decisions.”  Initial disclosures must be made by May 31, 2012 and subsequent disclosures by the 45th day following the end of the calendar quarter.  The regulations require the following to be disclosed on participant statements:

1. Quarterly statements will reflect plan fees and expenses deducted from a participant’s account

2. Provide information about investments available under their plan, including the cost of those investments

3. Use standard methodologies when calculating  and disclosing expense and return information to achieve uniformity across the spectrum of investments that exist in plans

4. Present the information in a format that makes it easier for participants to comparison shop among the plan’s investment options

5. Give access to supplemental investment information in addition to the basic information required under the final rule

Plan administrators who fail to provide participants with the required information may be deemed to have violated their fiduciary duty under the Employee Retirement Income Security Act. In that case, the administrator may be held liable for monetary damages to participants. However, as a result of the new regulations, plan participants will much better equipped to make informed decisions about their investment choices.   

Today Congress passed a deal to extend the payroll tax cut through December 31.Last December, the 4.2% social security tax rate that workers pay on wages was extended through February 29, 2012.

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Writing up the minutes of board of directors' meetings is not exactly a high priority for most business owners. Yet well-documented corporate minutes can provide valuable supporting evidence if your tax positions are ever questioned.

Owner CompensationMinutes are especially important where any kind of related-party transactions occur, such as payments, loans, or distributions between the company and its owners. For example, the IRS may challenge the amount of compensation paid to a business owner as unreasonable. Corporate minutes that document the factors considered by the board in approving the compensation can be a strong defense against such a challenge.

Retained Earnings & DividendsAnother area that receives close scrutiny from the IRS is the amount of earnings that are retained in the business rather than distributed as taxable dividends. A penalty applies to retained earnings over a certain limit unless they can be justified by business needs. Corporate minutes can be a strong piece of supporting evidence if they clearly spell out the reasons that the company needs to retain funds -- for example, to purchase assets or for working capital.

Retirement plans & fringe benefitsIf your company has a tax-qualified retirement plan or a stock option plan, the minutes should show decisions by the board adopting or modifying the plan. They should also document annual decisions on the percentage of contribution to profit-sharing plans and any decisions on fringe benefits, such as medical reimbursement accounts.Corporate minutes need not be lengthy, but they should provide a clear record of corporate actions and the business factors that were considered when those actions were taken. You should think of your minutes as a key element of your tax planning strategy.If your corporate minutes need updating, contact your attorney and take care of this important bit of business housekeeping.

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picture of a row of townhomes with snowThe Delaware State Housing Authority has put together a program that can make a difference in your community while you receive Delaware State tax credits for 2012.  The Neighborhood Assistance Act ("NAA") serves impoverished neighborhoods and low income  families.Here's how it works…..Individual and business taxpayers can participate if they pay Delaware state income tax.  By making a contribution to one of the many participating Non-Profit organizations that serve local neighborhoods, a state tax credit of 50% of your contribution will be received.  This credit is used to offset Delaware state income taxes.To qualify:1.  You must first pay Delaware state income taxes.2.  Your investment must be made to an approved NAA non-profit organization.  (Click here to review thelist of approved 501(c)(3) organizations.)3.  The credit is available each year for a cumulative statewide credit of $500,000, so the first $1,000,000 of contributions will receive the credit. However, the maximum credit per taxpayer is $100,000.Contributions:1.  For a business, a minimum contribution amount of $10,000 is required.2.  For an individual, a minimum contribution amount of $5,000 is required.Remember, the credit is on a first-come, first-served basis, so as contributions are made, the credit will diminish.  Take action sooner rather than later if you feel this is a worthwhile cause.  In 2011, the credit ran out before the end of the year.  Please do not miss out.If you have any questions, or you would like Gunnip & Company to assist you in the application process to obtain the credit, please do not hesitate to contact Sean Balliet, CPA .

filling the gas tankThe IRS recently announced that the mileage rate for business driving in 2012 will be 55.5¢ a mile. The rate can be used for cars, vans, pickups, and panel trucks.Companies that don't want to keep track of the actual costs of using a vehicle for business purposes may use this standard mileage rate instead. An annual study of the fixed and variable costs of operating an automobile is used to determine what the standard mileage rate will be for a given year.In addition to the mileage rate, a separate deduction may be claimed for parking fees, tolls, interest relating to the purchase of the automobile, and state and local personal property taxes.The standard business mileage rate can't be used for automobiles used for hire (e.g., taxicabs) or for fleets of automobiles used simultaneously by the taxpayer. Nor can the standard rate be used if the vehicle was previously depreciated by other than the straight-line method, including using bonus depreciation or the Section 179 deduction.When the business mileage rate is used, depreciation will be considered to have been allowed at a rate of 23 cents a mile. This depreciation reduces the taxpayer's cost basis in the vehicle.The miles driven for medical purposes can be taken on Schedule A as an itemized medical deduction.  The rate for medical has been adjusted to 23 cents a mile.The miles driven for charitable purposes can be taken on Schedule A as a charitable contribution.  The rate for charitable mileage is 14 cents per mile.  This rate does not change due to inflation, but is set by law. 

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You will continue to get a little extra money in your paycheck through February 29, 2012.  On December 23, 2011, Congress finally approved a two-month extension of the payroll tax cut for American workers. The agreement was reached after weeks of partisan bickering. Though both Democrats and Republicans wanted a one-year extension of the tax cut, they could not agree on how to pay for a year-long extension and settled on a paid-for two-month extension.The new law extends the 4.2% social security tax on wages through February 29, 2012. Without this extension, the employee tax rate would have gone to 6.2% on the first $110,100 of wages earned in 2012.  The law also extends benefits for the long-term unemployed for two months and prevents a scheduled cut in fees paid to Medicare providers from taking effect January 1, 2012.Of course any law that reduces taxes or increases benefits needs to be offset by a revenue raiser.  These extensions will be paid for by an increase in fees charged by government-backed mortgage companies (Fannie Mae and Freddie Mac) for new home loans.  Included in the agreement is a requirement that President Obama make a decision within 60 days on the construction of the 1,700 mile Keystone oil pipeline.Finally, the law calls for a House-Senate conference committee to negotiate an extension of the payroll tax cut through the end of 2012, as well as a longer-term extension of unemployment benefits and the Medicare reimbursement to doctors.

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We are pleased to offer an exciting alternative to completing a paper Tax Organizer. Gunnip & Company clients now have the option to submit their Tax Organizer online using Tax Notebook. This secure online tool ensures you will not overlook important tax data and is easier to complete. If you are interested in using Tax Notebook, please email taxnotebook@gunnip.com and we will forward you a User ID and password.Paper copies of the organizer will still be mailed later this month.

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