Small Buiness Tax Topics

New Form 1099-K

2011-06-28T08:00:00.001-04:00

With the passage of multiple pieces of legislation that affects 1099 reporting I think it is important for business owners to know about a few changes. The first and most direct change that business owners will notice is that they have received a new type of 1099 in 2012 (for the 2011 calendar year). This form is a 1099-K. Not all businesses will receive this form, but all businesses whom receive payments from credit card companies, or paypal should expect this form.

The form 1099-K will show how much a business has received from credit card and/or pay pal sales during the calendar year. This is a new form required by the IRS. Business such as merchants, retailers, restuarants and any business that uses paypal to collect payment should watch for this form.

Business owners would be wise to review these statements and verify that they correspond to receipts from credit card sales. Finding discrepancies early is often the only way to receive an amended 1099 in a reasonable amount of time. For this reason, I would strongly suggest that business owners review these statements as soon as they receive them, and contact the reporting agent as soon as possible with any discrepancies. These discrepancies do not happen very often, but the effects can be devastating for small businesses.

This form will be another tool used to audit for unreported income, one of the worst types of audits for business owners to go through. Your business does not want an audit caused by a clerical error by a credit card company, be on the lookout for errors.

Business Mileage rates increase

2011-06-24T10:17:00.000-04:00

Starting July 1, 2011 the new maximum allowable reimbursement rate for business travel has been increased from 51 cents per mile to 55.5 cents per mile. All businesses should take note and update their records to reflect this new mileage rate allowance.

Also note that the medical and moving mileage rate also increased from 19 cents per mile to 23.5 cents per mile. This change is also effective July 1, 2011.

Also see my previous post where I alluded to this possibility...Business Standard Mileage update for 2011 posted 5/25/2011.

Hiring Employees without proper documentation is more dangerous than ever!

2011-06-16T09:54:00.000-04:00

One of the things accountants and CPA's don't spend a lot of time talking about is payroll. As far as accounting services go, most CPA's find payroll services to be more of a necessary offering than a road to riches.

However, small business owners should take notice. The federal government is cracking down on employers that hire employees who do not have proper documentation. In recent weeks, many businesses have been served notices that their employment files have been chosen for review.

Usually in these instances, the federal government is looking for documentation relating to proper due diligence of business owners. Most business owners may not even be aware that they are required to make sure that the people they hire are eligible to be employed in the United States.

If you have a large payroll provider they may be supplying your company with these reporting requirements, but if they don't your company may not be in compliance. For that reason, it would be a good time for all employers to make sure they have good employee files and have met all employment record requirements for both the Federal and State governments (also local government(s) in some instances).

To add further credence to my point, here is a link to an article on The Wall Street Journal's website:
http://online.wsj.com/article/SB10001424052702304186404576387843087137216.html?mod=WSJ_myyahoo_module

Mileage deductions:Stay on track to keep the IRS off your back, Part 2

2011-06-08T07:00:00.000-04:00

1. When you own a business, you should ask yourself, “Do I owe anyone money, and why?”

If you do owe someone money, it might actually be “yourself” for out of pocket expenses relating to the business activity.

2. Unless an employee turned in a mileage log with totals, would you pay them for the mileage? The answer is most certainly no.

So why would small business owners think they are owed money from their business for mileage driven if they did not turn in the mileage logs to the business?

These basic concepts are the crux of the mileage reimbursement argument. From the IRS’s perspective: Why should I give a business a deduction for something unless there is a basis for the expense?

Small business owners should also recognize that keeping a mileage log may actually be less intrusive than trying to keep track of actual expenses relating to business travel, especially if they do not have a separate vehicle used only for business activity during the year.

That is why as a business owner, keeping a mileage log is one of the most important things that your tax professional should be talking to you about. If they are not, then maybe it is time to talk to someone else.

Michigan Business Tax (MBT) Repeal Continued

2011-06-03T07:00:00.003-04:00

Even though the Corporate Income Tax seems to be a much better deal, based upon previous discussions, the State of Michigan has decided to allow businesses that are otherwise required to file the Corporate Income Tax, to instead continue to file the Michigan Business Tax for tax years after December 31, 2011.

One of the key reasons why corporations may find it beneficial to file their return as the MBT instead of the new CIT would likely relate to the tax credits which are eliminated under the new CIT. Nearly all tax credits are eliminated under the CIT. For this reason, as of right now, if businesses would qualify for any "certified credits" they would be allowed to file an MBT return.

It is very important to note that right now, the Employment Credit is included in the definition of certified credits, this credit allows businesses to take a credit for wages and certain employment benefits provided to employees.It is interesting that almost all businesses that would otherwise qualify to file the CIT, could file an MBT tax return. For a list of credits available as qualified credits, click here.

It is also interesting because while the transition to the new CIT tax will likely cost a great deal in administration costs, because of the decision to keep the MBT tax available, legacy costs associated with auditing two types of returns could be very substantial. High oversight and administration costs should be watched closely, as Michigan can ill afford to go without these tax revenues.

Mileage deductions:Stay on track to keep the IRS off your back, Part 1

2011-06-01T07:00:00.000-04:00

Mileage deductions: One of the true gifts, and neglected aspects of your business or personal return.

When I talk to business clients, especially a new client interview, one of the things I always go out of my way to talk about is mileage. There are two reasons why I do this.

First, the standard mileage reimbursement rate is usually favorable to taking actual expenses during a tax year. I say usually, because I know of at least two clear instances where taking actual expenses are favorable. At this point let’s just assume that you (as the business owner) would be best served by taking the standard mileage rate.

Second, I understand that usually it is a pain in the butt to keep track of mileage. For this reason, I fear that clients would think to themselves why should I be keeping track of whom I see and why.

They might think, the IRS is giving me the standard mileage rate, all I need to do is estimate the number of miles I have driven and that will be the end of it. These people couldn’t be more wrong.

My next post will cover why mileage logs are instrumental in taking a business expense for mileage on your business or personal return (Sch C).

Michigan Business Tax (MBT) Repeal Continued

2011-05-30T07:00:00.000-04:00

Businesses will still be required to file (at least) one last return under the Michigan Business Tax for the tax year ended December 31, 2011.

2012 brings big changes for businesses when the Corporate Income Tax (CIT) replaces the Michigan Business Tax.

The changes associated with the Corporate Income Tax are evident from the start.

The only businesses that would be required to file a Corporate Income Tax return, would be businesses that are organized as Traditional C-corporations under Federal tax rules.

This means that the following business types would not be required to file a Corporate Income Tax return:

S-corporations
Partnerships
Sole Proprietorships
LLC's taxed as Partnerships
and/or nearly any type of pass-through entity.

Another big change, corporations (other than insurance companies) would be taxed at a flat rate of 6% of corporate net taxable income. With two additional exemptions. First, if your corporation had gross receipts under $350,000 you are not required to file a Corporate Income Tax return. Also, if your Corporate Income Tax liability is less than $100 in a given year, you are not required to file the Corporate Income Tax return for that year.

In my next posting I will cover an interesting twist the State of Michigan has included in the legislation, that may keep the Michigan Business Tax around for a long time...

Michigan Business Tax (MBT) Repeal Continued

2011-05-27T08:00:00.001-04:00

Now that we have established what the Michigan Business Tax was, businesses should understand when the MBT will be effectively eliminated and what (if any) effect the new replacement business tax has on their business.

First, businesses should note that although the Michigan Business Tax has been effectively repealed, the effective termination of the MBT will be January 1, 2011. For this reason, most businesses that had to file a Michigan Business Tax return in the past would have at least one more MBT tax return to prepare.

The first question most businesses will likely have will be, what happens if I am a non-calendar year-end taxpayer? For businesses that have year ends other than December 31, it is very likely that you would have to prepare a partial year return to bring your business filings in compliance with MBT filing deadlines.

However, as of this time, the State of Michigan has not issued additional guidance on this issue, please check back for updates as they become available.

Other Mileage Rates- 2011

2011-05-25T07:30:00.001-04:00

In addition to the standard business mileage rate, there is also a standard rate for both medical, and charitable mileage.

Charitable mileage is unchanged from 2010 at 14 cents per mile.

Medical and moving mileage increased by 2.5 cents from 2010 for a mileage rate of 19 cents per mile in 2011.

Business Standard Mileage update for 2011

2011-05-25T07:00:00.000-04:00

During 2011 the standard mileage rate for business reimbursement has been increased to 51 cents per mile.

This is an increase of one cent per mile from 2010, when the mileage rate was 50 cents per mile.

It is important to note that gas prices have increased significantly since the beginning of the year, so this may be a year where the IRS splits the mileage rate to reflect the increase cost of gas at the pump.

The last time this happened was 2008. Stay tuned, if gas prices stay at this rate or increase, it would not surprise anyone, if there is a rate adjustment at mid-year.

Michigan Business Tax (MBT) Repeal Continued

2011-05-23T07:00:00.001-04:00

As previously mentioned, the repeal of the Michigan Business Tax is a near guarantee, but with change comes confusion.

So as details become clear I will do my best to clarify how this change will affect your business.

First, I feel I should cover what the MBT tax was, and what types of businesses were required to file a Michigan Business Tax return.

The MBT was enacted on January 1, 2008.

The MBT was a required filing for businesses, doing business in Michigan, whom had Michigan Gross Receipts in excess of $350,000. All businesses that had gross receipts below this level were not required to file an MBT return.

The MBT was a two part tax, well actually a three part tax, because there was a surcharge if you had tax from either of the first two tests. The first part was a pure Gross Receipts Tax which (after adjustments) taxed Gross Receipts at a flat .8%. The second part was a pure income tax, which taxed net taxable income at a flat 4.95% (after adjustments). The "third tax" was a surcharge which added an additional 21.99% onto your tax, but only if you had tax from the previously mentioned taxes. As an example, I will show you how a business would have been taxed if they only had the following issues/ assumptions under the MBT:

Assume you have a C-Corporation, that only does business in Michigan, had $1,000,000 in gross receipts, had net taxable income of 10,000. Under these assumptions, their federal taxable income would be only $1,500. With the MBT, here is breakdown of their tax bill:

Gross Receipts Tax = $8,000
Net Income Tax = $495
Annual Surcharge= $1,868
Total MBT Tax= $10,363

This company usually would have qualified for additional tax credits that would reduce the total tax bill. How fair is it to ask a business to potentially have a tax bill that is larger than their net taxable income for a given year? These inequities and the complexity of the MBT are ultimately what led to its demise.
There were many additional adjustments, and tax credits that I will not get into on this posting, if you would like additional information relating to any of those credits or have a specific question related to this topic, send me an e-mail, or reply to this posting and I will do my best to address that specific issue. For purposes of this posting I am trying to show the nature of the tax, not an individual company's tax issues as it relates to the MBT, the tax is actually much more complex than I could possibly cover in one blog posting...

MBT Repeal: House Bills 4361 & 4362, now what?

2011-05-20T08:00:00.006-04:00

Many business people have been waiting years to finally hear that the MBT (Michigan Business Tax) has been repealed.

Unfortunately, due to the circumstances surrounding the repeal of the MBT, many business owners find themselves in an awkward position.

Should we celebrate?

What happens now?

One thing is almost certainly true. Newly elected Governor Rick Snyder came through on his promise to help business people in Michigan. One of his major campaign promises was the repeal of the MBT. With the legislation previously mentioned already passed through the Michigan State House and Senate, it is a near guarantee that this legislation will be finalized and signed into law. With that said, what should businesses expect as a result of these changes?

This is part one of a multi-part posting relating to these bills which significantly change Michigan business and personal taxation.

Payroll: FICA Withholding Reduced

2011-05-16T13:16:00.001-04:00

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, which passed in late 2010, brought many changes for businesses. One of the key changes included in this legislation, affects how payroll withholding should be calculated on W-2 wages in 2011.

During 2011, Social Security Tax will be withheld from an employee’s wages at the rate of 4.2% (down from 6.2%) up to the social security wage limit of $106,800. Remember that this legislation does not affect employer’s matching contributions, so their rate remains 6.2%.

In a similar fashion, self-employed individuals (subject to SE Tax) also have a reduced rate to match the reduction in 2011. The total tax rate on net self-employment income for 2011 is 13.3% on the first $106,800 of net self-employed earnings (down from 15.3%). Remember that self-employed individuals pay Medicare Tax at a flat rate beyond this income level at a flat 2.9%.

In addition, the credit for one-half of self-employment tax has been modified to reflect the related change.

To view the adjusted credit please visit the IRS website, or click here.

Smart Year End Tax Moves Part 5

2011-01-07T08:30:00.001-05:00

With the year end over, there still may be important tax items individuals should consider. One is your FSA, or Flexible Spending Account.

As most people know, flex spending accounts are used to provide tax deductible health expenses to employees. The types of deductible amounts available for reimbursement in 2010 include: doctor co-pays, out of pocket prescription costs, prescription co-pays, as well as more routine expenses such as cough medicine, band aids, and certain other quasi-medical expenses.

If you still had money in your FSA account and did not turn in your receipts before December 31, 2010, some plans have a grace period. This grace period is designed to allow participants to turn in receipts after year-end for reimbursement, so as to use all of the available money in the account.

Remember that FSA accounts are "use it, or lose it" so you should try to use all the money withheld from your paycheck, so you are not giving money away uselessly. Check with your plan administrator on whether or not your plan has a grace period, if it does, then you will have a short period of time to present receipts and draw down that FSA money to as close to zero as possible.

Check back in a week, when I will talk more about the changes ahead for flexible spending accounts in 2011.

IRS releases Audit Technique Guide on Capitalization

2011-01-05T14:30:00.000-05:00

There is a fine line between repairs and maintenance costs, and those costs that extend the life of an asset and therefore should be capitalized (depreciable property). One good source of reference for business people in need of guidance are IRS Audit Technique Guides.

As the name would suggest IRS Audit Technique Guides, are the actual guides that IRS Auditors follow when conducting an IRS Audit. For this reason, they can be very powerful to the average business owner, and tax professionals. This guide has specific case examples from prior court cases, including types of documentation to retain in order to form a substantial tax position on repair and maintenance and/or capitalized property.

I would encourage business owners whom are taking bookkeeping into their own hands to review this audit guide, as this particular topic can raise many questions.

Here is a link to the guide on the IRS website:

www.irs.gov/businesses/article/0,,id=231440,00.html

Smart Year End Tax Moves Part 4

2010-12-30T08:00:00.001-05:00

As year end approaches, many individuals are in the charitable giving mood. With that in mind, I offer one additional suggestion.

Recently, Congress has changed the nature of charitable giving, by allowing contributions to be made directly from retirement accounts to charitable organizations.

Here is one example of how it works:

Bill an IRA owner whom is 71 has Required Minimum Distributions from his IRA account. He also is very charitable by nature and customarily gives a significant amount to his church as well as other organizations. Now, Bill can schedule to make direct payments from his retirement account to the charitable organizations of his choice. These amounts are considered to be required minimum distributions for purposes of "testing" for the IRA at year end. But, the nice part is that these amounts are not taxable income to Bill. Since, he did not constructively receive these amounts, this is not taxable income to Bill even if he does not itemize (if Bill did itemize then this exercise would be kind of pointless because he would end up in virtually the same place anyway).

Please remember two things about these types of contributions. First, make sure the money is sent directly from the IRA account to the charity of your choice. Second, these amounts are not includable as "Schedule A" itemized deductions because they are amounts sent directly to the charity itself, and are therefore not included in income when they are sent.

As always, there may be specially circumstances surrounding your particular tax situation. Please consult a tax professional regarding tax consequences before making significant changes to your individual tax situation.

Smart Year End Tax Moves Part 3

2010-12-29T16:00:00.001-05:00

I have focused a lot of attention in the last week on retirement plans. In this post I will change gears a bit to focus on stock sales.

Recently there has been a lot of focus on stock sales as the bush tax cuts were set to expire, fortunately for most taxpayers, Congress extended the bush tax cuts to all individuals for two years. However, this doesn't mean there aren't things that people should be doing to put themselves in the best tax position.

Two smart year end tax moves that could really pay.

First, if you are planning to gift stock you should consider the best way to gift that stock.

If you are planning to give the stock to a charity, consider this. If the stock has lost money since you bought the stock, you should strongly consider selling the stock and giving the money to the charity. It is important to note that if you were to give the stock directly to the charity, your deductible contribution would be the fair market value on the date of contribution. So the only way to capture the loss, while you held the stock, would be to sell the stock, capturing the loss, and subsequently giving the money to your charitable organization.

The same rules apply when you give stock to family members (as gifts). So it only makes sense to sell the shares and give them the cash. If they choose they can take that money and buy the exact shares you just sold and their basis would equal the cash they received.

Smart Year End Tax Moves Part 2

2010-12-29T08:38:00.006-05:00

In my previous post I focused on retirement plans businesses can setup before year-end to capture tax savings. In this post I will focus on personal retirement plans and smart moves that can be made before year end to capture additional tax savings.

As you all may know IRA accounts are the primary vehicle for personal retirement.

Here are two things you should keep in mind coming into year end.

First, even if you currently contribute to a retirement plan such as a 401(k) plan, you could still potentially participate in either a traditional IRA, a Roth IRA or both. Certain income limitations apply to deductible contributions.

Second, if you plan on making contributions to an IRA account in 2010, you have until April 15th of 2011 to make tax deductible contributions to your IRA account. This may be a smart tax move since the maximum individual contribution is $5,000 with an additional $1,000 catch up available to individuals 50 years and older. Just as an example, if you are in the 25% tax bracket and are 52, you could potentially make a $6,000 contribution to a Traditional IRA. In this circumstance, if you maximized your contribution, you would also reduce your tax bill by $1,500, a very smart tax move indeed.

I also mention this because the IRS now allows for income tax refunds to be direct deposited into IRA accounts, a major benefit for taxpayers whom might not save that money otherwise.

Please note that certain taxpayers are not eligible to make deductible contributions to IRAs, please check with your tax professional before you make your decision.

Good marketing book

2010-12-26T08:15:00.000-05:00

Normally, I spend less time talking about running a business than about the tax topics that effect businesses.

But even tax nerds like me can change. With that in mind. Recently I picked up a book called "Duct Tape Marketing" by John Jantsch. It is a great book with the premise that every business owner should be a good sales person, whom offers the same attributes as duct tape. Those attributes are versatility, dependability and a good all around resource for "clients". It also talks about many other subjects including creating sticky relationships with your best clients.

I would recommend this book to all small business owners who are looking to make more money, because I guess in the end, that is what marketing is all about.

Beyond marketing, this book does a good job of helping business owners analyze their business in order to improve all the facets of the business and begin to create a cohesive business strategy.

I picked it up on amazon for around $10, so it is also pretty cheap, which I also really enjoyed.

Merry Christmas

2010-12-24T23:59:00.001-05:00

Merry Christmas to all and to all a good night...

Smart year end tax moves part 1

2010-12-22T08:36:00.006-05:00

One of the fastest ways to lower your tax bill and potentially pay yourself is through contributions to a retirement plan.

The reason I bring this up now is that most employer sponsored plans must be in place before December 31, of the year qualifying retirement plan contributions are to start, even if funding is allowed after the end of the year.

Every year I receive at least three phone calls in the last weeks of the year wanting to know more about retirement planning.

My best piece of advice for clients is to do your homework. As a business owner there may be multiple types of retirement plans available to you. If you are a small business, and want to keep costs low, options include traditional IRA accounts for employees, SIMPLE-IRA plans and SEP-IRA plans. I will cover these three types in this posting and focus on the other more costly, but maybe more flexible plan types in a subsequent post.

First I will cover traditional IRAs. This is one of the simplest types of employee benefits you can offer. If you decide to offer this plan, you offer it as an additional salary reduction item, so as you withhold amounts from the individual's paycheck you are required to remit that amount to their IRA account directly. Any size business can participate in this type of plan. This option is nice, because it is treated similar to other payroll deductions; limited record retention is required and employees can change their withholding amount at any time. The maximum contribution for 2010 is $5,000 with additional $1,000 available for persons over 50 years of age.

Next are SIMPLE IRA Plans. This plan requires minimal initial paperwork (see my previous post SIMPLE IRA Plans, mind the details and everything will be OK). This is also a salary reduction type of plan, however only businesses that have fewer than 100 employees can participate. There is also a limited amount of required matching by the employer, but the employer only is required to match a low percentage of contributions for participating employees. Employee deferals are limited to $11,500 per employee with an additional $2,500 available for employees over 50 years of age. Certain time of service and earnings restrictions may apply to employees pursuant to limitations detailed in the plan document.

Finally, a SEP IRA Plan is a third option. This plan type is different than SIMPLE IRA plans and traditional IRA plans. This plan allows for employer contributions to employee accounts from the profits of the business. The plans are very easy to set up with a simple form available on the IRS website, and some additional record keeping required. Once the plan is set up the business owner may decide on a yearly basis whether to make a contribution to the plan or not (and the amount as long as the contribution is not discriminatory). Beyond that, the employer may exclude certain employees based upon age, years of service, and earnings. The allowable contribution to these plans is much larger. The maximum contribution to each individual is $49,000 limited to a maximum of 25% of payroll for the year.

I will cover more about year end planning with contributions, especially as it relates to S-Corporations in a subsequent post.

Tax Deal Effects Paychecks

2010-12-17T12:14:00.003-05:00

A portion of the "bush tax cut" extension bill, recently signed, will have a significant effect on payroll checks in 2011. Normally employees have social security taxes of 6.2% on the first $106,800 of W-2 wages. Now, employees will have a withholding rate of only 4.2% on the first 106,800 of wages for 2011 only.

Employers should prepare for this change, and adjust their withholding accordingly.

Also, note that many large payroll providers have given notice to the IRS that they will need some time to change their software. For this reason, some employees will not receive the updated withholding amount on their first check, but the amount will be adjusted in a subsequent check when the issue has been resolved.

If you have a large payroll provider, we suggest you contact your representative to verify how they plan on handling this change.

Happy Thanksgiving

2010-11-24T10:23:00.001-05:00

Wishing you and your family a wonderful Thanksgiving.

Qualified Small Business Stock Revisited

2010-11-24T10:02:00.004-05:00

I have been out for continuing education the last few days and an interesting point came up during one of the classes. I want to use this example to clarify a lot of misconceptions that are out there concerning qualified small business stock (QSBS).

During one of the courses, the instructor, a former IRS agent, was talking about qualified small business stock. During her oration, she suggested that only S Corporations could be organized as a qualified small business (QSB). At that point I took issue. I raised my hand and clarified, that although businesses that organize as a QSB may choose to be taxed as an S Corporation, that does not preclude traditional C Corporations from organizing as qualified small businesses.

Organization whether it be a traditional organization, or organization as QSB, is separate from electing to be taxed as an S Corporation.

As I covered previously in my post dated 10/12/2010 there are specific limitations as to what types of Corporations may be organized as qualified small businesses.

Please note, an eligible QSB must organize with qualified small business stock before December 31, 2010, in order to qualify for 100% capital gain exclusion. Special holding requirements apply. Also, this must be an original issuance, not a subsequent issuance or qualified transfer.

Great business blog

2010-11-19T10:03:00.002-05:00

I am not one to go around giving out business references all willy-nilly (accountants do a poor job in general of referring people to other people, maybe it's a trust thing).

But there are a few bloggers out there that I love, and that you might fall in love with as well.

One that is worth checking out, is Zeke Camusio. He is the owner of an internet marketing business out of Seattle Washington. He posts some great stuff, and always seems to have something topical for small businesses/ start-ups. Even though he operates an online marketing business, his posts cover a good variety of business topics, which I enjoy.

So check him out at the link below.

http://www.theoutsourcingcompany.com/blog/entrepreneurship/why-most-businesses-fail/

I am not affiliated with Zeke Camusio, his businesses or affiliates.

PTIN Registration: one of the biggest changes in the accounting industry

2010-11-16T12:15:00.000-05:00

As industries go, the accounting industry is fairly well regulated. Employees (especially at larger firms) are expected to have a quality education, go through background checks before being hired, have annual performance reviews, etc. Needless to say big businesses have more to lose by hiring the wrong people than companies without an established reputation.

But, what if your business model is based upon offering as many tax returns as you can take from January 1st to April 15th (when your lease expires), or what if you are just establishing your business and need some extra help on the cheap. Businesses in these circumstances may be more inclined to cut some corners.

PTIN registration is the first step, in telling the IRS who is preparing returns within a firm. It is also very likely the first step in determining whom is at fault for faulty tax positions/ faulty tax preparation. It is also (thus far) the first step to try and make sure that anyone who is making significant tax positions on returns, is also receiving at least a minimal amount of continuing education on a yearly basis. In the near future, those whom are currently required to sign up for a PTIN would also have to pass a proficiency exam of some sort (unless these rules change).

This sounds all well and good, but many in the industry are crying foul. They want to know why individual people within a firm must register, pass an exam, and have continuing education if their work is reviewed by a signing partner, before the return is sent to the client. This is why oversight may change in the near future.

However, I look at it as a good first step. If your boss thinks you are qualified enough to put together substantial portions of a return, then you should be proficient enough to also pass an exam and have some limited amount of continuing education. Or in the more extreme cases, if you want to hang a sign in the window that says you are qualified to prepare tax returns, then you should have to prove that you are qualified before you can accept your first client.

Oh I forgot to mention, that the industry knows there are poor standards out there. That is why when you accept a new client,one of the first things you ask them for is the last three years of income tax returns. You are not only asking to get a intimate knowledge of the client, you also want to see how many mistakes, and what kind of mistakes their previous accountant made so that you might be able to get them a nice little refund as a bonus to signing on with your firm.

Interesting article

2010-11-15T09:00:00.000-05:00

Every once in a while, you trip over something that is interesting and worth sharing.

The Wall Street Journal does a great job of helping businesses. Whether getting ideas on technology changes to help businesses grow, or getting a handle on the economy in your industry, using the Wall Street Journal as a resource is helpful.

With that in mind, check out this article about family businesses and their special concerns.

Also check out the small business section of the Wall Street Journal, which may provide even more helpful hints for small business owners.

http://online.wsj.com/article/SB10001424052748703794104575546553171806306.html?mod=WSJ_myyahoo_module

Please note- I am not affiliated with the Wall Street Journal, its companies or affiliates.

8109-B coupons/ Federal Tax payments/ EFTPS

2010-11-05T10:53:00.000-04:00

If you are a small business owner you may have recently received a notice from the federal government regarding signing up for EFTPS. The information probably included a PIN and a phone number to contact the IRS directly.

Do not be alarmed by this notice. Also be sure to take note that the IRS is contacting you pursuant to proposed regulation. The fact of the matter is, that many banks are no longer going to accept payment coupons because they see no benefit in offering the service to their customers.

EFTPS is a program that directly transfers amounts from your banking institution to the federal government. You can use either the automated phone system or the online system. At this point in time, we are recommending that all of our clients sign up with EFTPS, as their bank will not be accepting coupon payments in the near future. If you need help making this change please contact your accountant, or check out this link to the IRS website.

http://www.irs.gov/efile/article/0,,id=98005,00.html

Medical reimbursement plans for self employed individuals (sect. 105 plans)

2010-11-05T10:49:00.000-04:00

We all know that health insurance premiums for self employed individuals (individuals filing Schedule(s) C, E, or F on their personal income tax return) are deductible on the front page of a personal income tax return. The issue becomes much muddier when you have a self employed individual that has a wife and children, whom are not covered under their own plan. One tax smart move, may be to start a section 105 medical plan.

This plan also known as a self-insured medical reimbursement plan offers many benefits (and a few pitfalls, if it is not implemented properly).

Usually, the first step in this exercise is to hire the spouse of the self employed individual as an employee. A helpful hint in this exercise is to draft an employment contract with the spouse employee, highlighting job duties, pay, hours of work required, etc. This employee will receive compensation for his/her work, but much of that compensation may end up being paid through tax-free reimbursements of medical expenses.

The second step is to create the plan. The employer must have a plan document and provide both the plan document and an agreement with all employees.This document offers them coverage under the plan. Keep signed copies of both the plan document and employee offers in a safe place. The plan document should highlight specific definitions, as well as how medical expenses will be reimbursed. In addition, most plans of this type have a maximum dollar amount that the business will reimburse for employees (this as well as other things can be amended in the future).

Benefit(s):

1. For the spouse- They receive medical reimbursements tax free.
2. For the family- They would have previously filed these expenses on Schedule A and had to apply a 7.5% (of AGI) floor against these medical expenses before a deduction would have been available. With this change they do not have to worry about this ‘penalty’.
3. For the business- These items are deductible against self-employment income avoiding the additional tax (SE) on their personal income tax return.

Warning- Follow these steps very carefully and do your homework. There is nothing illegal or improper about these plans, but the IRS is on the lookout for self employed individuals who are not following the rules and attempting to avoid paying their fare share of taxes. For more information consult IRC section 105, your accountant, or tax attorney.

Qualified Small Business Stock

2010-10-12T16:51:00.000-04:00

One of the most overlooked aspects of incorporating is the use of Qualified Small Business Stock (QSBS), but thanks to recent changes, the use of this stock may be more attractive than ever.

For small businesses forming from September 16, 2010 through December 31, 2010, the excluded gain upon sale of the business may qualify for 100% exclusion.

There are certain limitations as to what type of businesses qualify for QSBS, as well as dollar contribution limitations. But, if you are looking to incorporate a business between now and year end you owe it to yourself to look into QSBS and talk to a tax professional about its benefits and limitations.

Please note- in order to qualify you must hold the stock for at least five years, and other limitations do apply.

Start-up expense deductions increased for 2010

2010-10-12T16:47:00.000-04:00

Business start-up costs, also known as Section 195 costs can traditionally be expensed up to $5,000. Amounts beyond this limitation must be amortized. However, thanks to recent changes starting in 2010 tax year the allowable expense has increased to $10,000.

Qualified real property expensing

2010-10-12T16:40:00.001-04:00

For the first time, certain real property can be expensed under code section 179.

First I will list items that will apply, then I will list specific items that do not apply, then I will talk about further limitations.

So to start out, types of property that definitely apply include:

1. Qualified leasehold improvement property

2. Qualified restaurant property.

3. Qualified retail improvement property

Types of property that do not apply include lodging property.

Further limitations apply to the deductibility of 179 deprecation of real property. One such example is that no amounts may be deducted in a year after 2010, so you must use your deduction in 2010, then depreciate the remaining property value as you would have without considering 179 depreciation, after the 2010 tax year (similar calculation as using section 168(k) bonus depreciation).

Section 179 Deduction increased for 2010 & 2011

2010-10-12T16:32:00.000-04:00

Thanks to the small business jobs bill, key business deductions have been extended through 2010. One of which is the section 179 deduction. For 2010 and 2011, section 179 depreciation has been increased to a maximum allowable $500,000 per business per year (limited to the extent of income). This bill also increased the beginning phase-out of property placed in service limitation to $2,000,000.

Exempt Organizations: Due Dates for timely filing returns and related penalties

2010-08-25T14:43:00.000-04:00

As readers of previous posts would know, normally I don't spend a lot of time focusing on tax exempt organizations, in this blog. But due to the number of inquiries I have recently received, I thought it would be a good time to revisit a common type of tax filing.

Tax exempt organizations are required to file their annual return by the 15th day of the fifth month after the close of their return year. Or in plain language, if your tax exempt organization has a calendar year and closes its books on December 31, 20XX. A timely return should be postmarked or filed by May 15th of the following year. There are two three month extensions that tax exempt organizations can apply for at their discretion.

Penalties for non-filing can be very steep.

Penalties for organizations with gross receipts under $1,000,000 are $20 per day with a maximum penalty of the lesser of $10,000 or 5% of gross receipts for the year. This penalty also applies if the filing information is incomplete.

Penalties for tax exempt organizations whose gross receipts are over $1,000,000 is $100 per day with a maximum of $50,000. Keep in mind that this penalty also applies for failing to file a complete return.

Tax exempt organizations that are required to file form 990-N are generally not subject to late filing penalties.

In addition to these penalties the IRS can impose penalties on responsible parties for failure to file upon request by the IRS. Failure to timely comply with an IRS request can result in penalties of $10 per day to that person. With a maximum personal penalty of $5,000.

Of course these penalties may be abated by the IRS pursuant to their discretion if the tax exempt organization shows just cause for the filing delay.

There may be other non-monetary failure to file penalties such as losing tax exempt status, see my article regarding the small tax exempt organization filing requirements.

Small Tax Exempt Organizations

2010-08-25T14:19:00.000-04:00

The pension protection act of 2006 enacted a myriad of tax legislation changes. One item that was lost in the fold was its affect on Small Tax Exempt Organizations. Small tax exempt organizations are those with annual gross receipts of normally $25,000 or less.

This legislation effectively required all tax exempt organizations to file returns in order to keep their tax exempt status (prior to this legislation small charities were not required to file). In order to keep tax exempt status a small tax exempt organization must have filed at least one return in the last three years.

The legislation also created a new filing form for these small tax exempts known as the form 990-N ( or e-postcard). This filing form is very simple and is so easy to file, most tax exempt organizations should not have any reason to fail to file this form. However, many small tax exempt organizations that previously were not required to file have been caught in a precarious situation, if they have not filed any returns since the requirement came into effect in 2007.

There is good news for all those organizations who fall in this category. The IRS is offering a one-time "get out of jail free card" to all small tax exempt organizations that have not previously filed a required return. The IRS has said that all applicable organizations have until October 15 2010 to file required returns, and the IRS will not change their exempt status. In addition, they will not impose any non-filing penalties. It seems to be a win-win for the IRS and small tax exempt organizations.

If you believe your organization may be in danger there is a list published on the IRS website.

Click this link and it will take you to their web page.

As always consult a tax professional if you are unsure as to your specific tax situation.

Hiring children to work in the family business: A tried and true strategy.

2010-07-19T10:09:00.000-04:00

Although many small and large business owners are already aware of this strategy, some things are good enough to revisit once in a while.

This tax strategy can have the following ripple effects for your children:

Increasing their responsibility
Allows the business owner to show them how to run the business, while potentially providing tax benefits to ‘the family’.
Allows children the opportunity to get a head start on tax advantaged retirement plans such as contributions to IRA’s.

How it works:

Strategy 1: Income earned by children may be tax free (federally) to the extent they do not exceed $5,450.

Example: Sam who works for her mother’s company and is claimed as a dependent of her mother, earns $4,000 cleaning the office building every week. When Sam goes to file her return, although she is a dependent of her mother she still gets her standard deduction up to her W-2 earnings (limited to the first $5,450). So her federal income tax is $0. Her mother would still have to pay Social Security tax on the income, but usually this is a small price to pay to transfer small dollar amounts to your daughter who also now cleans the office (a win-win situation).

Strategy 2: Earned income contributed to the child’s IRA.

Example 2: Sam has worked in the office for a few years and now does filing duties as well as cleaning. Because of this promotion, her annual income has increased to $9,000. While Sam still receives a $5,450 standard deduction, there is another trick she can use to shelter some of that income (if not all). She can contribute (or her parents) up to $5,000 to a traditional IRA account to reduce her taxes by $355*. Or, she can contribute up to $5,000 to a Roth IRA and receive the money tax free (at a later date) for college, or a first home purchase in the future (Sam would give up the immediate tax savings of $355, and there are certain restrictions on these types of distributions).

* Tax without IRA = (9,000 – 5,450) x 10%
* Tax with traditional IRA = (9,000 – 5,450 – 5,000) x 10% (cannot be less than zero)

Happy Memorial Day

2010-05-28T13:27:00.000-04:00

I would like to thank all those who gave their lives for our country. For their friends and family, have a blessed memorial day.

SBA offers tools for small businesses

2010-05-28T11:06:00.000-04:00

Recently the SBA (U.S. Small Business Administration) released a collection of videos designed to help small businesses. This series has tools and suggestions that can help businesses with topics such as marketing, preparing for growth and team building (among others). These videos are designed to be short enough to be interesting, but succinct enough to entice small business owners into action. If you have some extra time, check it out here:

http://sba.gov/strategiesforgrowth/

Interesting article regarding MBT

2010-05-28T08:20:00.000-04:00

In a strange twist of fate, two compelling things have happened:

1. A Grand Rapids Press writer has something interesting and topical that was not taken directly from the AP wire.

2. This article talks about what accountants have been stressing since the implementation of the MBT. Namely that this tax is much more complex than the SBT and although it charges a "surcharge" (essentially a penalty for either adding value to your company, or gasp, actually earning net income) the actual revenue the state collects from this tax is less than collections from the SBT. What this article does not point out is that many businesses are having to pay a much higher share to this tax than others, because there are many advantageous tax breaks and tax credits for certain business types.

http://www.mlive.com/business/index.ssf/2010/05/michigan_business_tax_isnt_wor.html

Simplest visualization of US debt

2010-05-27T09:36:00.000-04:00

Check this out. It is a little nerdy, but hey, do what you know...

This is a visualization of the national budget vs. the proposed budget cuts the Obama administration is attempting to administer in the next 90 days. The rest speaks for itself.

http://www.wimp.com/budgetcuts/

New and Expiring Tax Credits: Part 1

2010-05-20T11:26:00.000-04:00

At no time in the history of the United States has the tax code changed so rapidly, in such a short period of time. With many changes to business and personal income taxes as well as other tax concerns, it is important to stay on top of the ever-changing tax landscape.

In the next few weeks I will attempt to cover most of the major personal and business tax changes that have either gone into effect in 2010, or that will be implemented in 2011.

Some of the major topics I will cover for businesses will include:

The Hire Act
"Universal Health Care"
NOL carrybacks
First year bonus depreciation (168k)
179 bonus depreciation

Some of the major personal topics I will cover include:

Capital Gains rate changes
Tax bracket changes
Education benefits changes
Many expiring tax credits
AMT tax changes
IRA distribution changes

So if anyone would like information regarding a specific tax credit, or tax concern, please let me know.

Deducting Health Insurance Premiums

2010-05-19T16:29:00.000-04:00

The other day I took a phone call from one of our business clients. His business provides insurance services to other businesses. He asked me a very simple question, "I have a business client who has a group health insurance plan for him and his employees, and he needs to know whether or not he can deduct these expenses."

It became pretty clear to both of us, that although it may have been an easy question for him to ask me, the answer to that question is a lot more involved. Thanks to the prevalent use of pass-through taxable entities (S-Corps, and Partnership returns), and changes to tax provisions, deducting health insurance as a business owner is not as easy as paying the insurance bill.

If this business owner has a traditional C-Corporation the corporation would be able to deduct the full amount of the health insurance expenses as long as they have a qualified plan in place that covers all employees (without discriminating in favor of Highly Compensated Employees, or the business owners, or their families).

If this business is instead a Schedule C business or a single member LLC (disregarded entity) the business would not be able to deduct the portion of health insurance purchased for the business owner and/or his family. The health insurance expense for his normal employees (other than himself and his family) would be deductible. However, the portion of the expenses paid for his personal health insurance coverage would be includable on the front page of the business owner's personal income tax return (1040). Therefore, the business owner would be allowed to deduct on his personal return, personal health insurance expenses (to the extent that his business has earnings in the current taxable year). If the business owner had a loss for that same year, he would not be allowed to take the deduction on the front page of his personal return, but would instead include the expense on Schedule A (to the extent that health expenses exceeded 7.5% of AGI).

If this business is instead a S-Corporation, and the business owner is a more than 2% owner, the preferred method for deducting this expense is to include the amount as a "Gross-up" of W-2 wages to the owner/shareholder. This method is a little more involved, but basically at the end of the day, the deductibility is treated similarly to Schedule C business owners.

In conclusion, thanks to many changes in the tax code in recent years, businesses and individuals should be aware of costs and opportunities associated with business tax decisions. If you have concerns regarding your business's specific tax items, it is important that you use a qualified tax representative.

Private letter rulings

2010-05-17T11:18:00.000-04:00

One of the major “insurance” opportunities the IRS offers for uncertain tax positions is called private letter rulings. These rulings are given to businesses and individuals on a case by case basis and cannot be relied upon by other taxpayers, but in the right instances can be very beneficial for taxpayers as a basis against an adverse IRS opinion. IRS private letter rulings cost between $625 and $11,500 (for a complex private letter ruling).

Business owners considering filing for a private letter ruling should do their homework before sending in a request for a private letter ruling as there are certain pitfalls associated with this type of filing, including:

1. You may have an issue that is already covered under an automatic or simplified method, that is both standardized and less costly than a private letter ruling.
2. Check IRS publications for matters that are already covered under statute, court decisions, revenue ruling, revenue procedure, etc as these have a higher standing as far as the IRS is considered than private letter rulings.
3. Make sure the IRS has not placed your topic of consideration on its “no ruling” list.
4. Seek guidance from the IRS directly. The IRS may be able to direct you to an IRS publication or revenue ruling that speaks to your issue directly.

Remember, an IRS private letter ruling may not always be the answer, but $650 may be much more tolerable than an adverse IRS ruling down the road with associated fees and penalties that can add up quickly.

Contributions to 401(k) and simple plans for 2010

2010-05-04T09:21:00.000-04:00

401(k) and Simple contribution limitations have remained the same from 2009.

401(k) contributions are limited to $16,500 for individuals, with available additional ‘catch-up’ contributions available to those ages 50 years and older of $5,500 (total available contributions of $22,000).

Simple contributions are limited to $11,500, with additional ‘catch-up’ contributions available to those 50 years and older of $2,500. (for total available contributions of $14,000).

Eleven Easy Ways to Destroy Your Company

2010-05-04T09:18:00.000-04:00

There was a great article written recently in the New York Times called ‘Eleven easy ways to destroy your company’. It is a short one page article highlighting the most common pitfalls of new and existing businesses that business owners might be too busy to keep in mind.

Check it out here:

http://boss.blogs.nytimes.com/2009/10/27/eleven-easy-ways-to-destroy-your-company/

Mileage rate 2010

2010-04-26T13:56:00.000-04:00

The standard mileage rate for employers to reimburse employees for business use of a personal vehicle has been decreased from the 2009 mileage rate level.

For 2009 the standard mileage rate was 55 cents per mile.

For 2010 the standard mileage rate has been reduced to 50 cents per mile.

'Schedule C' business or 'Other Income'?

2010-04-26T13:30:00.000-04:00

If you are one of the millions of Americans who receive a form 1099-MISC at year end, you may have trouble deciding how to characterize this income. If you are conducting a trade or business you would be required to file your business activity under Schedule C. If you are not, you would likely file this income on line 21, other income on your return. But this simple decision has very different tax effects, and may not be as easy as one might think.

The IRS has defined a trade or business as, “an activity carried on for a livelihood or in good faith to make profit.” Business activity can also be classified as one that is regular, frequent, and continuous. Businesses in this regard are not required to make a profit to maintain their status as a business, but must be furthering their business interests.

If you do not fall into that previous category then your income would most likely fall into the category of other income. Other income is not subject to self-employment tax, but the trade-off with this income type is that expenses are limited to the extent of the income you have received.

Please note that the fact that you have no intentions to continue the venture beyond one year’s time may not have any effect on whether or not you were conducting business activity during the time in which you earned income (one of the major misconceptions related with business activities).

Please also see the IRS small business/ self employed section for further information, or contact your tax adviser.

http://www.irs.gov/businesses/small/index.html

Long Term Care Insurance

2009-10-13T13:11:00.000-04:00

Recently the IRS released guidance on the deductibility of Long Term Care Insurance. Long Term Care Insurance, has been around for many years, but compared to other insurance products this type of policy is considered a new type of insurance. These plans are designed to cover the rising costs associated with caring for yourself or your family as you grow older. There are many providers for this insurance, with many different coverage types, I will avoid the discussion of whether a policy makes sense for ‘you’ but rather focus on the concerns of a business owner considering the use of this policy.

Self Employed individuals:
Self employed individuals can generally deduct any LTC premiums paid for themselves, their spouses or dependents. In order to deduct these amounts, business owners must have a employer sponsored plan and deductibility would be limited to details specified in the plan document. Therefore LLC’s, S-Corps, and sole proprietors can deduct premiums for coverage of qualified members, subject to specific limits. Members are not allowed to participate if this coverage is available through their spouse, or through any other employer the owner works for, in addition to his business. In addition, businesses must have earned income to off-set with this payment, otherwise the amounts are non-deductible. Lastly, the amounts may be limited according to IRS rate tables that limit the extent of deductions for these types of contracts based upon age of the recipient (eligible LTC premium amount).

Employer/Employee relationships:
When an employer has employees and offers the employee group LTC coverage as a benefit of employment according to a plan written by the corporation, there are many potential benefits. One of the major benefits is that LTC insurance premiums are fully deductible and are not limited to the same income and personal age limitations that self employed individuals have to deal with (not limited to eligible LTC premium amount). Also benefits received are not included in the employee’s income and the employee can receive the LTC benefits tax-free. In this case, if you were an owner of a C-Corp, whom was also an employee, in theory there is no major difference between you and your other employees. Therefore, as long as your plan covers the employee group without consideration of ownership status, the owner-employee would be eligible for LTC insurance benefits.

Although, I have tried to provide plain-English explanations to this topic, please do not misconstrue this to mean that these plans are simple. If you have LTC planning considerations, please do yourself a favor and find a good insurance provider, and CPA that can go through potential benefits, and avoid costly mistakes associated with Long Term Care Insurance.

If you would like additional information on this topic please consult:
Code Sections: IRC 7702B; IRC 213(d)(1); IRC 162(1); IRC 162(a); IRC 106(a)
Finn, Daniel R., ‘Long Term Care Insurance and Tax Planning’ Journal of Accountancy. PP 44-47. August 2008 Edition.

Social Security Max. 2009

2009-09-01T16:21:00.000-04:00

For the tax year 2009, employers are instructed to abstain from withholding social security tax after an employee reaches $106,800 in social security wages. This limit would limit an employee to paying $6,621.60 in social security taxes in 2009.

For 2008 the social security limit was $102,000 in social security wages, or $6,324.00 in social security taxes withheld.

Note- There is no limit on Medicare wages for either 2008 or 2009.

Keys to making Cash flow happen

2009-08-24T13:05:00.000-04:00

Many business owners face this dilemma, I am busy, but the cash isn’t making its way to my bank account. I know what you may be thinking, this should not be a problem, but it is a problem for more businesses than you would think. In fact, many accountants would do well by more aggressively trying to collect on their overdue accounts. So, as a small business owner where do you start?

The first logical step is to set forth a plan of action. Without a sound plan you probably will not know who you should be collecting from, what types of things that should be said, and what types of results are realistic for your business. To help you set up an action plan here are some helpful hints.

1. Ask for the money. If you have completed work or have signed contracts which have payments in arrears, you have to be willing to demand payment. That doesn’t make you rude, it is as much how you ask for payment as it is what you want them to do, if you don’t ask for payment, they might not realize they are behind on payments.

2. Hold work until payments are satisfied. If you are in a position where you offer ongoing services, or better yet you have not delivered the product simply withhold the work until you are paid.

3. Offer a flexible payment option. If you have a really good customer whom you don’t want to lose, but also whom you can’t collect payments from on a regular basis, suggest a payment plan that can work for both of you. That way you keep your best customer and you are happy with the result. Just make sure that your agreement is enough to cover continuing work so that amounts owed do not keep piling up.

4. Consider adding late fees or pre-payment agreements with certain customers. For your habitual offenders this is often the best option. They will not like that they are charged interest on the money and may pay up. One word of caution, it is best to talk with your customers before you make this change; it is never good to give your customers bad surprises.

5. Always the last resort, take the customer to collections or small claims court. You want to exhaust all other options before this one as you are likely to lose this customer after this step. Unfortunately, this is often the only way businesses can collect on amounts they are owed.

Once you have your plan of action formulated, follow through with your efforts. It is stressful for most people having to call and ask for payment, but more often than you would think people are willing to work with you to make things right.

Energy Tax Credits: trying to make sense of it all

2009-07-24T10:09:00.000-04:00

These days it seems like everyone is trying to do some small things to save money and/or help the environment. Recent tax credits offered from the federal government and State of Michigan hope to encourage this behavior. But, with new and changing credits come increased layers of confusion. If you are as confused as the rest of us on what credits are available to you as part of this new initiative, there is a bit of good news. The Michigan Alternative & Renewable Energy Center at Grand Valley State University has recently compiled some useful guides that should help to take the pain out of these tax credits.

They have both quick reference guides for those of us that need to know what types of credits are available to individuals and businesses, and more detailed information for those of us that like to know all the details (See the link below).

Another source that may be helpful for individuals would be form 5695 from the IRS (link below) or this IRS release regarding business energy tax credits.

Michigan Alternative & Renewable Energy Center release
http://www.gvsu.edu/marec/index.cfm?id=16C67908-0454-6A92-FC86012AE1BDD508

IRS form 5695
http://www.irs.gov/pub/irs-pdf/f5695.pdf

IRS release regarding energy tax credits
http://www.irs.gov/newsroom/article/0,,id=209564,00.html

To extend my posting earlier this week

2009-07-17T14:07:00.000-04:00

Earlier this week I posted a blog titled Economic Free Fall Part I. In connection with this posting I wanted to point out that new unemployment rates came out this week. There were no surprises in this report (unfortunately). Here is a link to an article on yahoo about the newly released unemployment rates in which Michigan earned the unenviable position of first (and highest unemployment in over 25 years).

http://finance.yahoo.com/news/Michigan-unemployment-tops-cnnm-3856805725.html?x=0&.v=3

Insurance for all may get ugly for small businesses

2009-07-16T11:50:00.000-04:00

I have no problem with the concept, insurance for every American is something that I believe would be helpful for a majority of Americans…If it does what it is designed to do, and that would be to make health insurance affordable and/or available to all Americans. But as science teaches us: every action has an equal and opposite reaction. So we begin the real fight: WHO IS TO PAY FOR THIS PROGRAM?

Under a recently released house measure (this is not a bill, it has not passed) members of congress would like a big investment from small businesses to further this initiative. Congress would structure a penalty system for small businesses that do not provide health care to their employees and it would be structured something like this:

Employers with payrolls: Penalty amount (of gross payroll):
Over $400,000 8%
250K – 400K (some smaller penalty)
Less than 250K Exempt from penalty

To further this cause, employers with payrolls less than $250,000 would be offered a tax credit as an incentive to offer health insurance.

According to the National Federation of Independent businesses this measure would affect more than one million small businesses.

Normally I don’t comment on bills that have not been finalized, but this would be a major shift in tax policy for small businesses.

Also check out a great article in the wall street journal that I gleaned much of the facts from, and from which you can extract more information.

http://online.wsj.com/article/SB124759535535340189.html

Economic freefall part 1

2009-07-14T08:42:00.000-04:00

A recent study by the University of Michigan estimates that michigan unemployment should peak in 2010 at nearly 16%. This is a staggering estimation keeping in mind that Michigan's current unemployment rate is over 12% and climbing and the full effects of manufacturing and tool and die unemployment may increase as the big three auto makers 'make-over' their companies. The one ominous fact left out in this study was an estimation for the future.

While they believe the unemployment rate will stabilize in 2010, there is no further estimation for when things 'go back to normal'. Unless they believe this high level of unemployment is the new normal (in which case we are all in trouble). I guess what I am trying to say is that our state, and the state of our economy is in big trouble. When you begin to measure the number of unemployed people as a fraction of 1 in 7 (actually higher than this), you begin to wonder how to take these people off the unemployment roles.

Many people talk about education as the key. What most people fail to understand is that many highly educated people are out of work. Yes we have lost many jobs related to GM, Chrysler and others, but many of the jobs are tool and die related jobs that take highly skilled laborers and are very worker intensive. When Michigan businesses look back at this time they will think one of two things, either this change was needed to bring us into the 'new economy', or this was the wake up call (that we missed) showing us how important manufacturing really is to our nations' economy. I am not trying to strike fear in the hearts of Americans, and I would very much like to be wrong, but as the days pass I am leaning much more toward the later.

Personal Service Corporations

2009-07-08T09:17:00.000-04:00

One of the things that keep accountants up late at night is heavy taxation. That is why most accountants dread the deadly little pill that is Personal Service Corporations (PSC) and Qualified Personal Service Corporations (QPSC). Any corporation in which substantially all the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial, performing arts, or consulting, and substantially all the stock, by value, is held directly or indirectly by employees, retired employees, the estate of any such employee or former employee is deemed to be a Qualified Personal Service Corporation .

For this purpose the test for ‘substantially all’ is defined as 95% or more of the time spent by employees of the corporation is devoted to these activities. This also includes auxiliary functions that may support the proper function of these services. Such functions include the supervision of employees, and support services that may be related to the proper function of the business as a whole. This same 95% test applies to the ownership of the business function.

The largest stigma of all is the fact that if you fit the QPSC test(s) you are taxed at the highest corporate tax rate of 35% on all earnings. Even the average C Corporation has a much more favorable tax rate than this form of entity.

If you are a new business preparing to incorporate, please keep these facts in mind as there are few benefits and many pitfalls associated with this type of entity. Also, if you think you own a personal service corporation and these issues have not been addressed, contact a qualified adviser or send me an e-mail at tonym@dalbergandassociates.com.

SEPs : Follow the law and everything will be okay

2009-06-15T09:58:00.000-04:00

As business owners prepare for the second half of 2009, there are tax planning opportunities that can be advantageous even in the middle of a tax year. One such opportunity is employing a retirement plan for an employee group. I am covering one retirement plan type here, but there will surely be more to follow in the future.

Many employers have heard about SEP plans, and many small businesses use them as a helpful retirement vehicle. SEP stands for simplified employee pension, which allows for employers to contribute amounts to employees’ SEP individual retirement accounts or SEP-IRAs.

SEP plans are usually employed in small businesses as a retirement vehicle for closely held corporations and partnerships in place of traditional IRAs which have lower contribution limits. In 2009 the maximum contribution for a IRA is $5,000 while the maximum contribution for a SEP is limited to the lesser of 25% of compensation (W-2) or $49,000. So you can see the potential upside to contributing larger amounts per year to your retirement plan through a SEP plan.

It is easy to set-up a SEP plan; there are only three general rules to follow. First you have to set-up the plan. Your business can do so by either filling out IRS form 5305-SEP or any other equivalent form provided from a financial institution. Second, you have to provide all employees with a copy of the plan. Last, you have to set-up SEP-IRAs for or by each individual employee.

Once you have the plan set-up you only have to follow two very important rules. One, you have to make substantially equal payments to all employees covered by the plan. For this test note that substantially equal means that contributions can be tied to a percentage of W-2 wages, or you can use the same contribution for all employees. Second, you have to remember to always contribute amounts equally to all covered employees, even if you are husband and wife and you see your compensation as ‘shared’.

Remember that you may be able to restrict the definition of covered employees to exclude those employees that have not completed a time of service restriction, or may be considered part-time or seasonal employees. Beyond these restrictions, the only maintenance a SEP Plan should have after the initial set-up would be verifying that contributions have been made substantially equal to all employees that qualify. If you do these things you should have a very beneficial retirement plan without many of the restrictions imposed by other plans (as long as the stock market doesn’t consume all of your savings J).

NOL carry-back for eligible small businesses

2009-05-28T15:00:00.000-04:00

All businesses have a window of opportunity to carry-back losses (known as NOL or Net Operating Losses) to a prior period in which they had earnings (and therefore income tax payments) in order to receive refunds of these amounts. This carry-back period had been only two years under prior tax law. Now the carry-back period has been extended to five years for qualifying small businesses for tax year 2008 only; a major benefit to businesses that have been adversely affected by the recent economic downturn.

In connection with this change, if your company previously elected to forgo the carry-back period because it would not have been beneficial, you can now reverse that election and choose to carry the amounts back to 3, 4 or five years. This is a one-time allowance to reverse your election to forgo the carry-back period.

To make matters better, a non-fiscal year ending business can elect to either use the carry-back provision in the year that begins or ends in 2008. Very good news for those businesses as it gives them the flexibility to plan themselves into a loss for either year and maximize this one-time carry-back extension.

Eligible small businesses are those that have had $5 Million in Gross Receipts or less on average over the last three years ending with the year they are attempting to claim the refunds in question. So if you own a business that has averaged less than five million per year in gross receipts over the last three years you are an eligible small business for purposes of this test. Please note that the rules are not this clear-cut in all cases and certain other businesses may be eligible, and generally the IRS has furthered the definition as Section 172(b)(1)(F)(iii) businesses replacing 15 million with 5 million for purposes of the gross receipts test.
There are also many specific filing requirements that may be pertinent to your specific case, with that in mind please consult a tax professional or consult Rev. Proc 2009-26

New IRS 941-X: Finally a tax form that makes sense

2009-05-21T08:37:00.000-04:00

The IRS recently released a new form for correcting previously misstated federal withholding amounts. This new form, form 941-X replaces the previous form 941c, Supporting Statement to Correct Information.

If you have ever worked with the old form 941c, you will love the changes 941-X has offered. With the old form you had to separately calculate discrepancies for social security withheld, Medicare withheld, social security matched by employer, etc., then you had to show the difference for each line item instead of using a simple grouping method (that would have been more than sufficient). The 941-X makes simple changes that allow for much easier explanation of discrepancies found by employers.

Another difference is that with the new 941-X, if you have both over-reported and under-reported your 941 liability for a tax period, you must file two separate 941-x statements to correct your mistake.

In connection with this change, the IRS has also eliminated interest charges on errors corrected with form 941-X. In order to qualify for the interest free adjustment, a business must file and pay for adjustments with form 941-X by the due date of the return for the return period in which the error was ascertained. If you do not pay the amount due to the adjustment, then interest will accrue from the time the return was due to be filed (per Code Sec. 6205).

Example: On February 11, 2009, you discover that you under-reported $10,000 of social security and Medicare wages on your 2008 fourth quarter form 941. File 941-X and pay the amount you owe by April 30, 2009 because you discovered the error in the first quarter of 2009, and April 30, 2009, is the due date for that quarter. If you file form 941-X and pay the amount when you file (before April 30, 2009) you will avoid interest on your discrepancy.

If you have further questions related to under-reporting of tax liabilities consult a tax professional or access this link to the IRS form 941-X instructions.

Note- This only applies to previously filed form 941 if you file 941-X within 3 years of the date form 941 was filed or 2 years from the date you paid the tax reported, whichever is later.

Standard Mileage Rate for 2009

2009-05-01T09:52:00.000-04:00

Recently the IRS increased the standard mileage rate for personal use of a vehicle for business. As many small business owners are aware, this rate is the rate that employees can be reimbursed for business use of a personal car. If a company vehicle is used, business owners cannot take standard mileage rates.

For 2008 the standard mileage rate from July 1, 2008 through Dec 31, 2008 was 58.5 cents per mile.

For 2009 the standard mileage rate has been decreased to 55.0 cents per mile. This change has been effected through both increasing average cost of vehicle ownership, and the decreased relative cost of gasoline.

Depreciation

2009-04-27T11:03:00.000-04:00

Depreciation is an item that most small business owners worry about, and an item that has experienced many changes recently. Although the premise of depreciation remains the same; the idea that certain items purchased have a life that benefits the business beyond one year, The Small Business and Work Opportunity Tax Act of 2007 (or SBWOTA) and the Economic Stimulus Act of 2008 brought many changes. Including increases to the allowable deduction of both sec. 179 depreciation expense and sec. 168(k) or “bonus depreciation” as it is more commonly known.

For 2008 section 179 depreciation expense increases to $250,000 for qualified property with a phaseout threshold to $800,000.

For 2009 section 179 depreciation expense decreases to $133,000 for qualified property with a phaseout threshold to $530,000.

For 2008 Section 168(k) “Bonus Depreciation” expense increases to 50% of qualified property for first year purchases, aka purchases made in 2008.

As of this date, there is no “Bonus Depreciation” expense allowable for the calendar year 2009.

Welcome

2008-12-12T09:16:00.000-05:00

Welcome to my blog. Thanks for stopping. I will be posting new content soon.