Small Business Profit Explosion

Tax Tip of the Week- IRS Kicks Off Random Corporate Audits

 An IRS official says, about 2,500 small corporations (those with assets of less than $250,000) will be audited as part of the IRS national research program. Starting in April, tax returns from 2010 will be reviewed. The IRS will use the results of these exams to update its return audit selection formulas.

Adding these random audits to the increase in audits due to the massive increase in the number of IRS auditors since 2007, greatly increases the odds that your small corporation may be audited.

This may be a good time for you to meet with your tax preparer and discuss any potential exposure you may have.

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.

 

Tax Tip of the Week – YES, We’re Still Here!

We’ve been working so hard on tax returns these last few weeks that we’ve neglected our poor little blog. 

Just a reminder, if you haven’t brought in your tax information you need to do it, and soon! The deadline this year is April 17^th.

We can only guarantee we can get your tax return done by the deadline, is if you bring you COMPLETE tax information to the office by April 4^th. After that, we can no longer guarantee it will be done by the deadline. Remember, if you owe money this year and do not meet the deadline you will be charged interest and penalties. If you need an extension, please call our office at 915-857-8158 so we can submit one for you.  Again, if you owe money and file an extension you will still be charged interest and a penalty for not paying your taxes by April 17^th.

Now back the tax tip of the week. We read this article regarding which deductions never to take. A lot of the deductions are questions that we get often. Click on this link, http://yhoo.it/GWLXAM. We hope it helps clarify any questions. 

 

Tax Tip of the Week: IRS Declares War on Charitable Contributions

One of my clients recently was selected by the IRS to have his tax return audited because he had a higher than average contribution deduction on his tax return. This is not me just making an assumption – this is what the IRS auditor told me. To be accurate, she said, “We have been auditing a larger number of high donor tax returns lately.”

When this is combined with the IRS auditing more charitable organizations, what other conclusion can you reach? Why would the IRS declare on charitable contributions you ask? Well, my opinion is that “rich” taxpayers’ helping the less fortunate doesn’t fit with the extreme liberal agenda where BIG GOVERNMENT is responsible for taking care of all us. How dare we co-op the government’s job!

Whether my opinion is right or not is immaterial. If you deduct donations on your return be warned – you are now a target for an IRS audit.

So what should you do? Well you can just stop donating. But, this would be just giving in to the big bully. Instead, I would recommend that you continue (or even increase) your good work and donations. But, be prepared to prove your deductions. Check out some of our prior blog articles on how to document charitable donations and how to win if challenged by the IRS:

• Cash donations substantiation requirements (Link http://bit.ly/waHe7I )
• Noncash Donation Substantiation Rules (Link http://bit.ly/zSt9fE )
• How do I prove to the IRS that I really did make donations to Good Will (Link http://bit.ly/pgC9bk )

 

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.

 

Tax Tip of the Week: Retirement pay for owner doesn’t reduce SE tax

The tax court ruled that retirement payments made by self-employed business owners for themselves cannot be claimed as a deduction on Schedule C in order to reduce self employment tax (the business owners’ Social Security and Medicare).

It is deducted from adjusted gross income on form 1040 in order to regular reduce income taxes.

Contributions for the business owner’s employees and the costs of running the plan may be deducted on the Schedule C and will reduce both income & self-employment taxes. 

                               

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.

 

Tax Tip of the Week: New tax return 1099 filing question poses danger to taxpayers and preparers

Two new questions on tax returns for businesses are giving tax preparers fits and exposing taxpayers to potentially large penalties.

The IRS wants to know if self-employed, farmers, landlords, partnerships, regular corporations and S firms made payments that must be reported on 1099s.

If so, they must also check a box stating whether they filed or will file all 1099s.

Preparers of their returns fear they’ll have to act as IRS agents to be sure their clients followed the information reporting rules. And they worry that the IRS will hit them with a preparer penalty if it turns out that clients messed up the 1099 filing rules.

Filing tip: The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 repealed the 1099 rules for landlords. Since 1099 requirement never went into effect, the question on Schedule E of whether landlords made any payments that required the filing of form 1099’s should be answered “no”.

                                                               

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.

 

Tax Tip of the Week: Short of cash for your IRA deposits – Get a loan from the IRS

Are you short of cash for an IRA contribution this year? The IRS may give you a “loan”.

Planning strategy: Use your federal income tax refund to fund your IRA contribution. Simply file your 2011 return early; claiming a deduction for the amount you intend to contribute (assuming you are allowed to make a deductible contribution). When you receive the refund, use it to help fund the IRA contribution you deducted on your return

Is it legal? Absolutely, the IRS approved this taxpayer-friendly technique years ago. (IRS Revenue Ruling 84-18) All you have to do is make the IRA deposit by the April 17 deadline.

The IRA contribution limit for the 2011 tax year is $5,000 ($6,000 if age 50 or older).                                                          

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.

 

Tax Tip of the Week: Key Tax Breaks for iPads

The IRS has informally indicated that iPads and other tablets will be treated like cell-phones when employers provide them to employees. Thus, employees won’t be taxed on the value of personal use, as long as the devises are provided primarily for business reasons rather than in the form of compensations (SBTS, November 2011). Similarly, reimbursements made by employers to employees for personally owned iPads generally should not be subject to tax when used primarily for business.

                                                               

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.

 

Tax Tip of the Week: IRS sets new 2012 retirement plan limits.

The IRS issued news Release-2001-103 (10/20/11) that announced the following Qualified Retirement plan limits for 2012:

Qualified Plan Provision                                                                                                                                                                                                                                                                                            2011                       2012

Maximum annual dollar limit for defined benefit plans                          $195,000              $200,000

Maximum dollar limit on additions to defined contribution plans        $ 49,000               $50,000

Maximum compensation taken into account from qualified plans      $245,000              $250,000

Dollar limit for defining “key employees” in top-heavy plans                $160,000              $165,000

Dollar limit for elective deferrals to 401(5)s                                             $16,500               $17,000

Dollar limit for catch-up contributions to 401(k)s                                    $5,500                 $5,500

Dollar limit for contributions to SIMPLEs                                                  $11,500                $11,500

Dollar limit for catch-up contributions to SIMPLEs                                  $2,500                  $2,500              

                                                               

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.

 

Tax Tip of the Week- Employee Discounts

Discounts on your business’s goods or services may be given to employees and their families tax-free. You can provide anything your business makes or sells at a reduced price, but never below cost.

Services may be provided at a discount of up to 20%.

Discounts must be given across the board to employees and families (or even retired employees), not just to higher paid employees.

There are a few items specifically prohibited from being discounted without being taxed to employees – primarily, real estate and investment property.

  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.

 

Don’t forget your required year-end IRA distributions!

Taxpayers 70 ½ and up must take their payouts from IRAs and company plans by year-end. Start with your December 31, 2010 IRA balances and divide each of them by a factor for your age. (The age factors are printed in IRS Publication 590 which you can find at www.IRS.gov .) You can use a higher factor if you are more than ten years older than your spouse. The sum of these amounts can be taken from any of IRA you choose. The process is similar for retirement plan payouts, but you must take the required amount from each plan.

Failing to do so can result in a 50% penalty on the amount that should have been distributed. The IRS can waive the penalty if the individual can establish that the shortfall was due to reasonable error and steps are being taken to remedy the failure to distribute.

 

  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.

 

7.5 Year-End Ways to Slash Business Income Taxes

There is still time to cut your business income tax bill for 2011. Here are 7.5 tax cutters that you should consider implementing before year-end:

1. Buy equipment this year. For 2011, the maximum 100% deduction of equipment under Section 179 is $500,000. This is scheduled to be reduced to $125,000 for 2012. There is also a bonus 100% depreciation on new equipment (not used) will be in place for both 2011 and 2012.
2. Write-off your bad debts. If your business uses the accrual method, you should write-off any receivables that you deem to be uncollectable. Document your good faith effort to collect these debts. Remember, if you later collect an account that you wrote-off you will need to pick up the total amount as income. 
3. Write-off old inventory. Review your inventory and write-down old inventory to market value. Research what you could sell it for on the internet. (Better yet, sell it at a deep discount. Better some cash than just throwing it away!)
4. Donate old inventory.  Better even than throwing away old inventory – donate it. You will be able to deduct an amount equal to ½ the difference between market and the product cost. Assume you normally sell your product for $100 and it costs you $50. Your deduction would be $75.
5. Prepay 2012 expenses in December. Pay property taxes in December rather than January. Pay your January 2012 rent or building payment in December. Look for other expenses that you can pay early. If you are short of cash charge it to a credit card. Even if you are on a cash basis you can deduct these expenses in 2011.
6. Donate computers and other equipment you no longer use. You can write-off one half of the difference of the fair market value less your remaining basis (original cost less depreciation). Since most of the equipment you replace is likely to have been written off, your charitable deduction will most likely be half of the market value. Take digital pictures to prove the deductions and keep proof of what you could have sold the equipment for at the time of the donation.  
7. Look into creating a retirement plan. The vast number of tax deductible retirement plan options makes this a subject that is well beyond the scope of this blog. Call your CPA for more information on how this can help you. 
   
   7.5  Check out my FaceBook page for daily tax savings tips that we have been posting since 10/21/11 (http://www.facebook.com/#!/pages/Wayne-J-Belisle-CPA/185259446999).

  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.

Tax Tip of the Week: Last chance to write-off 100% of Qualified Real Estate Improvements!

Until 12/31/11 you can use Section 179 to write-off 100% of qualified real property (called real estate for people who don’t speak IRS). Historically, only tangible personal property (equipment) qualifies for Section 179 treatment.

But, for tax years beginning in 2009 & 2010, up to $250,000 of qualified real property can be treated as Section 179 property. Qualified property includes qualified leasehold improvements, qualified restaurant property and qualified retail improvement property.

So, if you in one of those areas and are thinking about spending money on your rentals, your restaurant or your retail property in the near future you should 1) talk to your tax person to learn what qualifies and 2) complete it before year-end. Otherwise these expenses will be deducted using straight-line over 39 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.

Tax Tip of the Week: What volunteer expenses can be deducted?

Most taxpayers who do volunteer work for charitable organization fail to deduct their costs as charitable gifts on Schedule A of their income tax return. These deductions include:

• Travel, meals and entertainment related volunteer and charitable activities (actual expenses or 14 cents per mile, plus parking and tolls).
• Telephone calls and office supplies.
• Convention expenses – including travel to and from the convention.
• Part of organizational dues (the organization can usually tell you how much).
• Uniforms and work clothes, including laundry and dry-cleaning expenses. This is only for clothing not usable as ordinary street clothing (Boy Scout uniforms for example).

The trick, like any deduction, is to get proper documentation. Taking pictures and keeping receipts and logs of your volunteer work would be excellent documentation.

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.

Tax Tip of the Week: How do I prove to the IRS that I really did make donations to Goodwill?

If you have the bad luck to be audited, how will you prove that you gave items to Goodwill or Candlelighters? A receipt from them says you made a donation. But, the IRS knows that you get to fill in what was given and how much it is worth.

I tell my clients to take pictures of the donated items using their smart phones or digital cameras. That a picture is worth a thousand words is really true here. If I can show the auditor pictures of what was donated (preferably with the Goodwill truck in the background) it is much harder for them to disallow the deduction.

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.

Tax Tip of the Week: 2010 extended personal returns are due 10/17/11

Well the corporate extension deadline just passed and now the deadline for those taxpayers who extended their returns on April 15^th is approaching. The last day to file your 2010 individual tax return is October 17, 2011 (This year, the 15^th is on Saturday.) So if you haven’t filed your return you better get it to your tax preparer ASAP. Waiting until right before the deadline forces the tax-preparer to finish your return is a rush. This leads to errors, a higher preparation fee and higher taxes since you won’t have time to look for additional tax write-offs.

But, remember that the extension was only an extension of time to file your return not an extension of time to pay your 2010 income taxes. If you owe money you will get penalized as follows:

• Failure to pay tax – late payment penalty. This is a 0.5% tax on the unpaid balance for each month or part of month with a maximum of 25%. The penalty is cut in half for months that an installment agreement is place.
• Interest on the unpaid balance based on the latest IRS published rate.

These penalties are dwarfed by the penalties that you will receive if you fail to file your return on time. These penalties are:

• Failure to file tax return (late filing penalty). 5% of unpaid balance for each month or part of month the return is late with a maximum of 25%. There is no penalty if the return shows a refund. This can add up quickly.
• Fraudulent failure to pay tax late payment penalty. If the IRS determines that the underpayment was fraud related they can impose a 15% penalty up to a maximum of 75%.

So, the moral of the story is to file your return on time even if you can’t pay the tax. The penalty for not paying is much smaller than the penalty for not filing. You can always setup a payment plan.

Finally, be sure to not give the IRS a bad check. There is a 2% penalty for that on top of all of the above penalties.

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.

Tax Tip of the Week: Many Tax Breaks Set to Expire After 2011

The following is a list of tax breaks that are scheduled to expire at the end of this year:

• The 2% cut to the employee share of social security tax.
• College tuition write-offs.
• The $250 write-off of teacher supplies.
• The write-off of state sales tax.
• The 100% bonus depreciation will be reduced back to 50% for 2012.
• Direct payouts to charities of up to $100,000 a year from IRA’s
• The research & development credit.

Most of these will be extended – though it may not happen until 2012. One exception is the depreciation bonus which will most likely be allowed to expire due to budget restraints.

Also, I would be very surprised if the social security tax cut does not get extended before the end of the year. Allowing it to expire would result in every employee in the country getting a lower paycheck starting in January. Not something any politician is willing to allow in an election year.

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.

Tax Tip of the Week: IRS Eliminates Two Year Time Limit to Claim Innocent Spouse Tax Relief

Married tax payers have many benefits to filing a joint tax return. But joint filing comes with a catch: each spouse is liable, jointly and separately, for any tax, interest and penalties that are related to the return.

This liability exists even after a divorce. This means that the IRS will try to collect the full amount due from whichever spouse it can. This is true even if most of the income is attributable to one of the spouses.

Under the innocent rules, an individual may avoid liability for unpaid taxes and penalties, even after signing a joint return, if the following requirements are met:

• You filed a joint return which has an understatement of income.
• The understatement of tax is due to erroneous items of your spouse.
• You are able to establish that at the time the joint return was signed, you did not know and did not have a reason to know that there was an understatement of tax.
• Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement.

Under the old rules, you must have requested the innocent spouse relief within two years after the IRS started collection efforts. Now the IRS states that it will no longer apply the two year limit to new requests (IRS Notice 2011-70). A taxpayer whose request was previously denied solely because of the two year limit may reapply, using Form 8857, Request for innocent Spouse Relief, as long as the statuette of limitations hasn’t expired for the return in questions.

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.

Tax Tip of the Week: If I barter my products or services do I have taxable income?

The fair market value of property or services received in barter is taxable. But, it may not result in an increase in taxable income based on how what you received is used.

As an example, we trade accounting and tax services with an office supply company. We must include in income the fair market value of the office supplies received. But, we also get to deduct these costs as office supplies expense since they are used in our business.

But, when we trade accounting and tax services for a family photo we still have taxable income but we cannot deduct personal expenses. This results in an increase in taxable income in the amount of fair market value of the family photo.

Like all tax law there is an exception to the general rule. An informal exchange of similar services on a non-business basis is generally non-taxable. An example of this is carpooling.

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.

Tax Tip of the Week: Is All Cancelled Debt Taxable?

In this economy it is not unusual for a taxpayer’s debt to be forgiven or just written off. In general, cancelled debt that the taxpayer was personally liable for is taxable. But, there are the following exceptions where cancelled debt is not taxable:

• Cancelled debt that would have been deductible if paid is not taxable.
• Student loans that are cancelled after work is not taxable. An example is a nurse or doctor who takes a job in a government approved low income area.
• Debt cancelled in a Title 11 bankruptcy is not taxable.
• Debt cancelled where a taxpayer is insolvent (up to the amount of the insolvency) is not taxable. The amount of insolvency is the amount of the taxpayer’s debt that is above the total of taxpayer’s assets.
• Cancelled debt that is qualified principal residence indebtedness is not taxable.
• Cancelled debt that is intended to be a gift is not taxable.

As you can see, there are many exceptions to the general rule that cancelled debt is taxable. Additionally, it is a very complicated area that most taxpayers will require the help of an experienced tax professional.

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.