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Midyear Tax Update 2010.

Wednesday, June 30th, 2010

So we are halfway through the year; congress has done nothing except pass health care reform. There are rumors that incumbents are so terrified of losing their jobs, that they are afraid to act.  I don’t know about you, but congress’s inactivity also speaks to me-it’s congress’s job to make these decisions so that Joe & Jill average taxpayer can plan their taxes; right now its hard to say how much taxes they should be withholding.  At the rate congress is are going none of these issues will be addressed until after November elections.  At that point several issues may be resolved in the lame duck session, which is far too late for tax planning. 

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.

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More Changes For AZ Taxpayers

Friday, June 25th, 2010

July 1 is the start of the Arizona State fiscal year which is why several changes are going into effect on that date. 

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.

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Health Care Benefits On W2 Will Not Be Taxed

Friday, June 18th, 2010

Many people have heard of one of the provisions of the Patient Protection and Affordable Care Act is that their employers will be reporting the value of their employer-provided health care coverage on their W-2; that statement is true.  Congress apparently wanted employees to better appreciate what their employers spend on them. 

Unfortunately there is a hoax email floating around reporting that those benefits will be taxable benefits; the email states Kiplinger has written an article supporting this conclusion.  The email continues on hysterically about how much their taxes will go up. Folks, I get the Kiplinger letter, and they have stated that those health care benefits reported on W-2s will not be taxed; lawmakers definitely did NOT vote to tax workers on their health care coverage. 

The W-2s will report the value of your health care benefits to you and nothing more.  You will not be taxed on those employer-provided health care benefits (unless you are already being taxed on that income because your plan is not paid pre-tax).  The only thing that will change is you will now know how much your employer chipped in for your health care benefits. 

Thats it; the email is a hoax. 

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.

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Restaurants, Form 8027 & Tips Reporting For Employers & Employees

Friday, May 21st, 2010

An independent contractor suggested that although the IRS receives about 50,000 Form 8027’s in a given year it should be receiving around 3 times that amount.  As a result, the IRS will focus exams on firms that failed to file form 8027.

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 10th 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.

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Individuals – Start Thinking About 2010 Taxes Now

Friday, May 7th, 2010

Did you get a huge tax refund this year?  Most people feel pretty good about that until they realize they gave the government an interest free loan of all that money they just got back. 

If you received several thousand dollars back from the IRS this year, you may want to consider completing a new W-4 (including the worksheet), and increase your allowances. Take that “extra money,” stuff it in an interest bearing savings account and maybe you can earn some interest and build that nest egg at the same time. 

Conversely if you owed the government money you may want to make adjustments as well, especially if you paid a penalty for underpayment of taxes over the year. 

So far the tax brackets are very similar to last year.  Also the standard deduction is the same except for a modest $50 increase for Head of Household filers.  The amount for each exemption is also unchanged. 

As in the past the brackets for the Earned Income Credit have been adjusted for inflation and increased slightly.  The maximum credit is the same for taxpayers with no children and increased a few dollars for people with children. 

There are some tax breaks that have expired in 2010.

  • The exclusion of the first $2400 in unemployment income has expired at the end of 2009.  Be sure to include it in your estimated tax calculations for 2010.
  • The sales tax/excise tax dedution for the purchase of a new automobile purchase expired too.
  • So did the increase in the standard deduction for real-estate taxes and losses in a federally declared disaster area. 
  • Time has run out for those wishing to obtain the First Time home-buyer credit.  Only taxpayers that entered into a binding contract by April 30, 2010 can take the credit IF they close by June 30, 2010.  If a taxpayer takes the credit for a 2010 purchase on your 2009 taxes, they may not take it again in 2010. 

Those who got in on the First Time HomeBuyer Credit when it was a $7500 interest-free loan from the government instead of the tax credit it is today, will have to start paying it back this year (the original “credit” is paid back $500/year for 15 years).  Be sure to include this extra $500 tax into your calculations for withholding or estimated tax payments for 2010. 

Tax credit that are still around for 2010?

  • The American Opportunity Credit for education. The credit (up to $2,500 on the first $4000 of educational expenses in the first 4 years of school),  is not just for tuition anymore, but has been expanded to include books and supplies too. 
  • Energy credit for efficient doors and windows. The tax credit 30% of the cost of the new qualified doors and windows to a maximum $1,500 over the 2-year 2009-2010 tax year period.  If you took the full credit in 2009, you can’t take it in 2010. 
  • Energy credit for alternative energy such as wind and solar is still 30% of the expenditure, but there is no cap.  You will need to check with the manufacturer to be sure their equipment qualifies. 
  • There is the plug in electric drive vehicle credit for qualified electric vehicles purchased after December 31, 2009 running through 2104.  The credit disappears after the first 200,000 vehicles per manufacturer have been sold. 
  • Hybrid Vehicle Tax Credits are still available through the end of this year. Several manufactures have not yet sold 60,000 cars so they are still available for this tax credit.  Toyota, Ford and Honda already have sold 60,000 hybrids and are NOT eligible for the credit anymore.

The maximum pre-tax contributions to various retirement plans is unchanged, but there is a big change with respect to Roth IRAs.  People can convert from a traditional IRA to a Roth IRA regardless of income in 2010.  Furthermore they can spread the tax resulting from the conversion  over 2 years if they chose to do so.   For more information about pros and cons of a Roth Conversion, please read the blog, Traditional IRA to Roth Conversion in 2010.

There are certain items that have changed in 2010 over the 2009 tax year.  Remember Congress has the rest of the year to act on these items and probably will. 

  • The estate tax has been repealed.  But you can’t really plan on dying this year anyway… 
  • The AMT patch has not been passed yet; be aware if congress doesn’t act then AMT will drop back down to pre-2001 levels 33,750 (45,000 Married Filing Joint). 
  • The phase out  itemized deductions and exemptions for higher income earners has vanished. 

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.

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Another Change Coming to Arizona’s State Withholding Form A4

Friday, April 30th, 2010

Last year the federal government decided to give a tax break to workers in the middle of the year by reducing the amount of tax withheld from each paycheck.

Unfortunately, this meant the Arizona state income tax withheld went down, as AZ withholding is based on a percentage of the Federal income tax withheld.  So somewhere in the middle of the year, Arizona changed its withholding rates and required employers to get new A4′s from their employees selecting a new higher withholding tax rate.

This year the tax break is spread out over the entire year, therefore Federal withholding went up just a smidgeon.  So at the beginning of the year, all employers were required to new A4s from their employees selecting slightly lower withholding tax rates as Arizona had to adjust its withholding percentages again.

But hold on, we are not done yet.  The Arizona Department of Revenue (AZ DOR) has been tasked with coming up with a state withholding tax rate that is independent of the federal amount withheld.  The AZ DOR has now posted the new AZ A-4s at their website: http://www.azdor.gov/LinkClick.aspx?fileticket=9_U8ufG2wH8%3d&tabid=265&mid=884 If this link is broken you can find it by going to the AZDOR.gov forms pages.  

Arizona employers will need to get their employees to complete new A-4s before July 1, 2010 and start withholding amounts in accordance with those new A-4s on July 1, 2010.  The new A-4s list  AZ Withholding amounts as a percentage of income; they are not valid until July 1, 2010. 

A good starting place for an employee would be to see what percentage of income taxes were in 2009.   For example if an employee had an AZ adjusted gross income of 70,000 and was required to pay 1,700 in AZ taxes in 2009 their tax was about 2.4 % of their income.  They might opt for the 2.7% check box on their AZ A-4 assuming their situation in 2010 is similar to their situation in 2009.   For a taxpayer that had $30,000 in AZ adjusted gross income for 2009 and paid $500 in taxes, their tax was about 1.7 % of their adjusted gross income in 2009. They might opt for the 1.8% check box on their AZ A-4 assuming their situation in 2010 is similar to their situation in 2009. The new A-4 on-line the form actually has a worksheet to help them figure out what their withholding should be.  NOTE:  As an employer you should not advise employees as to what amounts to withhold, but you can suggest they use the worksheet that is part of the new AZ witholding form.

In other news as a fund-raising measure AZ DOR will now require businesses, which have a Transaction Privilege, Use and Severance Tax License (TPT)  issued before July 1. 2009 to “renew” them and pay a fee AND they are raising the fee for a license and updates effective June 15, 2010.  Art & Business Consulting LLC has an inquiry out to the AZ DOR as further information about this change to TPT did not appear to be located on their website as of the day we received notice of the change.   We will update you when we receive further information, such as how much the new license fee will be, are they going to mail the “renewal notices” out to current license holders, how often the license will need to be renewed, etc.

If you need help with this issue or any other, remember, small business services and taxation are our business.  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.  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 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.

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Business Owners: How To Avoid Getting Audited

Sunday, April 18th, 2010

Tax Audit.  Those two words strike fear in the hearts of many taxpayers. but as with many things an ounce of prevention is worth a pound of cure.  Here are 7 tips to avoid getting audited.

1. Keep good records – include details for income, expenses, debts and deductions and keep them for 7 years.

2. Omissions may make the IRS double-check a tax return therefore make sure it is completely filled out AND signed before submitting it.

3. Be sure the income on your tax return matches the income indicated on every 1099, W-2 and K-1 . The IRS gets a copy of every 1099, W-2 and K-1 you receive and their computers will pick up on reports that do not match exactly.

4. Don’t change or mesh cash and accrual accounting methods.  A combination of cash and accrual methods, or changing accounting methods is sure to attract attention.

  • Remember you need IRS permission to change accounting methods.
  • Remember if you sell inventory you are almost always required to use an accrual method to account for it.

5. Classify employees and independent contractors carefully. An independent contractor can ask for a review to be treated as an employee and many do so to reduce their self-employment tax by half.  If you do not have a contract with an independent contractor, the IRS may claim they are an employee and assess back payroll taxes.

6. Co-mingled books make auditors drool.  Although there is no specific rule for Sole Proprietors regarding co-mingling expenses and income – DO NOT co-mingle business and personal accounts – it makes it very easy for the auditor to suggest a given expense is a personal rather than business expense OR to concluded that a given deposit is business income as opposed to something else.

  • Have separate accounts bank accounts,  credit cards,  etc. and keep your personal and business receipts and other records separate.
  • Keep a contemporaneous log of vehicle mileage & expenses.
  • If you have a home office keep the work area separate, use it exclusively for business and document it.
  • If you piggy back vacation and business deduct only expenses related to the business portion of the trip.
  • If you plan on taking 100% deduction for any listed property expense: automobile, cell phone, computer equipment and entertainment devices, you had better be prepared to back that claim up; combining a business trip with a trip to a grocery store even once is enough to violate 100%.
  • Remember there is no deduction for Meals & Entertainment expenses that are not documented-keep your receipts and annotate them if required.
  • Treat your company as you would treat any other separate business relationship – keep all transactions at arm’s length.

7. If your taxes are complex hire a reputable tax preparer or learn to use tax software.  Although you are ultimately responsible for any tax return you sign, you may avoid mistakes if you obtain professional assistance; in the event a mistake does occur relaying on an expert’s advice may help you avoid penalties.

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.

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Selling Stocks For Best Tax Advantage

Wednesday, April 7th, 2010

When someone sells stock the IRS automatically assumes the first shares bought are the first shares sold, First In First Out (FIFO). However if the taxpayer can specifically identify shares purchased at different dates for different amounts they do not necessarily have to blindly follow FIFO.

e.g.  Stan Stockholder buys share in Volatile Corporation at various times of the year.  Stan keeps detail records of his transactions.  Stan purchased

  • 100 shares on January 15 when the price was $10 per share. ($1000)
  • 500 shares on July 7 when the price dropped to $5 per share ($2500)
  • 100 shares on Nov 18 when the price rebounded to $20 per share ($2000)

Then Stan decides to sell 100 shares of stock while Volatile Corporation’s price is $12/share on January 8 of the following year. In this case the sale of any shares sold would on January 8th would result in either short-term gain or short-term loss.

Without any other information the IRS will assume the 100 shares sold are the first one’s he purchased for a net short-term gain of $200 under FIFO.

However if Stan kept detailed records (in the event he trades stock himself) or tells his broker which shares to sell, Stan need not sell the first 100 shares of Volatile Corporation he purchased.  If he sells the ones purchased on November $18 he will have an $80 short-term loss; he might want sell these shares to offset other gains he expects to have in the year.  If he sells the some of the shares purchased in July he will have a $700 short-term gain; he might want to do this if he expects the current year to be a low-income year.  Stan can also just use FIFO if he desires, requiring no effort on his part.

How does Stan pick the shares he sells? If Stan decides to use the shares purchased in July or November instead of the ones purchased in January, he must specify those shares at the time of sale to his broker or agent by purchase price or date or both.  Stan must receive a written communication of the transaction in as proof of this alternate sale transaction.  If Stan is a trader who does not use a broker, he must keep detail records of his own transactions.

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.

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Health Care Reform, What Does It Mean To You?

Wednesday, March 24th, 2010

As I look over the information flooding in I realize, it doesn’t affect me much for the next  four years, except perhaps my insurance rates may go up and the threshold for itemized medical expenses is going to increase. I am currently shopping for health insurance and the prospects are grim. For the first time I am actually considering going without coverage.  Why?  Because the policies I can afford right now will not prevent me from going bankrupt in a medical emergency and do not pay for anything until an outrageous family deductible is satisfied.  I understand having insurance may make the difference between a doctor seeing me and not seeing me, but as a basically healthy person I am seriously considering rolling the dice, mostly because I just can’t afford it anymore. I know I am not alone. Update: I did finally get some family coverage-a plan with a high deductible that doesn’t qualify as an HDHP-go figure, but the price is less than half of the ghastly and expensive plan offered by my mate’s new employer.

Does health care reform help with my current dilemma? No.  I have to wait until 2014 then maybe it helps… or not. My crystal ball doesn’t see that far into the future.

In my opinion Health Care Reform does nothing to address the reasons why health care costs have skyrocketed. According to some analysts insurance costs will continue to rise.  As look what happened with credit cards in advance of that reform being enacted, I expect health insurance providers are going to keep raising rates and messing around with Joe-average consumer until 2014 as well.

Getting down off my soap box and moving along… Since the House Reconciliation Act strikes out or modifies a number of provisions in the Senate’s Patient Protection Act to which House members had objected, the Senate now must pass the “sidecar” House Reconciliation Act before it becomes law. Who knows how long that will take and what the final result will be.

Update: The Senate passed a sidecar that the House signed off on; President Obama is signed off on it March 30, 2010.  In the “new” version – banks are being stripped of the power to do student loans-in the past the loans were guaranteed by the government anyway, so the taxpayers were taking all the risk and the banks were making all the interest.  This bill will not change the status of existing student loans. What does this have to do with health care? Not much. Why did the banks get such a sweetheart deal in the first place? Dunno.  Weird how congress works.

The entire health care reform law rests on the idea that if everybody is paying into the pool, costs for sicker people will come down, therefore the law requires all individuals to have health insurance coverage by 2014; those who choose not to have insurance would pay a tax. Individuals who currently have coverage and wish to retain that coverage can do so under a “grandfather” provision in the heath care package and the coverage will be deemed to meet the individual’s responsibility to have health coverage. A similar grandfather provision applies to employers that currently offer coverage. Individuals covered by Medicare, Medicaid, Veteran’s affairs and other government programs would be regarded as having essential coverage.  The IRS will oversee much of the implementation of health care reform.

The health care reform bill means new obligations for insurance companies, new responsibilities for employers and eventually every individual will be required to have coverage or pay a tax. Some of the new law’s provisions take effect in a matter of weeks. Many other features of the health care overhaul won’t take effect until 2014 or even later.

  • The law doesn’t require employers to provide health insurance benefits; however, large employers (organizations with 50 or more employees) that don’t offer insurance will have to pay an annual tax of $2,000 per full-time worker. Businesses with more than 200 employees must automatically enroll workers into their health insurance plans.  Employees would then be able to opt out if they choose.
  • Small-business tax credits of up to 35% will take effect this year to help organizations with 25 or fewer employees pay for affordable employer-provided insurance. Update: Qualified Small Business: those with 25 or fewer employees and average annual wages of $50,000 or less. Starting in 2014 the small business will have to pay 50% to be eligible for the credit.
  • Qualified small businesses will be able to purchase insurance for employees through state-based exchanges known as Small Business Health Options Programs (SHOPs).  They will be designed to allow small employers to pool risk together, ideally lowering coverage costs.  SHOPs must be in place by 2014. If you’re a small business and even one of your employees opts out of employer-provided coverage in favor of insurance available through the state-based exchanges, you could be required to provide a voucher worth the value of the per-employee premiums you pay under your plan.
  • 2011: Employees will no longer be able to use FSA funds to pay for over-the-counter medications. The penalty for using HSA for non health care related expenses goes from 10% to 20%. 2103: The law also caps employee contributions to health-related flexible spending accounts (FSAs) at $2,500 per year & indexed to inflation thereafter.
  • All health plans must maintain dependent coverage for insured employees’ children until they turn age 26.  This rule takes effect in September. If your business provides health insurance coverage, get ready to re-enroll many young people who left their parents’ family coverage sometime within the last few years.
  • A high-risk insurance pool will be set up this spring and summer to provide affordable coverage for uninsured people with pre-existing conditions. Even if your company does not offer insurance, you may get questions from workers seeking coverage; refer them to your state’s insurance commission.
  • 2011: Large employers that pay for retiree drug coverage (Medicare part D) must declare for accounting purposes whether they intend to keep doing so; your accountants will have to wait for the IRS to set the final rules first.  Also employers must begin reporting the value of health care benefits on employee W2s
  • There are new rules limit how and for whom insurance companies can deny coverage.  The health care reform law prohibits insurers from denying coverage to children based on pre-existing conditions, putting lifetime dollar limits on coverage and canceling coverage retroactively except in cases of fraud. Similar rules for adults won’t kick in until 2014.
  • For some low income individuals and families, their premiums will be capped at a percentage (2-9.5%) of their income.

How do they pay for it?

  • There will be a 40 percent excise tax on high-dollar health insurance plans, to begin in 2018 payable by the insurer, which they can pass along to their customers
  • 2013: an increase in Medicare payroll taxes starting in 2013 on taxpayers in the $200,000- plus income category ($250,000 for joint filers)
  • There will be an 10% indoor tanning tax beginning July 1, 2010.
  • New fees on certain health-related industries &  a dozen other “revenue raisers” are also included in the final bill.
  • 2013: While not exactly a revenue raiser, taxes for some will increase as the itemized medical expense deduction threshold is raised from 7.5% of AGI to 10% of AGI in 2013. For individuals 65 and older the change doesn’t occur until 2016.

Other Items in the act:

  • Denies Biofuel Credit for “Black Liquor,” presumably because of abuses of this tax credit.
  • Codifies the Economic Substance Doctrine, the taxpayer’s economic position other than their tax position must change in a meaningful way in engaging in a transaction-mostly affects tax-shelter partnerships & S-Corporations. Violations are subject to stiff, automatically-applied penalties of 20 or 40 percent, depending on the underlying transaction and level of disclosure.
  • Increased corporate estimated tax payments on corporations with $1 Billion dollars in assets.
  • 2012: Adds corporations to information reporting; businesses will be need to get taxpayer identification info from corporations they pay more than $600 a year to for services and property (that’s a lot more 1099-MISCs folks) and report those payments.

Advice to businesses: Stay in contact with your health insurance broker or carrier.  They’ll have information as soon as it’s available. Talk to your FSA provider about implementing changes the FSAs as soon as possible as employees are going to start want to know what they need to do now.  It’s up to you to provide your employees about how the new mandates affect them, ask your benefits carrier for materials you can pass along to your employees.

Individuals should also stay in touch with their insurance broker or carrier.

And hang on. It’s going to be a bumpy ride.

What do you think about health care reform? What does health care reform mean to you?  Do you expect to receive any benefit or experience any harm in the near-term, or long-run?

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.

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The Current & Projected Deficit Means Taxes Will Rise

Monday, March 8th, 2010

Nobody wants new taxes, but the fact of the matter is our government is spending more than it is taking in. Given that the lending market is tight, the only place the government can get their revenue is from you, me and Bobby Magee Enterprises.  One estimate is that federal deficit is supposed to exceed $600 Billion dollars over the next 10 years, which would result in a $15 Trillion dollar deficit by 2020. Yes that is Trillion with a T; 15 followed by 12 zeros.   To put it in perspective, by 2020 the projected budget deficit will be roughly $50,000  for every man, woman and child currently residing in the United States.  Something’s gotta give.

So what are the possibilities.

  • One option is to raise the income and capital gains tax rates on upper income folks.  How much? Obama would like to see a top rate of 39.6% for income tax and raise the capital gains tax rate from 15% to 20% as well.  In addition, he would like to cap the amount itemized deductions can reduce a high income filer’s tax liability to 28%.  By the way, high income is something like singles with $196,000 in taxable income or $231,00o for married folks.
  • A payroll tax increase is being kicked about.  Some are discussing raising the Medicare tax rate and also discussing having those with high incomes pay Medicare tax on unearned income.
  • A graduated surtax is being bandied about.  A plan passed by the house in 2009 had the surtax start on incomes of Singles $280,000/$350,000 Married and had a top tax rate of 5.4% on Singles earning more than $800,000/$1,000,000 Marrieds.
  • A consumption tax (VAT) is being discussed. If items like food are exempted then obviously the rate on other things would have to be made higher to offset the exempted items-the tax rate likely be 3% or more.
  • Higher employment taxes on S-corporations is definitely in the works-both parties think that too many people are skirting employment taxes by taking income as dividends instead of pay.  Right now the rules let them.
  • Expect more required reporting to find revenue targets, including corporations, landlords, and filers with overseas accounts.
  • Tighter rules on independent contractors verses employees is a possibility.  Why try to pluck the feathers of many hissing geese when you pluck the feathers of just one?
  • Of course the government could also reduce spending.  Don’t hold your breath, you will turn blue and pass out, just like your mother said.

You can expect at least one variation on these themes to be passed eventually, and which one(s) that do pass depend largely on which party is in charge when the legislation passes. Yes, these are controversial measures but the government has to pay the piper sooner or later and when it happens there are bound to be some very unhappy constituents.

What do you think can or should be done about the federal deficit?  Who should pay? Should entitlements be cut? What is your take on all this taxation and spending? Remember, even though this topic is a very sensitive subject, we at Art & Business Consulting would ask that you try to keep the name calling and vitriol to a minimum in this hopefully civil discourse.

As always, small business services and taxation are our business, if you need help with this issue or any others, 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.  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 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.

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