Credit Card Transactions

Beginning with Jan. 31, 2012, by Jan. 31 of each year, merchants conducting credit card, debit card or gift card transactions may receive a Form 1099-K from the card processing company reporting the gross amount paid to the merchant during the prior year. Payments made through a third-party settlement network, such as PayPal or eBay, will be reported only if the payee receives more than $20,000 in aggregate and the total number of payment transactions exceeds 200.

Form 1099-K is a new form for the 2012 tax year, implemented to ensure that businesses, especially small businesses, pay tax on their credit and debit card income, especially from online sales. Even merchants who already properly report their credit and debit card income are affected by this new requirement because they must establish new accounting procedures. This is because Form 1099-K will report the gross amount received through payment cards, and therefore you must reconcile the form with your own records to take into account fees, returned items, cash back and other similar amounts.

Pay attention to requests for filing W-9 forms from your credit card vendors as the card processing company may be required to institute backup withholding on your credit card transactions if you do not provide them with a correct taxpayer identification number, such as an EIN. The IRS has delayed this requirement until after 2012, however. The IRS also has provided that for payments made to a third party settlement network, backup withholding will not apply to payees who receive fewer than 200 payment transactions, even if they receive more than $20,000 in payments.

Adoption Credit

There is good news for people who are planning to adopt a child under age 18 or a person incapable of self-care due to physical or mental challenges because there are two tax benefits that offset escalating adoption expenses.

In 2011, the adoption credit, which is fully refundable, rose to a maximum of $13,360 per child. Parents who work for companies with an Adoption Assistance Program can receive up to a $13,360 reimbursement from their employer for qualified adoption expenses without paying taxes on that benefit.

When adopting a child who is a United States citizen or resident, the family is permitted to take the credit in the year following the year when the actual expense was incurred. These expenses may be taken as a credit even if the adoption ultimately is not completed. Where a foreign adoption is involved, the family may not deduct any expenses, regardless of the year incurred, until the adoption is final.

When you adopt a child with special needs, you are allowed to claim the full credit regardless of actual expenses paid.

Bonus Depreciation

An additional depreciation that was implemented to encourage asset purchases is the provision for bonus depreciation. You can use the bonus depreciation rules to write off the entire cost of certain business property you first placed in use in 2011. This rule, known as first-year bonus depreciation, allows you to write off 100 percent of your costs in 2011. For property placed in service in 2012, the bonus depreciation allowance is decreased to 50 percent of the property’s cost. Any remaining cost not fully deducted under the bonus depreciation rules is subject to the regular depreciation rules. Thus, it must be deducted over a period of several years.

The allowance generally applies to tangible personal property, including property with a recovery period of 20 years or fewer, office equipment, computer software and certain leasehold improvements. The property must be new, it can’t be used.

By providing immediate tax relief, improving cash flow and providing additional capital for reinvestment in the business, this rule delivers a number of benefits to small business owners. It is important to properly coordinate between using the Section 179 rules versus the bonus depreciation rules as there can be tax consequences to each choice.

Child Tax Credit

The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended the Child Tax Credit to tax years 2011 and 2012.

The credit is worth $1,000 for each qualifying child who is under age 17 at the end of the calendar year and who qualifies as a dependent – your son, daughter, adopted child who lived with you all year, stepchild or eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals. The child must also be a U.S. citizen, resident or national. The Child Tax Credit is in addition to the child’s dependency exemption.

That means if you have three children, the child credit can potentially reduce your tax bill by $3,000.

Section 179 Expense Deduction

The Section 179 expense deduction is an expensing provision that applies to tangible business property placed in service during the tax year. By claiming it, you can deduct the full cost of newly purchased equipment in the year of purchase and, in the process, you receive a larger tax benefit, improve cash flow and have additional capital to invest.

Regardless of whether you made the purchase with cash or credit, the maximum write-off on a per-taxpayer basis is:

· $500,000 in 2011

· $139,000 in 2012

You are eligible for the deduction on a wide range of property purchases, from computer software to office equipment. For 2011, the deduction also is available for qualified restaurant, leasehold and retail improvement property. This expansion is not available in 2012, unfortunately.

You need to keep in mind that the deduction is reduced by every dollar more than $2 million. So, for example, if you spend $2.5 million or more on eligible property, your Section 179 expense deduction will be zero. Normal depreciation rules will then apply. In 2012, the $2 million dollar limit decreased to $560,000, and the deduction reaches zero for amounts more than $699,000.

The Section 179 expense deduction is limited and cannot be greater than your business’s taxable income and it does not apply to property you inherited or initially purchased for personal use, even if you later change it to a business use.