In a similar vein there is some speculation that congress will act to repeal the expanded 1099-MISC information reporting it made law with the health care legislation.  Once again, until that actually happens taxpayers must deal with matters as they are now, not as they hope they will be. 

The  Estate tax: short advice is to talk to a professional that specializes in Estate taxes.  GOT that? This is not a DYI activity.  The vast majority of people do not wind up filing the Estate Tax Return, Form 706.  But for those that do, proper advice is essential.  What is different in 2010? Given that in 2010, so far, there is no estate tax, heirs will start with the decedent’s basis for assets (rather than the step up in basis of the assets at the time of death or alternate valuation date). The executor can then increase the value of up to $1.3 Million in assets to the date of death valuation. Up to $3 million extra can be allocated to the surviving spouse.  The basis allocation cannot increase the asset’s basis over its value.  That means for very large estates, heirs will have to pay up, but the capital gains tax is far less than the estate tax would have been AND the heirs control when they pay the tax because it is not due until the heir sell the asset.

Expanded 1099-MISC Reporting: Businesses need to have their accounting systems in place starting 2011-they need to have the ability to track the difference between payment via Debit or Credit Card, verses payment Cash, Check or Barter (to corporations) so they can take advantage of the IRS guidance.  They will need  Form w-9 or equivalent from all businesses with whom they exchange more than $600 per year for goods and/or services in 2011. Realize businesses are supposed to do 28 % backup withholding from businesses that refuse to supply their TIN – businesses should collect the W-9 as soon as they pay a business money in 2011, especially if they know it will add up to more than $600 by year’s end.   

With respect to other tax breaks…

Statement No 1. If your favorite tax break has not been re-enacted, do not plan for it to be.  Set aside some funds to pay the extra tax. 

Statement No.2. Whether before or after the November elections, right now many believe:

• the tax rate cuts for taxpayers with incomes below $200,000 will be extended,
• the 15% capital gains rate will be extended,
• there will be an extension of Section 179,
• extension of Bonus Depreciation,
•  extension of business and individual energy tax credits,
• extension of the state and local property tax standard deduction,
• extension of state and local sales tax in lieu of the state and local income tax deduction,
• extension of tax free distribution from an IRA,
• extension of the research credit for businesses,
• extension of enhanced charitable contributions for food inventory and corporate computer donations for education.

All of these tax cuts are expected to be revived, but see Statement No. 1.  The best advice is for taxpayers must plan around things as they stand now, afterall no one predicted that congress would actually let the Estate Tax expire and yet… it did.

As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.  Please note: Our offices will be closed until October 1, 2010.  We may respond to emails and calls in the interrim, but no staff will be available to meet with you in person until October 1, 2010. 

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, certified financial planner or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

Why? The Economic Substance Doctrine.  The wife had work for years with no pay and the only reason to make the change was to receive a tax benefit.  The change in the farmer’s business practice had no economic substance other than the tax benefit so the benefit was denied.

Bottom Line: When related parties are involved employers should follow all legal formalities and have an economic substance behind them.  The farmer did not have a reason for suddenly paying for work that was previously unpaid, and did not establish that the pay was reasonable for the work done.  Also since the farm and personal expenses were paid from an account co-owned by the farmer’s wife she was essentially reimbursing herself.

See Medical Insurance Plans for Small/Micro Business Owners about one way to do it properly.

See Tips to Avoid Getting Audited, and How to Make Your Auditor Drool for more information about not co-mingling your funds and other ways to steer clear of an IRS audit.

As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, financial plan adviser, or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

So listen up all you gamblers out there.  Keep a diary of all of your trips to the track, the casino etc.  This diary needs to have the type of gaming activity, the date, the location, a statement of wins and loses.  Receipts and tickets (of both winners and losers-don’t trash them) should be kept to substantiate the claim on your tax return later on.  Examples of substatiation: 

• For bingo you would need the number of cards purchased, and amounts collected on winning cards.
• For Keno you need validated Keno tickets, copies of the casino credit reports and casino check cashing records
• For Racing a record othe the number of races that were bet on, amount of the wagers, and amounts lost
• For Slots, the number of the machine and winnings by date machine was played. 
• Tables (Black Jack, Craps, Roulette etc.), the number of the table where you played, casino credit card data indicating where the credit was issued.

Don’t pick up a bunch of losers from the ground.  The IRS will know that you did not make wagers on multiple ponies for the same race. The time to keep the diary, is now, before you hit the moderately big jackpot. As a gambler you know you have up days and down days, and you should be keeping a gambling diary to substantiate those days. 

For casual gamblers winning days are listed in “other income” on the front of the tax return, and you will need to itemize your tax return to take your losers, but because the gaming industry is so influencial gaming losses are NOT subject to the 2% limitation of income – they have there own special line right their on the Schedule A.  However you may not deduct losses on the Schedule A that that exceed winnings reported in other income.  Large write-offs on a Schedule A may trigger AMT though.

In a separate case, the Tax Court ruled there are “professional” gamblers.  It was a case of a couple whose gross wagers exceed $1 Million.  They spent every weekend playing slots that prior users had lost money on.  Although they made money at first they wound up down $200,000 with their retirement accounts tapped out, mortgaged to the hilt.  Then they decided to return to casual gambling.  This couple was allowed to claim losses up to their winnings on  a Schedule C. You can bet this couple had a lot of documentation of their activities. 

As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, financial plan advisor or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

If you are a self-employed proprietor, then you also owe self-employment tax on the money received. 

Payments to cover lost wages are also taxable and if your employer or employer’s agent is making the payment then federal income tax withholding should occur. 

If you do not supply your TIN to the payee then your payments will be subject to 28% back up withholding. 

If you have questions about your BP oil spill replacement income, and BP oil spill related tax matters, there is a toll free number you can call, 1 866 562-5227.  Also BP oil spill victims in financial trouble can call the IRS to suspend collection efforts.

As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, financial plan advisor or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

• The HIRE tax credit is a 6.2%  Social Security Tax break, up to the lesser of 6.2% of the employees wages or $1,000. The employer takes the credit on their payroll tax forms, by reducing the employer portion Social Security to zero for eligible employees.
• Then there is a HIRE Retention Credit which kicks in 2011 if a new employee is retain for 52 weeks and does not see a significant change in pay during the second half the year.  It also is the lesser of 6.2% of wages or $1,000.
• Work Opportunity Tax Credit (WOTC) is $40% of the first $6,000 in wages and could be as much as $2,400.  Of course WOTC applies to a specific class of individuals who face difficulties getting into the workforce: Welfare recipients, disabled veterans, residents of certain geographic locales, and disconnected youth-so not all new hires will qualify for WOTC, but some might. 
•  However the HIRE tax credit can not be taken with the WOTC.  But the HIRE Retention Credit can be taken with WOTC. 
• Finally, if an employer was taking the COBRA assistance credit, because they laid of a given employee, and that employee was  laid off for more than the 60-day period, the employer can rehire that employee, who will be eligible for HIRE tax credit too. 

If an employer does hire a new employee that qualifies for HIRE and WOTC its probably a good idea to see which tax credit is the most beneficial to them.  An employer can elect to bypass HIRE in favor of WOTC.  If an employer has already taken HIRE on an employee and decides that WOTC would be a better deal, they need to file an amended employment tax return, 941-x, for each quarter they took the HIRE and repay the social security tax.  Once that is done the employer can take WOTC. 

More information on the HIRE credit.  Employees are to certify that they have not been employed more than 40 hours in the 60 day prior to hire using Form W-11 or comparable document. The 60-day period of unployement must be continuous but can bridge 2009-2010.   The document is to be kept in the employer’s files.  Electronic versions with electronic signatures are valid. Scanned images of signed paper W-11s are valid.  W-11s and equivalent need not be notarized. The W-11 must be signed, completed and in the employer’s hands before the employer can claim the HIRE credit on their form 941.  If the employer realizes they have claimed the credit for an ineligible employee they must amend the 941 on which they claimed the credit and pay the tax.  Temp agencies are eligible for the credit, so if the temp agency claims the credit for a given employee, the employer can not; employers should negotiate with temp agencies to pass the exemption saving through to them.  The credit is only for wages actually paid (not earned) during March 19, 2010 and December 31, 2010. 

In other unemployment news, the COBRA subsidy has been expanded to included employees laid off through May 31, 2010 and goes through December 31, 2010.  Former employees are still only eligible for 18 months of COBRA assistance, but for newly laid off workers, this subsidy is some good news. 

Also the time to close on a home, get an occupancy certificate, and qualify for the Home Buyer’s Credit is extended to August 31, 2010-however the contract still must have been entered into by April 30, 2010. 

As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, financial plan advisor or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

Millions on unemployment need congress to act to receive extended benefits that were already in the works.  As an unemployed person reaches the end of their current tier of benefits, they will not be receiving benefits under the next tier unless congress acts.  Even if congress acts there is no plan to extend benefits beyond 99 weeks. 

As for other expiring legislation the usual suspects are in the offing:

• Deductions for college tuition
• Deduction teachers supplies
• R&D credit,
• Farm machinery write off over 5 years
• Leasehold improvements over 15 years.

There is talk they will revive:

• Writing of state sales taxes in lieu of state income tax,
• tax-free direct payouts to charities from IRAs,
• the extra standard deduction for personal property taxes.

Some new tax breaks they are kicking around

• A break on capital gains taxes on sales of stock for owners of a certain small companies, for stock held over 5 years,
• A larger deduction for business start up costs,
• Pension funding relief,

The estate tax talks are also underway, but are being addressed separately, and law makers plan to reinstate it retroactively, but may face a legal challenge. Congress is deciding whether to exempt $5M and have a tax rate of 35% or or $3.5 M and have a 45% tax rate. Nobody wants it to drop back $1 M in 2011. Currently there is no estate tax. 

 Alternative Minimum Tax (AMT) is also not in the current bill either-if congress does not pass higher AMT exemptions then they will fall back to pre-2001 levels and AMT will affect millions more taxpayers.. 

In other news the IRS is denying protective claims of refund for FICA taxes on severance pay for laid off workers.  Short of filing a lawsuit against the IRS, companies can file an administrative appeal with the IRS.  The appeals officer can take into consideraton the hazards of litigation and offer a settlement, but if no agreement is reached the company still has two more years to sue the IRS for the refund and by then the IRS appeal of the lower court ruling should be decided. 

In 2011 all paid tax preparers must be registered.  Starting in September the IRS should have a system in place for unregistered preparers to get a preparer tax identification number (PTIN).  Licensed preparers that already have a PTIN will have to re-register it too.  The fee for registration is slated to be between $100 and $200. Only unlicensed preparers will be subject to IRS competency testing; unlicensed preparers will have 3 years to pass the competency exam.

UBS turned over the names of 4000 account holders who may have stashed money overseas to avoid taxes.  If you are among these 4000 you may want to consider turning yourself in and throwing yourself on the IRS’s mercy in order to avoid criminal prosecution.  You may want to get a lawyer. 

A recent ruling (Shiekh, TC Memo, 2010-126) upholds passsive loss rule for real-estate pros with multiple rental properties-they must attach a statement to the tax return saying the properties are being treated as one activity in order to satify material participation rules to be treated as a nonpassive activity.  Merely grouping them all together on on schedule E does not qualify as a valid election to group the rentals into one activity for material partipation purposes.  

Business should be gearing up now to report health benefits received in 2010 on W-2s in 2011.  A health plan’s value is the same as would be used to compute the allowable premium for COBRA coverage. 

Stay tuned.

As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, financial plan advisor or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

AZ Withholding Tax Change: On July 1, 2010 an employer must withhold Arizona state income tax according to the new A4s, which they should have obtained from all of their employees prior to that date. We have prevously  blogged about the change coming to the Arizona A4. On July 1st Arizona’s state income tax withholding rate will decouple from the federal withholding rate. Every employee needs to do a new A4. An employer should not advise employees about how to complete the form except to point out the form comes with worksheet to assist them. That said, a quick and dirty calculation would be to see how much tax you owed to the state last year and divide it by your Arizona state income; but of course this assumes that your income, expenses, marital status, dependents, items of credit and deduction, etc. are similar to last year, which it may not be.

AZ Child Support Garnishments Change: If you are an employer who does garnishments for things like child support in Arizona through CLEARINGHOUSE, please be advised that the fee will increase from $2.25 to $5.00  starting July 1.

In addition to these changes that go into effect in less than a week, there are other things you should aware of. 

Transaction Privilege Tax License Change:  You are probably aware that the Arizona “sales tax” increased 1% statewide on June 1st, and you should have already adjusted your software, point of sales systems and registers.  However sometime in September the AZ DOR is going to be sending out Transaction Privilege Tax renewal forms.  The only people who won’t have to renew their licenses are those who got their licenses on or after July 1, 2009.  The law increases the fee to obtain, change or renew a license to $40 up from $12 for a period of 1 year and 2 weeks starting June 15, 2010;  means the change will be in effect for the state’s entire upcoming fiscal year.  It’s not expected to be a big revenue raiser, but the AZ DOR hopes to get people who have never filed a TPT return or who haven’t filed in a long time off the sales tax rolls.  If you’e had your license a year or longer, you will need to pay for the renewal if you want to keep it.

Nonconformity with Federal 2009 tax forms: This change quietly went into effect on April 27, 2010.  The State of Arizona decided not to conform to the Federal Tax code after the first tax deadline had passed.  If you filed your tax form on or before April 15, 2010 and you had any of the following items of income, deduction or credit on your tax return-you may need to file an amended Arizona tax return and pay additional tax.  You do not need to amend your federal tax return, just Arizona’s. 

• Unemployment: you need to add the $2400 the federal government exempted from gross income back into your Arizona income and pay the additional tax.
• Automobile Sales Tax deduction: you need to remove the automobile sales tax from your deductions, which will increase your income and you may owe additional tax.
• Haiti Contributions made between January 11 and before March 1, 2010 that were taken as a charitable deduction in 2009.  These contributions will be eligible charitable deductions on your Arizona taxes in 2010.  Again this will increase your income and you may owe additional tax.
• Discharge of Indebtedness (DOI) Income From Business Indebtedness Discharged by the Reacquisition of a Debt Instrument-the feds allowed it to be added ratably over 5 years, AZ did not. 
• Original Issue Discount (OID) on Reacquisition of Debt Instrument-the feds allowed the income to be deferred, AZ did not. 
• Special Federal Net Operating Loss (NOL) Carryback Rules for 2008 and 2009 Losses-the feds allowed a special longer carryback period of 3, 4, or 5 years, instead of 2, AZ did not. 

 The amended tax form is 140X for individual taxpayers and it can be found on the AZ DOR website.  There is more information about AZ 2009 nonconformity here. These links take you to the Arizona Department of Revenue website and you will be subject to their privacy policies etc.; Art and Business Consulting LLC is not affilicated with the AZ DOR. 

If you live in another state, check with your state’s department of revenue regarding conformity issues with respect to your state. 

As always Art and Business Consulting is here to help.  If you need help filing an amended Arizona tax return, or any other with a small business and or tax issue, please give us a call.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, financial plan advisor or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

• Payments made by a partnership on behalf of a partner are deductible as Guaranteed Payments to the partners, not as medical insurance expense/employee benefits.  The partnership must reimburse the partner if the partner pays for the insurance in their own name. 
• For 2% shareholders such payments must be included in their wages subject to the usual withholding taxes. 2% shareholders must be reimbursed by their S-corporations in order for the insurance to be considered established under the business to qualify for the adjustment.
• Self-employed persons, AKA Sole Proprietors, can take the Medical Insurance Adjustment to 1040 Income, whether they purchase the insurance in their own name or the name of the business. 

However there is a way to obtain medical insurance for business owner that is deductible as a business expense.  Based on Section 105 of the Internal Revenue Code, a small business owner who can demonstrate employable interest in the business can become eligible for an employee benefit program. All business filing types are eligible including sole proprietors, partnerships, C- and S- corporations. Section 105 HRA plans are designed specifically for small business owners that can legitimately hire their spouse. Because the spouse/employee can be reimbursed for family expenses the employer indirectly benefits as well. This type of plan is made possible by Section 105 of the Internal Revenue Code, Revenue Ruling 71-588 and IRS Letter Ruling 9409006. For C-corporation and S-corporation owners it will not be necessary to use the spouse/employee method. The corporation becomes the employer and the owner is an employee as long as they are an employee receiving a regular paycheck.

So you are saying, “So what.  If I can take the deduction on my personal tax forms why would I care?”  Whereas it is true that up to 100% of the payments made for health insurance maybe deductible on your 1040, which saves on the associated income tax, all those premiums will be subject to Self-employment taxes as well.  Under a section 105 Plan, the amounts paid for the plan premiums will not be, a tax savings of 15.3% of those premium costs.  Furthermore out-of-pocket medical expenses are only deductible if you itemize, subject to the 7.5% limitation of income; under a section 105 it may be possible to write off 100% of out-of-pocket medical expenses too. 

Setting up a Section 105 Plan is not a trivial exercise.  Care must be taken when establishing a Section 105 HRA to ensure that a legitimate employer/employee relationship exists with the family member. In 1999 the IRS Industry Specialization Program issued a paper that said: “The extent and nature of a spouse’s involvement in the business operations is critical. Although, part-time work does not negate employee status, the performance of nominal or insignificant services that have no economic substance or independent significance may be challenged. Merely calling a spouse an “employee” is not sufficient to qualify a non-working spouse as an employee”.

If you are going the employee/spouse route, the spouse must provide meaningful services to the company, those services must be necessary (have economic substance), and the spouse’s compensation, which includes the Section 105 plan, must be reasonable. Furthermore it is essential that business and personal funds not be co-mingled.  e.g. If you hire your spouse to do filing for 4 hours a week and then pay them $10/per hour and provide them with family medical plan costing $800 per month, you can bet the IRS is going to look askance at compensation which is 82% benefits and 18% hourly wages.  It probably won’t fly. 

How do I establish a section 105 plan?  If you are a business owner, you are going to have to hire your spouse.  Really, we are talking the whole employment enchilada here. Your business will need an EIN for payroll purposes.  You will need an employment application, w-4, I-9, New Hire paperwork and other items from your spouse, just as you would for any other employee.  You will need to keep a record tracking hours your spouse worked and a description of your spouse’s duties.  You will need to pay reasonable compensation for those duties on a regular payroll schedule.  The household account and the business account must be separate so that paychecks and reimbursed medical expenses won’t be deposited back into the account they came out of.  Your spouse/employee will need to be the policy holder.  Finally you will need the Section 105 plan documents. 

In order for a Section 105 plan to work there are a lot of rules that must be followed, which is why Art and Business Consulting LLC recommends you get help if you think your business might qualify for a one.  Section 105 plans are really outside Art and Business Consulting LLC’s bailiwick, although we could certainly advise you on the related tax issues.  So we have found someone who does do Section 105 plans.

Art and Business Consulting LLC is not affiliated with the following entity, Total Administrative Service Corporation (TASC), but we did meet with Todd Kuehn, Regional Sales Director-Scottsdale Region Office TASC  at an Arizona Society of Enrolled Agents event.  TASC’s bailiwick does include Section 105 Plans; they are a third-party benefits administrator based out of Madison, Wisconsin, can simplify compliance and the administrative procedures associated with Section 105. According to their website, TASC has been doing just that for over 30 years with BizPlan. They even offer a savings guarantee and a full Audit Guarantee!

For more information see http://www.tasconline.com/buytasc/affiliate/bizplan/460163769708.  Please note if you click on this link you will be navigating away from our website; you will be subject to their policies and we have no idea what those policies are. Art and Business Consulting LLC has not received any gifts or other compensation for mentioning these folks, and we are not specifically endorsing them. 

As always Art and Business Consulting is here to help.  If you need help with a small business and or tax issue, please give us a call.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, financial plan advisor or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

What is Form 8027? It’s the Employer’s Annual Information Return of Tip Income and Allocated Tips.  It’s required of employers who operate large food or beverage establishments.  If more than one establishment operates under 1 roof each establishment must provide a Form 8027 if receipts are recorded separately, and file form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips as well along with the form 8027.

What is a large food or beverage establishment?

• It serves food or beverages to be consumed on the premises.
• Tipping is customary
• More than 10 employees, who worked more than 80 hours, were typically employed on the premises in a typical business day.  The number of employees includes those who are not necessarily tipped, such as bussers, cooks, kitchen staff, wine stewards, seat persons etc.  but it does not include a person who owns 50% or more of the stock in a corporation while working in the business.

The Instructions for Form 8027 includes a worksheet to determine if Form 8027 is required.  You will take ½ the average of the number of hours worked/per day in the month with the greatest gross receipts and add it to ½ the average of the number of hours worked/per day in the month with the lowest gross receipts.  If this number s more than 80 hours then your firm is required to file Form 8027.

If business is a new business, and has more than 10 employees who worked more than 80 hours that were typically employed on the premises in a typical business day for 2 consecutive months, the business will be required to file form 8027 covering the remainder of the year starting with the next pay period after they meet the requirement.

Businesses not required to file form 8027:

• Establishments that operated less than 1 month during the year.
• Establishments where tipping is not customary such as fast food where 95% of the sales are carryout or cafeterias with a 10% or more service charge.

Forms 8027 are due on March first of the following year, or March 31 if filed electronically.  An extension of time to file is requested using form 8809, Application of Extension of Time to File Information Returns, and can be filed no later than March 1.  There are penalties for failure to file unless the firm can show reasonable cause for the delay.

You will be reporting Gross Receipts.  You may have Non-allocable Receipts for carryout and items for with a 10% or more service charge that are not included in Gross Receipts.  Complimentary Items for which tipping is customary must be included in the Gross Receipts; e.g. drinks at a casino, tipping is customary – include them in Gross Receipts, fruit basket in hotel room, tipping is not customary – do not include them in Gross Receipts.   You must allocate tips among employees if total tips reported to you during any payroll period are less than 8% (or the approved lower rate; the burden of proof for a lower rate rests with the petitioning employer). Employers-you need employees to report tips to you. When you allocated tips you must include the allocated tips on the employee’s W-2, which is due to the employee by January 31 of the year following.  The instructions for Form 8027 provide specific instructions for completing the form.

Tips Reporting-Employees

• The employee must report ALL tips if the employee receives more than $20 per month in tips. The employee may have heard all they need to do is report tips equal to 8% of sales, or 10%, or just charge-card tips. That’s a big myth, and could get the employee in legal trouble if they earn more.
• Employees should keep a daily tip diary, so they have a record to show to the IRS to prove earnings.
• Employees need to report tips to their employers if they earn more than $20/month.  They must report these tips by the 10^th day of the month following.  The employer can require reporting more often….
• The employer needs to know this tip income so they can properly withhold Social Security, Medicare and other payroll taxes from the employee’s paychecks.
• Failing to report tip income can resulting in penalties, interest, a big bill for the unpaid FICA taxes and possible jail time.
• Sometimes the employee owes more payroll taxes than the wages on their paycheck will cover.  The employee may either pay their employer money out of their tips to cover the unpaid Social Security Taxes avoiding underpayment of estimate tax penalties, OR they may pay estimated taxes. The employee also may need to set aside some money to cover their taxes come tax time.

Tips Reporting-Employers

• Employers are required to gather tip reports from their employees.
• The employer is required to pay the employer’s share of taxes on employee tips, and withhold all payroll taxes for tips and wages, from the wages actually paid to the employee.
• Some employers must file form 8027 and allocate tips.
• Sometimes the employee owes more payroll taxes than the wages on their paycheck will cover.  In this case the government requires the employer to pay withholding taxes in a certain order. The employer needs to report Uncollected Social Security Taxes on the employee’s w-2.

Are you required to file Form 8027? Are you properly recording and withholding taxes for employee tips?  As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

The FICA tax break only applies to the Employer’s Social Security portion – the employer must still pay the Medicare Tax and collect both the Social Security and Medicare employee portions.

• The newly hired employee cannot have worked more than 40 hours in the last 60 days  in order to be eligible for this tax credit.
• The employer cannot replace current employees unless those employees are discharged for cause or the employee quits voluntarily.
• The newly hired employee cannot be related to the employer.
• The newly hired employee cannot directly or indirectly own more than 50% of the company.
• A qualified employee may work any number of full-time or part-time hours.

The tax break for March will show up as a credit on the Q2 941; for the rest of the year the employer can take the break into account when making regular payroll deposits.  This tax credit CANNOT be taken in conjunction with the Work Opportunity Tax Credit (WOTC).  Employers also CANNOT double up using the FICA Tip Credit either.   The second half of the credit kicks in after the employer has retained the employee for a year; the tax credit is the lesser of 6.2% of the employee’s wages or $1000.

As eager as an employer might be to take advantage of this tax credit, they should not use it as a condition of hire, which would probably be a discriminatory hiring practice.   If an employer decides to hire someone they should be careful about when and whether they ask the employee if they are long-term unemployed until after making a hiring decision.  Once they decide to hire someone then they can ask them to certify that they have not been employed for more than 40 hours in the last 60 days.

As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.