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Things to Know for the Current
Tax Year

Changes to Schedule D and New Form 8949

Beginning in 2011, most stock that was acquired after December 31, 2010 must report the following information for stock sales on the yearly
Form 1099-B:

• Cost or other basis of stock

This amount will generally be the total amount paid by the customer adjusted for commissions and the effects of other transactions occurring within the account.

• Reported gain or loss
• Type of gain or loss – Short-term or Long-term
• Date of purchase

Due to this new requirement, the IRS has changed the way stock sales and other capital asset sales (that were reported directly on Schedule D) are reported.

Beginning with Tax Year 2011 all capital asset sales that were reported directly on Schedule D will be reported on new Form 8949 (Sales and Other Dispositions of Capital Assets). Short term transactions will be reported on Page 1 and Long-term transactions on Page 2 of Form 8949.

Some new information for a capital asset sale will now be required when entering a capital asset transaction on Form 8949 as follows:

• Transactions will be classified based on if the asset is reported on Form 1099-B, is not reported on Form 1099-B or a Form 1099-B was not received at all for the transaction.

The total amount of each type will be reported on a separate line on Schedule D for both Short-term and Long-term transactions.

• Gain/Loss for each transaction will not appear on Form 8949. The total net capital gain/loss will be shown on Schedule D for each transaction type.
• A code will be required enter into column b. This code will identify what type of capital asset transaction it is and whether or not an amount needs to be entered in the new column g (Adjustments to gain or loss).
• New column g (Adjustments to gain or loss) will be calculated based on the code entered in column b.  In the simplest case, if the taxpayer believes the basis reported on the 1099-B is not correct they will indicate that difference in this column by adjusting the reported basis on the Form 1099-B.

See a draft of new Form 8949.

Schedule D is now being used to gather all capital gains and losses reported from the applicable supporting forms and then calculating the net capital gain or loss for the year.

Schedule D has revised the first part of the short-term and long-term sections as follows:

• The first three lines of each section are now for the total amounts from Form 8949 for:
• Gains/Losses from transactions with the basis shown on
  Form 1099-B.
• Gains/Losses from transactions with the basis not shown on
  Form 1099-B.
• Gains/Losses from transactions for which a Form 1099-B was not received.

See a draft of Schedule D.

Federal tax provisions that are no longer applicable for 2011
(Expired at the end of 2010)

• Deduction for health insurance costs in computing self-employment tax
• Making Work Pay Credit – Schedule M has been eliminated
• For small businesses:
• Extended 5 year carryback of general business credits
• Allowing general business credits to be used in calculating AMT
• Increased Start Up expense deduction
• Alternative motor vehicle credit for:
• Hybrids
• Advanced lean burn technology autos
•  Qualified alternative fuel vehicles
• Payroll tax forgiveness for hiring unemployed workers
• Exclusion from income for benefits provided to volunteer firefighters and emergency medical responders.
• Work opportunity tax credit for unemployed veterans and disconnected youth.
• Computer technology and equipment allowed as qualifying higher education expense for Sec 529 accounts.

Nonbusiness Energy Property Credit

The credit has reverted back to the rules that existed prior to 2008.

The credit is equal to the sum of:

• 10% of cost of qualified energy efficiency improvements installed during 2011, and...
• Any residential energy property costs paid in 2011

The credit is limited to a combined credit for all tax years after 2005 as follows:

• Total maximum credit - $500.
• Windows maximum credit - $200.
• Residential energy property costs for 2011 of:
• $50 – circulating fans
• $150 – natural gas, propane of oil furnace or hot water boiler
• $300 – for any item of energy efficient building property.

Qualified energy efficiency improvements are defined that qualify for the 10% credit:

• Insulation
• Exterior windows and skylights
• Exterior doors
• Metal or asphalt roofs designed to reduce heat gain of home

2011 Form 5695 Changes:

• Address of home where improvements were made
• Will require any nonbusiness energy property credit claimed in 2006 – 2010 be reported on new line 2.

See the draft of the 2011 Form 5695, page 3 for more information

Safe Harbor Rule for 100% Bonus Depreciation for Passenger Autos

The following explanation is a synopsis of what is contained in Revenue Procedure 2011-26.

If 100% bonus depreciation is taken on a passenger automobile between September 9, 2010 and December 31, 2011, the maximum depreciation deduction for the first year is $11,060.

Per the Small Business and Credit Act of 2010, the unrecovered basis of a passenger auto is determined as follows:

(50% of cost of auto + first year depreciation of remaining basis)
Less $11,060 (the maximum allowable for 100% bonus depreciation in the year of purchase)

If the result is positive then unrecovered basis exists.  Any unrecovered basis is depreciated beginning in year six. This means that no depreciation can be taken on this auto in years two – five.

If the result is negative no unrecovered basis exists.

Revenue Procedure 2011-26 creates a safe harbor rule that allows a depreciation deduction to be taken in years two through five. The method that is used is based on whether unrecovered basis exists on the auto per the above calculation.

The safe harbor rule works as follows:

• If unrecovered basis exists, depreciation for year two through five is calculated as follows:
• Depreciation is calculated as if 50% bonus depreciation was taken. Therefore the basis for depreciation is 50% of the cost of the auto. The depreciation deduction is calculated using the depreciation tables for five-year assets.
• The maximum limits for passenger autos for years two through five apply as well. Those limits are:
• Year 2 - $4,800
• Year 3 - $2,950
• Year 4 - $1,775
• Year 5 - $1,775
• The unrecovered basis is added to the remaining basis at the end of year five. This remaining basis is depreciated until it is fully depreciated taking a maximum deduction of $1,775 per year.

• If unrecovered basis does not exist, depreciation after year one is calculated using the computation without tables as if the 50-percent bonus depreciation had been used. 

See Revenue Procedure 2011-26 for the IRS explanation and examples of the safe harbor rule.

The safe harbor rule explanation begins on page 12 of the Revenue Procedure.

See example 5 in Revenue Procedure 2011-26, page 20 for how the safe harbor rule works when unrecovered basis exists.

See example 6 in Revenue Procedure 2011-26, page 21 for how the safe harbor rule works when there is not an unrecovered basis.

2011 Basic Changes

Exemption Amount: $3,700

Standard Deduction
Basic amounts for 2011 are:

• Head of Household - $8,500
• MFJ and Qualifying Widow(er)s - $11,600
• MFS - $5,800
• Single - $5,800

Additional standard deduction for Aged and Blind:

• $1,150 for each
• $1,450 if the individual is unmarried and not a surviving spouse

Standard Mileage Rates
The rates for 2011 are:

• Business purpose (Applies to up to four vehicles):
• January 1 – June 30: 51 cents per mile
• July 1 – December 31: 55.5 cents per mile

• Medical/Moving purposes:
• January 1 – June 30: 19 cents per mile
• July 1 – December 31: 23.5 centers per mile
• Charitable Contributions:  14 cents per mile

Section 179 Expense Limits

• Maximum Section 179 deduction: $500,000

• Maximum cost before the limit is reduced: $2,000,000

5% Capital Gains rate remains at 0%
The 15% capital gain rate remains the same.

Income from Credit Cards and Schedule C    

As a reminder, beginning with calendar year 2011, banks will be issuing new information on Form 1099-K for their 2011 income received via credit cards.
The amounts from Form 1099-K must be reported on a separate line on the 2011 Schedule C.

The new income section for Schedule C will have a new look:

• Line 1a: Merchant card and third party payments
• Line 1b: Gross receipts or sales not reported on Line 1a
• Line 1c: Total Gross Receipts
• Line 1d: Returns and allowances plus any “cash back”
              included on Line 1a
• Line 1e: Net Gross Receipts

There will also be two questions added to Schedule C, E and F asking if the business made any payments in 2011 that require it to file Form(s) 1099 and, if so, did they or will they file all required Form(s) 1099.