Coverage for individuals: After 2013, any individual not eligible for Medicare or Medicaid must obtain minimum essential coverage or pay a nondeductible penalty based on a flat dollar amount or a percentage of household income. The new law also provides coverage subsidies to qualified lower-income individuals through premium assistance tax credits and reduced cost-sharing.

Employer requirements: Beginning in 2014, an employer failing to offer minimum essential coverage in any month for an eligible full-time employee will be liable for an additional tax. The tax equals 1/12th of $2,000 times the number of all full-time employees. This penalty applies to employers with 50 or more workers, but the first 30 workers are subtracted from the calculation.

Small businesses: Beginning in 2010, a qualified small business may use a special tax credit to offset employer-provided coverage. A “small business” is generally one with no more than 25 employees and average annual wages of less than $50,000 per employee. A bigger credit is available to employers with no more than 10 employees and average annual wages of less than $25,000.

Medicare taxes: Beginning in 2013, an additional 0.9% Medicare tax is imposed on wages of unmarried individuals with earned income above $200,000 and $250,000 for married joint filers; and an additional 3.8% Medicare tax applies to “net investment income” received by unmarried individuals with a modified adjusted gross income (MAGI) above $200,000 and $250,000 for joint filers.

Tax on health insurance plans: Beginning in 2118, insurers will have to pay a 40% excise tax if the annual premiums for a health insurance plan exceed $10,200 for individual coverage and $27,500 for family coverage.

Medical deductions: Under current law, an individual may deduct only qualified medical expenses in excess of 7.5% of adjusted gross income (AGI). Beginning in 2013, the new law generally raises this “floor” to 10% of your AGI.

However, an individual (and spouse) who is age 65 or older is temporarily exempt from this increase for tax years beginning after 2012 and before 2017.

Flexible spending accounts: The new law caps the annual amount of health care FSA contributions at $2,500, beginning in 2013 (indexed for inflation after 2013).

Adoption credit: The new law makes the adoption credit refundable, retroactively raises the dollar limit on the credit for 2010 from $12,170 to $13,170 and enhances the credit for adopting special needs children.

Information reporting: Beginning in 2012, a business must file information returns for annual payments of $600 or more to any corporate or noncorporate recipient (other than tax-exempt entities).

Of course, this is only a general overview of several important tax provisions in the massive health care legislation. The new health care law will have far-reaching effects for individuals and business owners. To find out exactly how the new law affects you, your family and your business, call us and we will be glad to provide you with an analysis of your situation.

But nothing has changed in the rules for Roth IRA distributions. Unless payouts are treated as “qualified distributions,” they are subject to tax.

Nevertheless, despite the common perception, the tax burden on taxable distributions may be less than you think. Some “taxable” distributions might be completely tax-free. The exact tax treatment depends on the “ordering rules” for Roth IRA distributions.

If a withdrawal meets the requirements for a qualified distribution, it is 100% exempt from tax. A qualified distribution is one that is made from a Roth IRA in existence for at least five years after reaching age 59 1/2, upon death or disability or used to pay first-time homebuyer expenses (up to a lifetime limit of $10,000).

All other distributions are nonqualified. Nonqualified distributions are treated as coming from Roth IRA assets in the following order:

• Regular Roth IRA contributions
• Taxable traditional IRA conversions
• Nontaxable traditional IRA conversions
• Earnings on Roth IRA assets

Because distributions are treated as coming first from Roth contributions, you   may be able to take out as much as you put in — at any time — without any dire tax consequences.

We can walk you through the “ordering rules” to minimize the tax liability, if any, for your particular situation. There may be additional complications for early withdrawals. We can provide the necessary guidance in this area. Contact us for more details and we will be glad to assist you.

If you are a sole proprietor use the information in the chart below to help you determine some of the forms that you may be required to file:

References/Related Topics

• Other Useful Forms for Sole Proprietorship
• Publication 334, The Tax Guide for Small Business (for Individuals Who Use Schedule C or Schedule C-EZ)
• Publication 583, Starting a Business and Keeping Records
• Husband and Wife Businesses
  
• Distinguishing Between Self-Employed Individuals and Independent Contractors

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.

Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.

If you are a partnership or a partner (individual) in a partnership, use the information in the charts below to help you determine some of the forms that you may be required to file.

Chart 1 (Partnership)

Chart 2 (Individual Partners in a Partnership)

References/Related Topics

• Election for Husband and Wife Unincorporated Businesses
• Husband and Wife Business
• IR-2005-143, IRS Extends Transition Relief to Partnerships and Pass-Thru Entities Under New Code Section
• IR-2005-146, IRS Releases Schedule M-3 for Partnerships
• Other Useful Forms for Partnerships
• Publication 541, Partnerships
• Publication 583, Starting a Business and Keeping Records

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

If you are a C corporation, use the information in the chart below to help you determine some of the forms you may be required to file.

Corporations that have assets of $10 million or more and file at least 250 returns annually are required to electronically file their Forms 1120 and 1120S for tax years ending on or after December 31st. For more e-file information, see References/Related Topic listed below.

References/Related Topics

• Other Useful Forms for Corporations
• S Corporations
• Publication 542, Corporations
• Publication 583, Starting a Business and Keeping Records
• Business Structures
• e-file for Business and Self-Employed Taxpayers

To qualify for S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation
• Have only allowable shareholders
  • including individuals, certain trust, and estates and
  • may not include partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have one class of stock
• Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders.

Filing Requirements:

References/Related Topics

• Compensation and Medical Insurance Issues
• Employees, Shareholders and Corporate Officers
• S Corporation Stock and Debt Basis
• Special Rules for Health Insurance Costs of 2-Percent Shareholder-Employees (IRB 2008-2 Notice 2008-1)
• Other Business Structures

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Classifications

The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file as a corporation, partnership or sole proprietorship tax return.

An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a “disregarded entity.” Form 8832 is also filed to change the LLC’s classification.

Effective Date of Election

The election to be taxed as the new entity will be in effect on the date the LLC enters on line 8 of Form 8832.  However, if the LLC does not enter a date, the election will be in effect as of the form’s filing date.  The election cannot take place more than 75 days prior to the date that the LLC files Form 8832 and the LLC cannot make the election effective for a date that is more than 12 months after it files Form 8832. However, if the election is the “initial classification election,” and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of the Form 8832).

References/Related Topics

• Forming a Limited Liability Company
• Single Member Limited Liability Companies
• LLC Filing as a Corporation or Partnership
• Possible Repercussions
• Forms for Limited Liability Companies
• Form 8832