Lancaster Law Blog : Lancaster PA Lawyer & Attorney : Russell Krafft & Gruber Law Firm : Pennsylvania : Lancaster's Legal Link

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The IRS issues its Standard Mileage Reimbursement Rate each year. The rate determines the amount that can be used as a deduction for business travel and serves as a guideline for employers who reimburse their employees for the same. It reflects not only fuel costs, but also factors in average wear and tear on a vehicle.

In July 2011, the Internal Revenue Service responded to high gas prices by raising their mileage reimbursement rate from 51 cents to 55.5 cents per mile. In Notice 2012-1, the IRS indicated the new rate, which went into effect on January 1, 2012, would remain the same. The only change this year is that the rate for medical or moving expenses was raised from 19 to 23 cents per mile. The rate for charitable purposes remains at 14 cents per mile.

While there are generally no Pennsylvania laws requiring employers to use the IRS rate, there are tax advantages for doing so. The IRS will deem employers who make qualifying reimbursements up to 55.5 cents per mile as meeting their accounting requirements, thus no income reporting or withholding is required for those reimbursements. However, employers need to make sure that their employees have provided adequate proof that the mileage was strictly for business use. Qualifying employees who are not reimbursed for their business mileage will be able to deduct 55.5 cents per mile on their individual tax returns.

As an interesting side note, AAA's website offers a gas price tracker ("AAA Daily Fuel Gauge Report") that can be used to monitor gas price averages and compare averages in different geographical areas. This tool can be helpful in analyzing fuel expenses against reimbursement rates and keeping track of the fluctuation of gas prices.

According to the tracker, as of the date of this post, the national average for regular gas is $3.374 per gallon. Pennsylvania's average is slightly higher at $3.457 per gallon. At $3.439, the average in Lancaster County is also higher than the national average, but a fraction lower than the state average. A year ago, the gas average in Lancaster was $3.146, showing a rise of approximately $0.30 per gallon in the area over the past year.

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I would like to thank Timothy Kershner, CPA for providing his accounting and tax expertise for this blog article.

Timothy Kershner, CPA is a partner at the accounting and consulting firm of Walz, Deihm, Geisenberger, Bucklen & Tennis, P.C. He has more than 20 years of experience in public accounting and operates as the partner in charge of the firm's accounting and consulting division.

One important decision most business owners must confront is whether to treat certain workers as employees or independent contractors. An employer who makes the mistake of incorrectly classifying an employee as an independent contractor can face tax consequences and incur heavy penalties. Fortunately, the Internal Revenue Service ("IRS") has launched the Voluntary Classification Settlement Program (“VCSP”), which will enable many employers to reclassify workers as employees with minimal penalties. For those who are unsure of whether they are correctly classifying their workers and are concerned about possible audits, the VCSP can work as a "reset" button that offers a fresh start.

Employees vs. Independent Contractors

Before addressing the VCSP itself, it is important to understand a few basic concepts regarding tax reporting and withholding requirements for employers. If a worker is treated as an employee, the tax law requires the employer to withhold certain portions of the worker’s pay and pay those amounts directly to the federal government. The amounts withheld are generally reported to the IRS on payroll tax returns and to the employee on IRS Form W-2. In addition, the employer must remit their portion of payroll taxes.   

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In a recent blog article, Christina Hausner explained how Lancaster County residents affected by the recent flooding may be eligible for property tax relief. In addition to those tax advantages, taxpayers may be able to deduct uninsured losses resulting from catastrophic damage. 

The Internal Revenue Service allows deductions for "casualty losses," which are defined as the complete or partial destruction of a taxpayer’s property resulting from an identifiable event that is sudden, unexpected and unusual. Disaster losses are casualty losses that occur within an area that has been declared a disaster area by the federal government. 

There are two methods of determining the dollar amount of a disaster loss. The first method is to have a qualified appraiser determine the fair market value of the property immediately before and immediately after the disaster, the difference of which would be the loss. The second method takes into account the actual cost of repairing the property in determining the loss, which can only be done when the property is actually repaired. In addition, no part of a loss for which the taxpayer has been reimbursed or for which there is a reasonable prospect of reimbursement is deductible. Another limitation is that disaster losses are generally subject to a floor equal to 10% of the taxpayer’s adjusted gross income (AGI). This means that the loss can only be taken to the extent that it exceeds 10% of the taxpayer’s AGI.

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On September 15, Aaron Zeamer blogged about how the flooding in Lancaster County resulted in an extension of income tax deadlines. Additional tax relief as a result of flooding could be a reduction or elimination of property taxes. If you have suffered a "catastrophic loss" due to mine subsidence, fire, flood or other natural disaster which exceeds 50% of the market value of your real property prior to the loss, you have the right to appeal your real estate assessment to the County Assessment Board. The Board has the duty to reassess your property to reflect the loss in value from the date of the loss to the end of the taxable year. In addition, any property improvements made after the loss in the same tax year shall not be added to the assessment roll for the remainder of the tax year but shall be added for the following year. If this is done, tax authorities need to reflect the reduced assessment in the form of a credit for the succeeding tax year, or if the property owner applies, taxing authorities shall pay a refund. 

We recognize that the broad scope of the term "catastrophic loss" probably means that you may have bigger problems to face than getting your property taxes reduced, but in the event that you have suffered such a loss, this is another means of relief. 

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The flooding in Lancaster County has inconsistently affected residents and businesses. Some residents have come away from the flood with absolutely no water at all in their basements and others have seen major damage from the flooding. My own neighborhood effectively turned into an island and getting home seemed impossible without a row boat. On September 13, 2011, Lancaster County was declared a Federal Disaster Area. This declaration can have significant impact, not only for those trying to get the water out of their basement or who have been severely affected by the flooding, but also for those who had tax deadlines this week.

Lancaster County's Website has some very helpful links and information for those who were affected by the recent flooding. On their website you can apply for federal assistance through FEMA, and other federal and state agencies, including unemployment assistance for individuals who find themselves unemployed due to the effects of Hurricane Irene or Tropical Storm Lee.

For other individuals and businesses in Lancaster County and surrounding counties including Adams, Bradford, Columbia, Cumberland, Dauphin, Lebanon, Luzerne, Lycoming, Montour, Northumberland, Perry, Schuylkill, Snyder, Sullivan, Susquehanna, Union, Wyoming, and York counties, the declaration making these areas a Federal Disaster Area has extended some important tax deadlines until October 31, 2011, even if you were not directly affected by the flooding. This extension includes corporations and other businesses that previously obtained an extension until September 15 to file their 2010 returns, and individuals and businesses that received a similar extension until October 17. It also includes the estimated tax payment for the third quarter, normally due September 15. You can go to the IRS website for more comprehensive information about the tax extension.

The Federal Disaster Area determination will also allow taxpayers in the affected areas to claim disaster-related casualty losses on their federal tax returns for either this tax year or last year. 

Please also remember that if you take advantage of the deadline extension, you may still receive a penalty notice from the IRS; you will need to contact the IRS using the number provided on the notice. You may need to confirm with the IRS that you are in an affected area and are entitled to the extension without penalty.

The PA Department of Revenue is providing a similar extension for the affected counties. Their website lists additional details regarding the special extension for affected PA taxpayers.

Countless Lancaster County residents were affected by these two storms. Regardless of the degree with which the storms may have impacted your home or business, be aware that you may be eligible for some benefits or assistance due to the Federal Disaster declaration.

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The Pennsylvania State Tax Equalization Board recently changed the common level ratio for Lancaster County from 1.33 to 1.31. The common level ratio is the ratio of assessed value of properties to fair market value for each county.  If the fair market value equals the assessed value, the ratio would be 1.00, which is the case following an assessment.  If an assessment occurs next year, the ratio will fall to 1.00.

The common level ratio is used annually for the distribution of state subsidies for each school district and also as a measure of the fair market value of real estate for calculating realty transfer taxes.  The changes in the common level ratio reflect the changes in property value.  It is also a good measure of cost of living.  The common level ratio last year in Philadelphia, for example, was 3.13.

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Even though gas prices are slowly falling, they are still relatively high. In fact, they are so high that the Internal Revenue Service has agreed to raise the standard mileage rate for operating a vehicle for business purposes from 51 cents to 55.5 cents per mile. The new rate applies to qualifying expenses that are both incurred and reimbursed on or after July 1, 2011. I think most would agree that despite the increase, the IRS will still not be winning any popularity contests.

While there are generally no Pennsylvania laws requiring employers to use the IRS' rate, there are tax advantages for doing so. The IRS will deem employers who make qualifying reimbursements up to 55.5 cents per mile as meeting their accounting requirements, thus no income reporting or withholding is required for those reimbursements. However, employers need to make sure that their employees have provided adequate proof that the mileage was strictly for business use.

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It doesn’t happen often, but sometimes the government realizes that it may have bitten off more than it can chew and reconsiders its actions. Such reassessment occurred twice this past April when both the Pennsylvania and federal legislatures repealed unpopular portions of legislation they had previously enacted. 

On the state level, the legislature repealed a 2009 addition to the state’s Uniform Construction Code which required residential builders to include sprinkler systems in new construction. Some have estimated that sprinklers add $2,000 to $4,000 to the price of an average new residence. Many builders and real estate professionals asserted that the additional cost would depress an already struggling home builders’ market. Thus, last month, the state legislature reconsidered and authorized a repeal of the provision and Governor Tom Corbett signed the repeal into law on April 25.

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A few weeks ago I shared the good news that the IRS extended the tax deadline to April 18 this year.  If you’re like me, you probably thought, “That’s nice, but two days doesn’t make that much difference so I’ll just have my taxes done by April 15.”  Now that the deadline is fast approaching I’ve been asked by a number of friends and clients if the new deadline also applies to state and local taxes.  The PA Department of Revenue announced some time ago it had also extended the deadline for PA personal income tax returns.  However,  if you check out the homepage on the Lancaster County Tax Collection Bureau’s website you will see they have extended hours on Friday, April 15, but return to normal working hours on Monday, April 18.  They did, however, confirm that taxpayers have until Monday to file individual returns. In addition, taxpayers can now file their Lancaster County returns online.

Despite some information online to the contrary, the instructions for IRS Form 1040-ES lists April 18 as the due date for federal estimated payments as well. Filers who have applied for an extension will also receive a reprieve from the normal October 15 deadline which falls on a Saturday in 2011. Final returns are due on Monday, October 17.

Here are some parting thoughts as you take on the dreaded task of preparing your 2010 tax return.  It was Benjamin Franklin who said, “The only things certain in life are death and taxes.”  I recently read an anonymous quote in response to Franklin’s famous words, “Death and taxes may be certain, but we don't have to die every year."

**When this article was initially posted I did not include information regarding PA State Estimated Tax payments.  According to the PA Department of Revenue website Pennsylvania 2011 Personal Income Tax Estimated Payments are due on April 15.  Please note this deadline has not been extended until April 18.

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For most tax professionals and many taxpayers, April 15^th stands out every year as the day when tax returns and any related tax payments are typically due. However, this year we will have three extra days to file returns and make payments. 

The filing deadline for 2010 returns has been pushed back to Monday, April 18, 2011. Why? It turns out that Friday, April 15, 2011, is observed as Emancipation Day, a legal holiday in the District of Columbia. Relevant laws state that District of Columbia holidays affect tax deadlines just as federal holidays do because the offices of the Internal Revenue Service will be closed. The April 18^th deadline applies to any return or payment normally due on April 15^th, as well as to the deadline for requesting a tax filing extension and to making 2010 IRA contributions. Moreover, taxpayers who request an extension will have two extra days to file their returns because October 15, 2011, falls on a Saturday.

As an interesting side note, Emancipation Day celebrates the day in 1862 when President Abraham Lincoln signed the Compensated Emancipation Act for the release of slaves in the District of Columbia. This occurred approximately nine months before President Lincoln issued the famous Emancipation Proclamation. For more information on Emancipation Day, please see the District of Columbia website. 

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Since publishing my recent post regarding The Adoption Tax Credit and Special Needs Children we have received numerous comments and emails asking for clarification. More specifically, most inquiries are related to what evidence is required to prove that a determination of special needs has been made by the state when taxpayers are claiming the adoption tax credit on their 2010 tax return. This issue has arisen because, in many cases where a child would otherwise fit the definition of a special needs child, the adoptive parent has nothing from the state indicating that a determination has been made. 

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A few months ago I wrote about a case I argued in the United States Court of Appeals for the Third Circuit. The case concerned whether an IRS regulation requiring taxpayers requesting equitable innocent spouse relief to request the relief within two years was valid. The effect of the regulation is that any request made after two years would be rejected, regardless of how inequitable it would be to deny the request, which I argued was contrary to Congress' intent when the law was passed in 1998.

On January 17, 2011, the Third Circuit released its Opinion which leaves the issue ultimately still undecided. In the appeal, I argued that the IRS's regulation was invalid because Congress intended the section to not have a statute of limitations, but if the regulation was valid, it was subject to "equitable tolling," which means that the statute of limitations would not bar a taxpayer from requesting relief if the taxpayer was prevented from discovering the liability or requesting relief within two years. The court held that the regulation was valid, with Judge Ambro dissenting, and the court sent the case back to the Tax Court to determine if equitable tolling applied to the regulation, and if so, whether the taxpayer was entitled to tolling in the case. I believe the court saw equitable tolling as the preferable result for two reasons. First, it has a similar effect to finding the regulation invalid. It allows taxpayers that file for relief beyond two years to still receive innocent spouse relief if they can show a good reason for doing so. Second, it allowed the Third Circuit to reach this result without disagreeing with the Seventh Circuit, which found the regulation to be valid about six months before our appeal.

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The Internal Revenue Service has announced a new standard mileage rate for 2011, which is generally used to estimate the costs of operating an automobile for tax purposes. The new rate, effective January 1, 2011, is 51 cents per mile, up one cent from last year. In addition, the standard mileage rate for medical or moving and medical expenses has been raised from 16.5 to 19 cents per mile, and the rate for charitable purposes remains at 14 cents per mile.

While there are generally no Pennsylvania laws requiring employers to use the IRS' rate, there may be some tax advantage for doing so. The IRS will deem employers who make qualifying reimbursements up to 51 cents per mile as meeting their accounting requirements, thus no income reporting or withholding is required for those reimbursements. However, employers need to make sure that their employees have provided adequate proof that the mileage was strictly for business use. Qualifying employees who are not reimbursed for their business mileage will be able to deduct 51 cents per mile on their individual tax returns.