Emotions run high on both sides of the campaign that ended Tuesday with a victory for the supporters of Measure 66 and 67. Now the buzz is all about really trying to understand the new taxes. How will the taxes affect you? Everyone is talking about it, but misinformation seems to be the only common denominator. Let’s talk about the facts and answer some of the misunderstanding about the new law.
Measure 66 increased the state income tax rate for households who have taxable income over $250,000 or individuals with taxable income over $125,000 from 9% to 10.8% plus a temporary bracket for those earning over $500,000 at 11%. This tax is retroactive to 2009 so high income tax payers will have a tax bill that they didn’t plan for.
Business in Oregon is affected by Measure 67. If you have a business entity of any kind except for sole proprietors, you will pay some additional tax. The Oregon Center for Public Policy has created a flow chart that is the best I’ve found in making the tax implications to business clear. The flow chart helps to bring clarity to the new taxes and who they will affect.
S Corporations, LLC’s and partnerships will pay $150 to file a tax return rather than $10. They will continue to pay tax on the net business income on their personal tax returns. The biggest misrepresentation of the campaign was that corporations only pay $10 in tax. Of course anyone with common sense knows that this wasn’t true. Business owners of S Corporations or LLC’s pay plenty of tax in Oregon. Luckily if you have an S Corporation or an LLC this is the extent of your tax increase (unless your business income puts you in the “high income” category for personal taxes). However, also tied to this legislation you will now pay $100 to renew your corporate filing each year rather than $50.
C Corporations are the ones who get hurt the most. Corporations are designated with the IRS as either a “C Corp” or “S Corp.” The difference is that a C Corporation pays tax as an entity rather than passing its taxable income to its owners. If you are a C Corporation who has revenue over $500,000, even if you don’t have any profit, you will now pay a minimum tax of $500 and the tax increases as your revenues increase. This will affect small and large companies in Oregon.
Do you remember last April when your paychecks got a little fatter? That was due to the Making Work Pay Credit which was the government’s 2009 method of stimulating the economy. This credit is similar to 2008’s Recovery Rebate Credit in that it was a way for our federal government to get more money in your pocket in hopes that you would spend it to stimulate our economy. Rather than sending out paper checks or depositing money in your bank account, this credit was given to you through fatter paychecks.
Now when you file your 2009 tax return you will attach a Schedule M to calculate this credit. The credit will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. The credit phases out if your AGI exceeds $75,000 or $150,000 for married filing joint.
So will the MWPC make your 2009 tax refund bigger. First of all if you don’t work you won’t get the credit. Retirees will get a reduced $250 credit. Second, your refund is a function of the tax withheld from your paychecks in 2009. Some taxpayers may be dismayed to learn that the withholding adjustment was more than the credit and now their refund is smaller than expected.
Now is also a good time to determine if your 2010 withholding is enough to cover your expected 2010 tax. Having too little tax withheld from your paycheck will result in a smaller refund or a balance due at filing time. The Making Work Pay Credit is also in effect for 2010. The adjustment to withholding is spread out this year over all 12 months rather than 9 months. Ask your tax professional to help you determine if your 2010 withholdings are going to cover your 2010 tax. You can also perform a quick check of your withholding using the interactive IRS Withholding Calculator.
Also find out more about the American Recovery and Reinvestment Act of 2009.
So I’m way behind on my effort to give you valuable business and tax advice in the form of a monthly blog article that peaks your interest and solves your tax problems. Things like filing payroll tax reports, deciding on a new web site and 2010 marketing campaign creep into my to-do list and the monthly blog article falls to the bottom of the list every time. This being “self employed” life is just great!
You know the drill – waking up in the night to ponder on which health insurance plan you should choose or thinking about how to start a Facebook page to promote your business. The days of regular steady pay checks and cushy benefit packages are long gone. In their stead are late nights with Quickbooks trying to process the bills, lunch from the microwave at the desk, calls home to say I’ll be home late again tonight. It is the up and down cycle of working for yourself. Maybe it sounds familiar.
My goal in 2010 is to help you brave entrepreneurs who fight the battle every day so that your burden is a little easier. I want you to be confident that you are making good business decisions and that you have the resources to make those decisions.
Now on the task list for most clients is gathering and processing the 2009 financial data. Keep your files clean and organized. Hire someone to help you if this is not your strength. Organization is the key to finding the information that you need to succeed. I love to see happy clients come in with up-to-date records that are organized and ready to file 2009 taxes. If this doesn’t describe you then talk to me about ideas to make this happen. No business ever grew and thrived in chaos and disorganization. Strive for the peace of mind that comes with good records.
Here is a task list for business owners in January:
• File 1099 Forms for all persons paid $600 or more for services
• File W-2 forms and annual payroll reports
• Review your asset list to clean up any equipment that is gone, obsolete or not in use
• Prepare and file your personal property tax report
• Clean and store your 2009 data and make room for the new 2010 filing system
• Back up your records and file in a secure and safe place (of course you should do this all the time – but here is a great reminder to do it again)
• If you have inventory – count it and reconcile inventory on hand with your financial statement
Make 2010 your best year ever. I can’t wait to hear about the business growth and success that we all will see in this New Year.
If college expenses are stretching your budget, you may be eligible for some tax relief. The American Opportunity Credit replaces the existing Hope Credit for tax years 2009 and 2010. Improvements have been made to this credit to make it available to a larger group of taxpayers.
The credit is available for tuition and related course materials paid for a college student in his or her first four years of college. The old Hope Credit was only available to the first two years of post-secondary education.
The income limits have increased so that more taxpayers will qualify for the credit. The full credit is available for taxpayers whose modified adjusted gross income is $80,000 or less ($160,000 for married filing joint returns).
The amount of the credit has increased to a maximum of $2,500. This credit is equal to 100% of the first $2,000 spent and 25% of the next $2,000. So if you send $4,000 in qualified education expenses you get the full credit – which is a dollar for dollar reduction of tax owed.
You can even benefit from the credit if you have no tax liability. The American Opportunity credit is refundable up to $1,000 for each eligible student or 42% of the credit (whichever is less). The existing credit did not allow for a benefit if you had no tax liability.
If you or your student is in graduate school the American Opportunity Credit is not applicable, but the lifetime learning credit or tuition and fees deduction may still provide a benefit to you.
Fear of the IRS and of the audit process is very high for most taxpayers. Recently several clients called me because they received the dreaded letter from the IRS. The letters vary in scope from a request for more information on mortgage interest deduction to a more detailed audit of a Schedule E (rental income and expense). Recently I assisted a taxpayer through an audit of tax years 2006 – 2008. The client had made several errors on these returns and the IRS caught them. The result was a long process of putting the puzzle back together and a large bill for underpaid tax.
All of these recent experiences got me thinking about the IRS and its desire to enforce tax compliance. Until recently Congress has been reluctant to increase IRS funding for enforcement. However, now that our federal government is spending money faster than ever before you can be sure that they will be looking for sources of revenue. The IRS estimates that the tax gap (the difference between what taxpayers should pay and what they actually pay on a timely basis) is about $345 billion. The IRS uses enforcement activities (ie: audits) to recover about $55 billion of the tax gap.
The IRS sends millions of letters each year. Most of these are the result of math errors or income items left off of the return. The letter reports a schedule showing items left off the return and bills the additional tax due. These assessment letters are often not completely accurate and it is very wise to have your tax professional review the tax amount due. This is a correspondence audit and usually can be resolved with a letter response to the IRS.
The other types of IRS audit are office and field audits. Both of these audits are more comprehensive and require the taxpayer to meet with an IRS agent and bring or provide documentation for specific income and/or deductions. As I was in the downtown Portland IRS office recently, I noticed several new IRS agents in training, which leads me to believe that the IRS is stepping up its enforcement activities.
The IRS does a computer review of all returns and assigns a score called a DIF score. A higher DIF score will make your return more likely to be audited. What items cause a higher DIF score? Two big triggers are:
• High ratio of deductions to income
• Self employment income reported on a Schedule C
How do you protect yourself? My first recommendation is if you file a Schedule C talk to your tax professional about options for creating a separate entity such as a corporation or LLC. Also keep good records, keep documentation for all of your deductions, separate business and personal finances and finally file your returns on time (or by the extension deadline).
Getting a letter from the IRS should not be as scary as we make it. The best way to handle this situation is to contact your tax preparer immediately. If you self prepared your return you may consider finding a good tax professional to assist you in your response. Never ignore a letter from the IRS. The best outcome will be to respond quickly and with as much information as possible. If you are prepared, you may be dismayed to see that letter in the mailbox, but you won’t be afraid.
Good old summertime is a quiet period in the tax business. So I take some time to reflect, plan and brainstorm on business practices, tax challenges and the everyday grind that business owners face all throughout the year. I read articles online and in business journals about business owners who are reviewing all facets of their business to stay ahead of the curve and remain successful in these economic times.
Many business owners are taking action to re-invent their business and they are working in a spirit of co-opetition or cooperative competition. A common feeling among small business owners is isolation as they struggle to reinvent their business alone. Some of these business owners have arranged informal meetings with other business associates to talk about marketing ideas, accounting questions, share business leads and brainstorm new ideas. I find that working in a group is a very effective way to stay fresh and focused on business strategies. I meet with a group of small business owners, called Biz-Connect, every Tuesday morning in my community. We set goals together, talk about what works and share information about our successes and struggles. I find this weekly session works well to lift my spirits and keep me focused, sharp and prepared.
The internet is a rich source of business information and provides a venue for sharing strategy and ideas. The website BizNik.com has the subtitle “Going it Alone, Together.” It is a site where entrepreneurs share ideas on a daily basis. Users post articles on their area of expertise and can post business events in their area. The key is to stay involved with other business owners in your own community and online by exchanging ideas and helping each other.
In summary, you can create a successful business by reaching out to other entrepreneurs in your area. Learn from them and also share with others what works for you. This exchange of mental and emotional support will bring more business to you and to me. It is all about sharing and leading and watching out for each other.
Business ownership is a risky venture involving many hidden dangers. The biggest hazard is that you have all kinds of important things to get done and you’re keeping at least 5 balls in the air at the same time, but losing your focus on the financial side of your business. With all of the demands on your time that is a common issue.
The solution is to divert a few minutes a day to review your cash position and the upcoming demands on your cash. Hire someone to help you pay attention to this important aspect of your business. Monitoring your daily cash position, forecasting cash needs, and measuring timing of receipts and payments will help you maximize your profit. You want to have enough cash at the right time so that you can take advantage of opportunities like taking a discount for paying your vendors by the 10th of the month.
If you carry inventory, you know that in order to stay in business you must understand the inventory cycle. You must have the right inventory on hand when the orders come in, but you don’t want too much of the items that don’t sell quickly either. Reviewing sales trends and talking with your customers will help you maintain the “right” amount of inventory.
Having the ability to invest excess cash or draw on a credit line when cash is low is crucial. Talk to your banker about the opportunities s for protecting yourself if you hit a cash crunch. The best time to secure a credit line is when you don’t need it.
Also look into options for putting idle cash to work for you through investing. Too much cash in the bank means that you are not looking for growth opportunities. You can use excess cash to pay off debt, invest in short-term securities, buy a competitor, or pay cash dividends.
Review your accounts receivable aging report several times a month to make sure that you are collecting from customers on a timely basis. If you let too much time go by, you may lose your opportunity.
Cash flow is the most important part of the financial puzzle to monitor and understand in your business. Minimize excessive costs, make sure that your debt load is manageable and that you can keep current with your obligations. You want to maintain your professional image and show lenders and creditors that you are organized and that you manage your cash needs carefully. It’s all part of making your business successful.
New small businesses are sprouting up around town by entrepreneurs as a result of forced opportunity. Many smart business people who have lost their jobs to this economy are deciding to become entrepreneurs rather than engage in a long and arduous job hunt. For some this is the kick in the pants that they needed to do what they have thought about doing for a long time.
The Wall Street Journal article dated May 11, 2009 called “Starting Over as an Entrepreneur” delves into the risks that these entrepreneurs are taking. “This new crowd faces lots of obstacles. …. necessity entrepreneurs have often done less of the spade work than other entrepreneurs—in part because they weren’t thinking that a layoff was imminent. And the fragile economy makes just about any new company a chancy proposition.”
Being your own boss has many advantages and allows business owners to use their creativity to make a dream come true. The risk comes when a new entrepreneur doesn’t look at the business basics of legal structure, financial management, marketing and cash flow. Every potential new business owner needs to develop a business plan. A good business plan helps set the stage and puts in writing the business idea and how it will be implemented. A business plan organizes the ideas into the steps to take to make your business successful.
An organization called SCORE has a Portland chapter that is ready and willing to help take some of the mystery out of owning your own business. A SCORE volunteer can be a mentor and help set you in the right direction to make your new business successful. These volunteers are retired or current business people who have experience in small business and can help with the mysteries of creating a business plan or putting together a marketing plan. A schedule of workshops in the Portland area can be found on the SCORE website.
Being an entrepreneur sounds sexy, but it can be very unnerving. You will need partners along the way. Don’t be afraid to ask for help from those who have knowledge in your business or field. Knowledge is power and you should seek it in many avenues before and during your new business launch.
If you owe tax to the IRS but you can’t pay the full balance right now, you have some options. Follow these tips to avoid additional penalties and interest. First, file your taxes or file an extension by April 15th. However, the extension does not grant you additional time to pay the tax due and if you think you will owe money you should pay as much as you can of your projected tax with the extension.
For those who are tight on cash right now, you are not alone, and the IRS has offered to allow a “grace period” of 30 to 120 days to pay the tax based on your circumstances. Penalties and interest will be lower if you qualify and can pay the tax in a month to three months. You can complete an Online Payment Agreement Application or call the IRS at 1-800-829-1040.
If your tax payment due is less than $25,000 you can request installment payments online through the Online Payment Agreement Application and receive immediate notification of approval.
Finally you can pay your tax balance with your credit card. Below are links to IRS authorized service providers. There is no IRS fee to pay with credit card, but the provider will charge a convenience fee for the transaction.
Link2Gov Corporation:
To pay by debit or credit card: 888-PAY-1040 (888-729-1040), http://www.pay1040.com
Official Payments Corporation:
To pay by credit card: 800-2PAY-TAX (800-272-9829), http://www.officialpayments.com
To pay by debit card: 800-866-4PAY-TAX (866-472-9829), http://www.officialpayment.com/debit
Keeping records safe in an electronic environment is important. Learning the best method for storing your important financial data will protect you if a disaster strikes or if you get that dreaded letter from the IRS.
As a tax preparer I have a fiduciary responsibility to keep your personal information confidential. I put in place safeguards to keep your information safe both physically and electronically. Individuals and business owners should put in place procedures to keep records available and keep them safe. Storing your records electronically is a great option. This allows you to keep copies in the office, at home and in a safe deposit box. This safeguards you from a disaster. Be sure to password protect your information. I had a client who destroyed records too soon and then was subject to an IRS audit. The backup was gone and the IRS hit this taxpayer with more tax than she would have paid if she had kept her important business records.
What should you keep? The IRS has a list of important documents to store in Publication 583 Starting a Business and Storing Records.
As you have gathered your 2008 tax records to prepare your tax return, you may wonder how far back you need to keep your documents. The IRS has issued guidelines on this area:
1. If you owe additional tax and situations (2), (3), and (4), below, do not apply to you save your records for 3 years .
2. If you do not report income that you should report and it is more than 25% of the gross income shown on the return then save records for 6 years .
3. If you file a fraudulent return there is no limit to the time your records could be up for audit.
4. If you do not file a return you put no limit to the time the IRS can ask for your records.
5. If you file a claim for credit or refund after you filed your return you must keep your records for the later of 3 years or 2 years after the tax was paid.
6. If you file a claim for a loss from worthless securities or a bad debt deduction you must retain the records for 7 years .
For most taxpayers, three years of records is enough. However, if you are self employed you should keep up to 6 years of records so that you could prove to the IRS that you reported all of your income.
As April 15th is quickly coming, now is the time to make sure you have methods in place to prepare yourselves both from disaster and have the information you need to defend your tax positions.
