Money Matters: How might recent tax changes affect you?

By James W. Rahmlow

The Daily Record Newswire

Late March and the month of April was a busy tax period in many respects. We had significant legislation signed into law by the president, numerous releases by the Internal Revenue Service and select court cases worthy of mention. I’ve attempted to summarize the most important and most interesting topics for your review.

New Small Business Health Care Credit — (IR-2010-48)
As part of the Health Care and Education Reconciliation Act of 2010 signed by President Obama on March 30, qualifying small businesses are eligible for a health insurance tax credit of 35 percent of the cost of premiums paid for health insurance coverage.
Eligible small employers must contribute at least 50 percent of the cost of the premiums paid and the credit is effective for tax years beginning after Dec. 31, 2009. Qualifying small businesses can have no more than 25 full time equivalents (FTEs) and pay annual wages for the year of no more than $50,000 for the FTEs. However, in order to qualify for the full credit, qualified employers must have no more than 10 FTEs and pay average annual wages not in excess of $25,000.
A phase out of the credit occurs and the credit is completely eliminated if an employer has 25 or more FTEs or pays $50,000 or more in average annual wages.
To compute FTEs and to give effect to part time employees, the standard used by the IRS is that an FTE works 2,080 hours. The credit is claimed as additional estimated tax payments on the employer’s business tax return.
For family owned businesses, in general, a sole proprietor, a partner or a shareholder owning more than two percent of an S corporation and any owner of more than five percent of others businesses are not
considered employees for purposes of the credit. Also generally excluded are family members of any business owners.
Interest Rates Issued for May — (Rev. Rul. 2010-12)
In a recent revenue ruling, the IRS released the short-term, mid-term and long-term applicable interest rates for May, 2010. Below is a summary of those rates.
Short Term Mid Term Long Term
Applicable .79% 2.83% 4.38%
Federal Rates (AFR)
Adjusted AFRs .66% 1.86% 3.91% 
Federal Deposit Coupons going green
As part of Treasury’s move to a paperless environment, beginning in 2011, with few exceptions, businesses that currently use Federal Tax Deposit coupons (Form 8109-B) will have to make those deposits electronically. In general, only businesses with quarterly tax liabilities less of $2,500 or less will still be allowed to use the hard copy coupons.
IRS Visits to Practitioners during the 2010 Filing Season — (IR-2010-44)
As part of an initiative started in January, the IRS visited more than 2,000 tax return preparers during the January-April filing period to remind filers of their responsibilities to clients and to the tax profession. These visits followed letters sent to more than 10,000 tax return preparers in January both reminding of the preparer’s responsibilities to clients as well as discussing common return errors that the IRS sees.
Interestingly, the IRS announced that 320 undercover visits had been made to preparers since the start of the 2010 filing season. This was not part of the original initiative.
Higher Medicare Taxes Starting in 2013 — (H.R. 3590, H.R. 4872)
As part of the recently signed Health Care and Education Reconciliation Act of 2010 finalizing employer and individual responsibilities for health care coverage, Medicare taxes will be increased.
For taxpayers who have earned income in excess of $200,000 ($250,000 for married couples filing jointly), an additional 0.9 percent tax rate will be imposed on that earned income. The law also imposes a 3.8 percent “unearned income Medicare contribution” requirement on the investment income of higher-income individuals. For purposes of the 3.8 percent tax, the definition of investment income is expansive.
Tax Court Reaffirms Covenant Not To Compete is a 15 Year Asset — (Recovery Group, Inc., TC Memo. 2010-76)
Reaffirming prior guidance issued by the IRS, the tax court ruled that a covenant not to compete is a Code Sec. 197 intangible asset that must be amortized over 15 years.
In the case at hand, taxpayers attempted to deduct the entire cost of the covenant over the covenant’s stated one year term. The court held that regardless of the term, the covenant not to compete meets the criteria for a Code Sec. 197 intangible asset and as such is subject to the 15 year amortization. The taxpayers were not, however, liable for an accuracy-related penalty since they relied on the advice of an experienced tax advisor.
IRS to Require Tax Preparers in 2011 to Have Individual Preparer Identification Numbers — (IR-2010-37, NPRM REG-134235-08)
In proposed regulations recently issued by the IRS, tax preparers filing and signing tax returns and refund claims after Dec. 31 will be required to provide a unique preparer tax identification number (PTIN) as prescribed by the IRS in forms, instructions and other guidance. 
In order to regulate tax preparers, the IRS has indicated that preparers who either apply for or renew a PTIN must undergo a tax compliance check of their personal obligations to file returns as well as pay taxes.
All applicable forms and instructions will be revised to reflect the PTIN requirement. Penalties will apply for preparer failure to provide the required number.
James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at