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Last December, the 4.2% social security tax rate that workers pay on wages was extended through February 29, 2012.

Now a Congressional conference is being held to find a way to extend the lower tax rate through the end of 2012. The sticking point is lack of agreement between Republicans and Democrats on how to pay for the extension, estimated to cost $100 billion.

House Democrats have expressed the hope that the conference will be completed by the Presidents’ Day recess scheduled for the week of February 20. The legislation would extend the current 4.2% payroll tax rate through December 31, extend unemployment insurance benefits, and prevent cuts in reimbursements to Medicare providers.

Several legislators want to include tax extenders in the payroll tax cut legislation. These “extenders” include such provisions as the research and development credit for businesses, the optional deduction for state and local sales taxes, and the $250 deduction for school supplies purchased by teachers. Though these tax breaks appear to be universally popular, finding a way to pay for them remains the big issue.

 As you do your 2012 tax planning, keep the uncertain legislative picture in mind.

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

Individual Income Tax:

Tax Rates

• 10% Rate extended through 2012
• 15% No change
• 25%, 28%, 33% and 35% Rates extended through 2012
• For taxpayers in the 25% or higher tax brackets the capital gains and dividend rates of 15% is extended through 2012.

Deductions

• Personal Exemptions Phase-out repealed through 2012.
• Itemized Deduction Limitation repealed for 2010 through 2012.  Taxpayers are no longer subject to an itemized deduction limitation if AGI exceeds a certain level.
• Tax credit for qualified adoption expenses increased from $5,000 to $10,000 and also provides a $10,000 income exclusion for employer provided assistance programs. These benefits are extended through 2012 as refundable credits.
• Contributions to Coverdell Education Savings Accounts are increased from $500 to $2,000 and extended through 2012.
• Employees that receive Employer provided educational assistance may exclude from income $5,250 for undergraduate AND graduate education expenses through 2012.
• $250 Deduction for elementary and secondary school teachers extended through 2012.
• Qualified tuition and related expenses extended through 2012.
• State and Local Sales tax deduction extended through 2012.
• Taxpayers age 70 ½ may make tax free distributions from an IRA to a qualified charity up to $100,000 per taxpayer, per tax year. Transfers that occurred in January of 2011 may be treated as having been made in 2010.
• Self Employed Individuals can deduct SE Health Insurance Premiums paid to reduce their social security self employment tax in addition to their income tax liability.

Two-Year AMT Patch

Business Income Tax:

Depreciation:

• Beginning in 2010 or 2011 Business can expense up to $500,000 of the first $2,000,000 worth of qualified investment property placed into service under Code Section 179.
• Also in 2010 and 2011 up to $250,000 of qualified real property (qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property) can be expense under Code Section 179. 
• 50 % Bonus Depreciation on assets placed in service before September 8, 2010
• 100% Bonus Depreciation on assets placed in service after September 8, 2010 through December 31, 2011.
• 50% Bonus Depreciation on all assets placed in service after December 31, 2011 through December 31, 2012.

In the current financial crisis, economic worries are impacting businesses across the country. From customer cutbacks and lower demand for products and services to increased costs of business, many organizations are suffering from the downfall of the market. At the same time, individuals are also impacted as they grapple with layoffs, foreclosures and rising expenses.

Also, consider the latest statistics. According to the Association of Certified Fraud Examiners’ 2008 Report to the Nation, U.S. organizations lose 7% of their annual revenues to fraud. This is an increase of two percent from their 2006 reported figure. Furthermore, the median loss caused by the occupational frauds in the study was $175,000. This study was done before the current economic downturn, and therefore these numbers are expected to steadily increase.

What business owners do not realize is that as their employees’ financial pressures increase, so do the chances that their employees will steal from them. The reason for this has to do with what fraud examiners refer to as the “fraud triangle.” Donald Cressey, a researcher from Indiana University, did extensive research on the subject of embezzlement and the culprits whom he referred to as “trust violators.” Cressey’s research is still used as the classic model of occupational fraud. His conclusions have become known as the “fraud triangle”.

According to Cressey, employee theft or embezzlement begins when the person is faced with some type of pressure. This could be a financial predicament, such as threat of foreclosure, or others that require funding such as a medical issue, drug or alcohol use, gambling, shopping addictions and even extramarital affairs. When faced with this pressure, an otherwise trustworthy employee will take note of perceived opportunities within the company to embezzle money. Once this happens, the third component of the triangle – rationalization — takes place. The employee may convince himself or herself that he or she is only “borrowing” the money and will pay it back. Of course in most fraud cases, this doesn’t happen.

In today’s economic situation, management may not know that the company’s trusted bookkeeper is facing foreclosure or that the accounts receivable clerk’s husband lost his job last month and that they can’t make ends meet. And while management may be unaware of their vulnerability to embezzlement – the accounting staff are aware, and they will take advantage of the weaknesses if they can rationalize it and get away with it.

Fraud and embezzlement can occur in many ways. Aside from outright theft of cash, checks, inventory, tools and supplies, embezzlement can occur through creative methods such as paying expenses to shell companies maintained by the perpetrator, paying personal expenses with company funds, paying the same invoice twice and then accepting vendor kickbacks or pocketing the refund, paying non-existent employees and keeping the check, and offering unauthorized customer concessions or credits, just to name a few examples. In addition, managers may falsify reports or purposely not pay expenses in order to boost the perceived profitability of the business if they are compensated based on company performance.

There are many ways to prevent fraud from happening in your business. The following are some ways in which you can reduce your risk of employee theft. These tips will help in any business.

Identify where you are vulnerable

The key to preventing fraud is identifying the weaknesses in your business structure that lend themselves to this type of activity. By closing fraud opportunities within your business you can keep honest employees honest and at the same time, discourage dishonest ones from stealing. Take advantage of seminars on this topic and become educated about fraud. In addition, a qualified fraud examiner can conduct a study of your business operations and will be invaluable in determining where your weaknesses are.

Examine your business culture

Although management assumes this, it should be communicated that fraudulent activities will not be tolerated. Business owners should not create an atmosphere of permissiveness. Employees should be encouraged to report any infraction, and disciplinary action should be taken when improprieties do take place. Allowing infractions to go unpunished gives a message to all employees that the behavior is acceptable and they will not blow the whistle on future crimes.

Be careful who you hire

An important safeguard in any business is screening prospective employees. It is important to conduct background checks on all prospective employees. However this only gives limited assurance and is not an end to fraud prevention. While in some embezzlement cases it was discovered that the culprit had a history of such crimes, for many convicted fraudsters, the theft was their first offense. Still, the small investment before hiring can help to save much heartache down the road.

Segregation of duties

The most important deterrent to fraud and embezzlement is maintaining appropriate checks and balances referred to as segregation of duties. This means that one person should not be given too much control over cash and reporting functions.

In segregating duties, business owners must make sure that employees with recordkeeping duties do not also handle cash and invoicing. In weak companies, for example, one person is given the task of endorsing checks, filling out the deposit slips, taking the deposit to the bank and posting the receipts to the accounting system. The existence of one person performing all these functions makes the company susceptible to fraudulent activity by whoever handles these functions – no matter how trustworthy.  In this example, the performer of these functions could take incoming cash and checks, deposit them into an account that he or she opened and then manipulate the respective customers’ accounts to show that they had paid.

Watching the ship

While delegation is essential, do not leave complete responsibility of watching the ship to others. The business owner should be the first one to open the monthly bank statements. Preferably, the statements should be mailed directly to the owner’s home address. Look at the cancelled checks, and question those that are unfamiliar. Be known for your inquisitiveness. Additionally, review management reports and financial statements closely and look for inconsistencies as well as unusual or missing expenses. If this is difficult, it should be considered necessary to retain an outside professional to periodically review these reports.

By watching your business closely and putting safeguards in place, you will go a long way in saving your hard-earned revenue and your bottom line.

David Landman is a CPA and Certified Fraud Examiner for Gorfine, Schiller & Gardyn, P.A. in Owings Mills, Maryland. As senior manager, he specializes in assisting attorneys in litigation and business owners in fraud prevention . He also gives fraud presentations to all types of businesses. He may be reached at 410-581-6823 or [email protected].

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Local fire departments often deliberately burn existing structures as a training exercise. New fire fighters can practice their skills and techniques, knowing in advance that the structure is uninhabited. Often individuals will donate an old property, possibly even a former residence, to the local fire department. Obviously, where possible, taxpayers would like to take a charitable contribution deduction for their donation.

The first and most important point to note is that there is a significant difference between donating the house itself to the fire department and giving the fire department the right to use the house for training purposes. In the latter case, Sec. 170(f)(3)(A) specifically states that “a contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer’s entire interest in such property”. As a result, no charitable contribution is allowed. (See also Regs. Sec. 1.170A-7(a)(1).)

To get a charitable contribution deduction for the fair market value of the property, the taxpayer must contribute the house itself to the fire department. (This item does not discuss the substantiation and documentation rules required by Sec. 170(f)(11).) In most situations taxpayers want to contribute only the property and not the underlying land. They are also concerned about deeding the property to the fire department and the related costs of doing so.

The regulations and IRS Pub. 526, Charitable Contributions, contain no requirement for an actual transfer of a deed. In fact, a Tax Court decision supports this position: Scharf, T.C. Memo, 1973-265, concerned tax years 1968 and 1969, and although it predates Sec. 170(f)(3) (which was added to the Code by the Tax Reform Act of 1969, P.L. 91-72, effective for contributions after July 31, 1969), in the right circumstances it is still good law.

The case dealt with a “building…given by the [taxpayer] to the fire department partly for the purpose of having it burned down. The transfer was not evidenced by any deed or other formal conveyance.” The underlying land was not contributed.

The Tax Court agreed with the IRS that after the house was contributed and burned down, the taxpayer ended up with a more valuable tract of clear land than he had before the donation. The court nevertheless concluded that the benefit the taxpayer received was far less than the benefit the fire department received. As a result, the taxpayer was allowed a charitable contribution deduction equal to the house’s fair market value.

Conclusion:

Taxpayers can obtain a charitable contribution deduction for the fair market value of property (i.e., land improvements) donated to a fire department to be burned down. The deduction is allowed even when there is no formal deed recording the transfer and even when the underlying land is not transferred. The taxpayer needs to properly structure the transaction so that the property, and not just the right to use the property, is being donated.

From Bernard Leibtag, CPA, MBA

Gorfine, Schiller & Gardyn, P.A.

Owings Mills, MD