SEPs : Follow the law and everything will be okay

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

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

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

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

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.

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