Tuesday, June 28, 2011

New Form 1099-K

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.

Friday, June 24, 2011

Business Mileage rates increase

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.

Thursday, June 16, 2011

Hiring Employees without proper documentation is more dangerous than ever!

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:

Wednesday, June 8, 2011

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

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.

Friday, June 3, 2011

Michigan Business Tax (MBT) Repeal Continued

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.

Wednesday, June 1, 2011

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

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).

Monday, May 30, 2011

Michigan Business Tax (MBT) Repeal Continued

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:

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...

Friday, May 27, 2011

Michigan Business Tax (MBT) Repeal Continued

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.

Wednesday, May 25, 2011

Other Mileage Rates- 2011

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

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.

Monday, May 23, 2011

Michigan Business Tax (MBT) Repeal Continued

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...

Friday, May 20, 2011

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

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.

Monday, May 16, 2011

Payroll: FICA Withholding Reduced

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.

Friday, January 7, 2011

Smart Year End Tax Moves Part 5

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.

Wednesday, January 5, 2011

IRS releases Audit Technique Guide on Capitalization

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: