IRS Issues 2011 Mileage Rate Update

Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 51 cents per mile for business miles driven
  
• 19 cents per mile driven for medical or moving purposes
  
• 14 cents per mile driven in service of charitable organizations
  

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Details from the IRS

Summary of the Small Business Jobs Bill of 2010

There's still a lot of work to be done before we have the certainty we need for tax planning in 2011 and beyond, but the Congress got a start with the Small Business Jobs Bill of 2010. ADP/CCH have a nice summary of the provisions on their site.

A quick synopsis:

• Section 179 expense limits are restored to their higher levels
• Bonus depreciation is back
• Sole proprietors now save SE tax on their health premiums
• Some sales of small business stock become tax-exempt

Here's a Tax Simplification Proposal to Watch

Tax simplification is on the minds of legislators these days. It might not be the best thing for a CPA's business, but I'd love to see the tax code become more understandable. Here's one proposal that's being considered.

• Only three tax brackets: 15% for the first $75,000 of taxable income for couples, 25% on the next $65,000, and 35% over $140k. Cut those brackets in half for singles.
  
• Bigger standard deductions: $30,000 for married, $15,000 for singles. That means far fewer people will itemize deductions.
  
• Alternative minimum tax is eliminated, as are phaseouts of itemized deductions and personal exemptions on higher income taxpayers.
  
• 35% of your dividends and capital gains would be excluded. That would put those items at a maximum 22.75% tax rate, versus the current 15% rate that's already set to expire at year end.
  
• Municipal bonds would be less favored. You'd get a credit for 25% of the interest on new bonds, instead of the full exemption they enjoy now.
  
• Some tax breaks would be eliminated. These include flex plans, miscellaneous itemized deductions, moving expenses, the foreign income exclusion, and some tax-free benefits like group term life insurance, employer-provided meals and employee awards.
  

Some S Corporations To Incur Additional Taxes

Owners of small S corporations will begin paying some self-employment tax on the corporate earnings under a Senate bill expected to pass shortly. Personal service corporations who have three or fewer employees will face the 15% SE tax in addition to regular income tax, as will any S corporations who are partners in a service business.

S Corporations have long been a popular tool for saving self-employment tax. They can still serve this purpose in larger settings or in non-service businesses. Set up correctly, the owner is paid a "reasonable wage" that is subject to payroll taxes. Any remaining profits can be distributed to the owner, who pays only regular income tax on those profits.

The problem? Too many hogs screwed up the whole deal for the rest of us. The IRS notes 35,000 one-employee S corporations with income of more than $100,000 who showed no wages. Another 40,000 S firms with income of $50k-$100k also paid no wages, and therefore, no payroll taxes. The IRS has long argued about what is "reasonable compensation," but no one can argue that zero is reasonable.

As is often the case in tax law, pigs get fed, but hogs get slaughtered. The hogs who thought they could abuse the SE tax provisions are on their way to the slaughterhouse.

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