Automated IRS System Helps College-Bound Students with Financial Aid Application Process

College-bound students and their parents typically want to make every dollar and every minute of the college experience count including money spent on tuition and time spent on the college financial aid application process. The Internal Revenue Service is helping minimize the time spent on the completion of the Free Application for Federal Student Aid (FAFSA) form by automating access to federal tax returns with the IRS Data Retrieval Tool. This tool provides the opportunity for applicants to automatically transfer the required tax data onto the FAFSA form.
Here are some tips on using the IRS Data Retrieval Tool:

• Benefits The IRS Data Retrieval tool is an easy and secure way to access and transfer tax return information directly onto the FAFSA form, saving time and improving accuracy. Also, the increased accuracy reduces the likelihood of being selected for verification by the school’s financial aid office.
• Eligibility Criteria Taxpayers who wish to use the tool to complete their 2012 FAFSA form must:
  • have filed a 2011 tax return;
  • possess a valid Social Security Number;
  • have a Federal Student Aid PIN (individuals who don’t have a PIN, will be given the option to apply for one through the FAFSA application process);
  • have not changed marital status since Dec. 31, 2011.
• Exceptions If any of the following conditions apply to the student or parents, the IRS Data Retrieval Tool can not be used for the 2012 FAFSA application:
  • an amended tax return was filed for 2011;
  • no federal tax return for 2011 has been filed ;
  • the federal tax filing status on the 2011 return is married filing separately; a Puerto Rican or other foreign tax return has been filed.
• Alternatives If the IRS Data Retrieval Tool can not be used and if the college requests verification documentation, it may be necessary to obtain an official transcript from the IRS. To order tax return or tax account transcripts, visit www.irs.gov and select  Order a Transcript  or call the Transcript toll-free line at 1-800-908-9946.

In addition to helping reduce the time and effort involved in completing and submitting the FAFSA form through the IRS Data Retrieval Tool, the IRS offers money-saving information to college students and their parents.  Important information regarding tax credits and deductions for qualifying tuition, materials and fees is available at the IRS Tax Benefits for Education: Information Center and in IRS Publication 970, Tax Benefits for Education both of which are available at www.IRS.gov.

Links:

• IRS Data Retrieval Tool/FAFSA 
• IRS Tax Benefits for Education: Information Center 
• IRS Publication 970, Tax Benefits for Education (PDF)
• Order a Transcript

Reasonable salary for S corporation owners

 

By Debra M. Johnson, CPA, J.D.

May 2012

Besides its single level of taxation as a passthrough entity, an advantage of an S corporation over a C corporation is that a shareholder’s share of the corporation’s net income is not considered self-employment earnings and therefore is not subject to self-employment tax (13.3% in 2011 and 2012). This treatment is in contrast to that of a general partner, LLC member, or sole proprietor, for whom net earnings from self-employment include any trade or business income and a partner’s distributive share of income from a trade or business carried on by the partnership (Sec. 1402(a)).
However, if the S corporation shareholder provides services to the S corporation, he or she must receive an adequate or reasonable amount of compensation for these services. The S corporation may deduct the compensation expense and must pay the employer share of employment taxes: 6.2% Social Security tax and 1.45% Medicare tax. The shareholder-employee is responsible for 4.2% Social Security tax (in 2011 and 2012) and 1.45% Medicare tax. The S corporation is also responsible for Federal Unemployment Tax Act (FUTA) taxes. Minimizing these taxes provides an incentive to keep the S corporation shareholder’s wages low and to characterize most of the passthrough income as distributions.
The U.S. Government Accountability Office reported in 2009 on employment tax noncompliance among S corporation shareholders. The IRS has been pursuing this perceived abuse of inadequate compensation in favor of dividend distributions to shareholder-employees and has won a number of cases. (See, for example, Watson, No. 11-1589 (8th Cir. 2/21/12), described in Tax Matters, page 62.)
The IRS has the authority to reclassify dividends, distributions, or payments to the shareholder-employee, including loan repayments, as compensation if it deems compensation inadequate or unreasonable. The courts have held that the question of reasonable compensation is one of fact, determined on a case-by-case basis. The IRS has posted on its website (tinyurl.com/7kp3yrf) three major sources of gross receipts it will consider when determining reasonable compensation: the services provided by the shareholder, the services of nonshareholder employees, and the capital and equipment of the corporation.
IRS fact sheet FS-2008-25, Wage Compensation for S Corporation Officers, lists the following factors in determining reasonable compensation: training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, payments to nonshareholder employees, timing and manner of paying bonuses to key people, what comparable businesses pay for similar services, compensation agreements, and the use of a formula to determine compensation. Sources of information on comparable compensation for services include the U.S. Department of Labor’s Bureau of Labor Statistics, employment agencies, and a market analysis. The key in defending a claimed compensation amount is to document all research to support the amount.
Shareholders who are officers of a corporation who do not perform any services or perform only minor services in that capacity and who do not receive or are not entitled to receive direct or indirect compensation are not considered employees of the corporation. Thus, since most shareholder-officers of closely held corporations do provide more than minor services to the corporation, they most likely are considered employees. If a shareholder is an officer who is considered an employee, Section 530 of the Revenue Act of 1978, P.L. 95-600, does not apply as a safe harbor for recharacterizing the shareholder’s compensation because, under Sec. 3121(d)(1), corporate officers are statutory employees (see Joseph M. Grey, P.C., 119 T.C. 121).
The S corporation entity form provides planning opportunities to avoid payroll taxes or self-employment taxes on distributions that are instead a return on capital and assets. With the increase in Medicare tax of an additional 0.9% for high-wage earners scheduled to begin in 2013, this may represent a larger opportunity. The key in defending against a possible audit and recharacterization of dividends is to document all research and analysis of the determination of the shareholder-employee salary.
By Debra M. Johnson, CPA, J.D., (djohnson@msubillings.edu) associate professor, Montana State University–Billings in Billings, Mont.

Federal Tax Provisions Not Applicable for 2012 Tax Returns

As we move towards the 2013 Filing Season you will need to keep an eye out on what Congress does with regard to the “Extender” tax provisions that expired at the end of 2011.
Here are two lists of the provisions that will have the most impact on individual Tax Year 2012 Federal returns.



Provisions that are no longer applicable for Tax Year 2012 Federal returns:

• $250 Educator Expense Deduction – Form 1040, line 23
  
• Tuition and Fees Deduction – Form 8917
  
• Itemized Deduction for Sales Tax
  
• All personal nonrefundable tax credits allowed when calculating Alternative Minimum Tax
  
• Residential energy credits on Form 5695
  
• 5 year depreciation for farming business machinery and equipment
  
• 15 year straight line depreciation allowed for qualified leasehold restraint and retail improvements
  
• Tax-free distributions from IRAs for charitable purposes
  
• Contributions of capital gain real property made for conservation purposes (50% limitation applied instead of 30% limitation)
  

Provisions that changed significantly for Tax Year 2012 returns:

• Alternative Minimum Tax (AMT) exemption amounts revert to what they were for Tax Year 2000
  

Tax Year 2012 AMT exemption amount is:

• Single/Head of Household: $33,750
  
• Married Filing Joint: $45,000
  
• Married Filing Separate: $22,500
  
• Maximum Section 179 Deduction amount has been reduced to $139,000 for Tax Year 2012
  
• Bonus Depreciation percentage is reduced to 50% for Tax Year 2012
  
• Adoption Credit
  
  • Will revert to being a nonrefundable credit with any excess allowed to be carried forward for 5 years
    
  • Maximum credit is reduced to $12,170 per child
    

As in the past there is the possibility that Congress will extend some or all of these provisions sometime before the end of 2012 (most likely in the November/December timeframe). Check back for more information as to what action Congress takes on these provisions later this year and what impact these late legislative changes will have on the start of the 2013 Filing Season.

Tax Professional Earns Registered Tax Return Preparer Status

Patricia Brackin (Pat), a member of our staff,  has reached a personal and professional milestone in her career by passing the Internal Revenue Service’s (IRS’) Registered Tax Return Preparer (RTRP) competency exam. The award of the RTRP designation recognizes demonstrated knowledge of all aspects of federal individual taxation and assures clients that the preparer is up-to-date on the latest tax law changes and ethics requirements.

To retain the status of a registered tax return preparer, individuals must complete a minimum of 15 continuing education credits (CPEs) per year. RTRPs are also governed under stringent rules set forth by the IRS.

If you need assistance with any taxation issue, you should seek the help of a tax professional. As a professional tax preparer Pat can assist you with a review of your tax history and answer questions on how taxation issues may impact your future.