Small Business Profit Explosion

Client Question: Can Those Companies That Advertise on Cable TV Really Eliminate My tax Problems?

Every year I hear this question many times from taxpayers who are behind in their taxes. It’s understandable, the IRS has scared them and they are looking for a quick and easy way out.

The problem is that many of these tax problem resolution companies have been found guilty of deceptive trade policies where they overpromised, collected tons of money upfront and then failed to perform. In fact, many of their customers had bigger problems after they were hired then they did before.

Checkout this link to an article written by David Leeper (an excellent tax attorney if you ever need one) for the El Paso Times that goes into more detail specifically on this point. http://bit.ly/JP0sME

 

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

 

Client Question – I Do Non-Compensated Work For A Charity. Can I Deduct Auto Expenses?

Answer: Not exactly. If you use your own car, you may deduct actual gas expenses plus related tolls and parking fees attributable to charitable related travel. Instead of keeping detailed records, you may choose the IRS-approved flat rate deduction of 14 cents per mile in 2012.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

 

Customer Question of the Week – My Child is Working Can I Still Claim Them on My Taxes?

If they’re under 18 or younger, yes.

Once your child marries you can no longer claim them, even if you’re supporting them.

It’s when they get older that it gets tricky. In order to claim your child that is over 18 they must be a full time student for 5 months or more and you must have supported them for the year. Their yearly income can exceed $3,700 for the year.

If your child is over 18 and not a full time student,  the only way you claim them is if they make less than $3,700 for the year and you must have paid over half of their living expenses.

Once your child turns 24 it no longer matters if they’re a student or not. The only way to claim them is if they make $3,700 or less for the whole year.

Your child may need to file a tax return; but, they must specify they are being claimed by someone else. If they do not, this can cause problems with your tax return. There are ways of fixing this, but it will take time and other tax preparation fees may accrue.

I hope this clarifies the whether or not you can claim your working child. It can get complicated. If you need any more clarification, call our office at 915-857-8158. 

 

Client Questions - Can I Deduct My Spoiled Inventory?

Question: A florist called our office this week asking if she can deduct the cost of flowers that didn’t sell over Valentine. I get this question often from restaurant owners also.

Answer: Since flowers and food have a short shelve life, it is very rarely held in inventory. Normally the business owner deducts the cost of the flowers or food when they are purchased. Accordingly, they cannot be deducted again when they are thrown out.

Larger retailers, wholesalers or manufacturers who have an inventory on their tax return will get a deduction when they write items of inventory off as worthless.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

 

Client Question: Can I still make an IRA deduction if I am retired?

Answer: Normally no. But, if your spouse is still working you will qualify for a “spousal IRA”. If you are both over 50 you can deduct up to $6,000 each for a total of $12,000 (assuming either of you earned at least that much during the year). You have until your tax return due date to make the annual contribution.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Client Question of the Week: How long am I required to keep my tax records?

Question: How long am I required to keep my tax records?

Answer: “Audit-proofing” your return means having the proper documentation to proof a deduction if you are audited. We have written in the past about what documentation is required (see our ‘Surviving an IRS Audit Series link under categories on our blog).

But, how long you should keep records depends on various factors:

1. If you owe additional taxes, and situation 2, 3, and 4 do not apply – then 3 years.
2. If you do not report income that you should report and it is more than 25% of your gross income shown on your return – then 6 years.
3. If you file a fraudulent income tax return – No limit.
4. If you do not file a return – No limit.
5. If you file to amend a previous return – Then the later of 3 years or 2 years after the tax was paid.
6. If you amend your return due to a bad debt deduction or loss from a worthless investment security – then 7 years.
7. If you have employees – then your employment tax records must be kept for 4 years.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Client Question of the Week: When should I incorporate my business?

Question: When should I incorporate my business?

Answer: This week I had an appointment with the owner of a small trucking company who wanted to know if he should incorporate. He has been in business for about five years and had grown the company to about $700,000 in revenue but was still having small losses due to high fuel costs and a slow economy.

As I told him, there are really only four reasons to incorporate:

1. If you are in an industry that has a high legal exposure such as doctors, construction and trucking (due to possible accidents by his drivers). But, this may not be enough of a reason. A business owner’s first line of defense should be their liability insurance. Also, many startup business owners have very few personal assets so they are in effect “judgment proof”.
2. To save taxes. About 87% of small businesses who incorporate are formed as S-Corporations. The ability to save social security taxes is the big reason. The idea can be illustrated by considering a small business that has a schedule C (sole proprietor) income of $100,000. They would pay self employment (SE) tax of $15,300 (15.3%) on this business income. If they are an S-Corporation and the owner pays themselves a salary of $60,000 then the remaining $40,000 would be not subject to the SE tax for a savings of $6,120.
3. If the business has more than one owner. For these businesses I highly recommend that they start off incorporated and structured as a S-Corp. A partnership has shared liability by the partners. This basically means that your partner can borrow money or sign agreements that you are also personally liable for even if you don’t agree with it.
4. To look bigger then you really are. The idea here was that having the words “President” on your card made you look more attractive to your prospects. In the world of the internet and social media this really just doesn’t work anymore.

These reasons must be compared to the following extra costs related to incorporating. These include:

• The cost of having a good accounting system. For a schedule C all I need to prepare the income tax return are its income and expense items for the business. Once you incorporate I will also need good numbers for your assets and liabilities. This means spending the time and money to have a real accounting system. Something that I strongly believe every business owner should have anyways.
• You have the cost of incorporating. If you do it yourself online this will cost you around $500. If you hire an attorney to incorporate you this will cost you about $1,000 to $1,500.
• You will need to file a separate corporate return that will cost you at least $750 per year.
• In Texas, you also may have to pay a franchise tax return of 4.5% on your gross profit.

So what did my trucking company owner decide? Well, he decided I had given him a lot to think about and he probably will wait until the company starts to make money before he incorporates.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Client Question of the Week: Why did the IRS penalize me 10% for sending them a check to pay my payroll taxes?

Question: Why did the IRS penalize me 10% for sending them a check to pay my payroll taxes?

Answer: Beginning January 1, 2011, the Treasury Department eliminated the system that processed the yellow coupon books (Form 8109) that most small business owners brought to the bank in order to pay their required federal tax deposits for payroll, income tax estimates & extension payments. Now, taxpayers are required to make all of these tax deposits using the Electronic Federal Tax Payment System (EFTPS). Failure to do so can result in a 10% penalty.

In order to enroll in the EFTPS system small business owners should go to www.eftps.gov or by calling 1-800-555-4477.

New businesses that indicate a federal tax obligation when requesting their Employer Identification Number (EIN) will automatically be pre-enrolled in EFTPS. They will then be mailed instruction on how to activate their enrollment.

If you must pay by check in order to avoid a late payment penalty (due to problem with EFTPS or while waiting for the temporary PIN#) must be able to prove that they mailed in at least two days before the due date and mail it to the following address:

                Financial Agent

                FTD Processing

                P.O. Box 970030

                St. Louis, MO  63197

 

Be sure to write your company’s EIN# and print the tax period being paid.

 

If you receive a penalty notice you should 1) enroll in the EFTPS and 2) write a letter responding to the penalty notice requesting abatement. Be sure to enclose proof that you enrolled. Even though we have had success doing this I won’t promise that they will abate the penalty. The IRS is seldom consistent in their treatment of taxpayer penalty abatement requests. But, I know it won’t work if you don’t at least try!

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.