November brings a chance to prepare for the 2011 filing season and also for me to take advantage of continuing education. I recently attended two different seminars , one with the State of Oregon and the other was a Federal Tax Update. In summary, the things I learned from these seminars was how important it is to teach how to gather and store documentation and how taxpayers must be able to substantiate their deductions.
At the State of Oregon Liaison meeting, I heard from state auditors about how they interact with those selected for audit. The number one problem seems to be timely response to their audit request. To fix this problem, the State of Oregon is putting a 10 day deadline to call and make a connection with the auditor. This short time frame may frustrate tax payers, but the truth is that a quick phone call to the auditor from the taxpayer or the CPA will satisfy the 10 day time frame. This lets the state know that you have received the request and you can then set up a time to get the requested information gathered.
What will you likely need to provide to the auditor? If you are a small business owner you will need to provide bank statements including credit card statements, general ledger, cancelled checks, receipts. They may even request a copy of your Quickbooks file, though you can print out reports to satisfy their requests.
My experience has taught that an organized response makes the auditor happy and will result in a better outcome. But to be organized, the taxpayer must be prepared. This means that you have copies of charitable donation receipts, mileage logs, proof of home office use, etc. Usually you must have these documents created contemporaneously, meaning that at the same time that the expense occurred. Write down who you took to lunch on that receipt, detail out your business mileage on a phone app, keep copies of your phone statements, jot down the purpose of the business trip. Our memories fail us and if we have to go back and recreate these documents it will be much harder.
Sometimes during the year you have a question about whether an expense is tax deductible or whether a tax credit will benefit you. Contact your CPA during the year to make sure. Don’t wait until tax filing day to ask if you did it right back in July of 2011.
Tax filing season is quickly approaching. Enjoy the holiday season and take time to get organized and ready to make tax filing easy and painless!
Today is September 15, one of the four times a year taxpayers must pay their quarterly estimated tax payments. If you are one of the many taxpayers who must “prepay” their tax throughout the year with quarterly estimated tax payments, I have a suggestion for you. Don’t write a check and mail with a voucher or even use a credit card processor and pay a $20 fee, but switch to the online payment systems provided by the IRS. Enroll in EFTPS, which is free, and you can schedule your payments in advance and track the history of your account.
The IRS is quickly moving away from paper and now requiring many business owners and employers to pay their taxes electronically. Self employed individuals, investors, and retired individuals who must make tax payments throughout the year will find the EFTPS system easy and convenient.
“Taxpayers are embracing the security, flexibility, and convenience of EFTPS,” said Russell Kuehn, FMS EFTPS program manager. “EFTPS provides online access to sixteen months of payment history, and once you’ve enrolled, you can schedule a payment from anywhere there’s a phone or Internet connection.”
If you want to switch to the online payment system you can log into eftps.com and ENROLL. After you enroll you will receive a personal identification number in the U.S. mail. Save this letter because it will contain your enrollment trace number and PIN number. You need this info to set up an Internet Password to use the online system. You can also scheduled payments via the voice response system. Payments can be scheduled up to 120 days in advance of the due date for businesses, 365 days for individuals. Payments must be scheduled by 8 p.m. ET the day before the due date to reach the IRS timely.
Try it out, it’s free and easy.
Have you received an IRS notice in the mail? Not what you want to see in the mailbox when you trot down to get your mail. Unfortunately your odds are high because IRS notices have increased 670% over the past 10 years ago. Last year the IRS issued 201 million notices to taxpayers. See this blog post by Cordasco and Company called IRS Notice Frenzy! Many of these IRS notices are routine letters showing that you missed reporting an item on your return such as a 1099 or interest or dividend income. These are fairly easy to resolve. A small percent are letters notifying you of an IRS audit or are a request for documentation for a specific item on your return.
Below are recommendations from the IRS on how to handle these notices:
1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
2. There are a number of reasons why the IRS might send you a notice. Notices may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.
8. It’s important that you keep copies of any correspondence with your records.
Please contact your tax professional if you receive an IRS Notice. We can see if the IRS adjustment is correct or if the item was reported on your return but was not clearly picked up by the IRS computers. It is very possible that you don’t owe the entire amount due on the IRS notice, we want to help you to pay the correct amount of tax and not too much. Happy Summer!
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. How many more acronyms (EFTRRA or JCTRRA) do we have to know? This Act, in essence, is an extension of the Bush-era tax cuts for two years. Also, the legislation includes a payroll tax holiday for 2011 and a change in the exemption amount and maximum tax rate for estate taxation. The Act incorporates many business and individual extensions of the so-called “annual extenders.” Here are some highlights:
INDIVIDUAL TAX HIGHLIGHTS
• Individual Tax Rates remain at 2010 levels –these lower rates will be in effect until 2012
• Repeal of the “phaseout” for personal exemptions and itemized deductions for taxpayers with an Adjusted Gross Income above certain levels
• Modifications to child tax credit: The Act keeps the child tax credit amount at $1,000 per child, extends the allowance against the regular tax/AMT and maintains the refundability through 2012.
• Expansion of adoption credit and adoption assistance programs: The credit increased to $13,170 (adjusted for inflation, the 2011 amount is $13,360).
• Dependant care credit: The Act provides that the dependent care credit is extended so eligible expenses of $3,000 for one qualifying child/disabled dependent and $6,000 for two or more children/disabled dependents creates a tax credit for an additional two years, through 2012.
• Elimination of marriage penalty : The Act extends the marriage penalty relief for the standard deduction and the tax rate schedules for an additional two years, through 2012.
• Marriage penalty relief for earned income credit: This will insure that more families qualify for the earned income credit and married couples are not penalized.
• Modifications to education individual retirement accounts (now Coverdell education savings accounts): Coverdell education savings accounts are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary. EGTRRA increased the annual contribution amount from $500 to $2,000 and expanded the definition of education expenses to include elementary and secondary school expenses. The Act extends the changes to Coverdell accounts for an additional two years, through 2012.
• Extension of exclusion for employer-provided educational assistance: An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance. Now both under-graduate and graduate education tuition can be excluded. The Act extends the changes for an additional two years, through 2012.
• Elimination of 60-month limit and increase in income limitation on student loan interest deduction: Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for such interest expenses up to $2,500. The 60-month limit was eliminated through 2012.
• Deduction for higher education expenses: EGTRRA created an above-the-line deduction for qualified tuition and related expenses. Currently, subject to income phase-outs, taxpayers are allowed to deduct a maximum of $4,000.
• Reduction in capital gains rates for individuals; repeal of 5-year holding period requirement: The Act extends the lower capital gains rates of 0% or 15% for all taxpayers for an additional two years, through 2012.
• Dividends of individuals taxed at capital gain rates: JGTRRA lowered the dividend rates so that they were taxed the same as capital gains. The Act extends the current dividends rates for all taxpayers for an additional two years, through 2012.
• American Opportunity Tax Credit: The 2009 ARRA created the American Opportunity Tax Credit as a temporary replacement of the HOPE credit. Generally, the credit is for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. The credit is allowable for the first four year of post-secondary education. Under this tax credit, taxpayers receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25% of the next $2,000 of tuition and related expenses paid during the taxable year. Further, 40% of the credit is refundable. However, the credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). The Act extends the American Opportunity Tax Credit for an additional two years, through 2012.
• Child Tax Credit: Generally, taxpayers with income below certain threshold amounts may claim the child tax credit to reduce federal income tax for each qualifying child under the age of 17. The 2001 EGTRRA expanded the refundability of the child tax credit so that those who owe little or no tax still get a benefit.
• Earned Income Tax Credit: The 2009 ARRA increased the earned income tax credit to 45% of a working family’s first $12,570 of earned income for families with three or more children and increased the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children). The Act extends for an additional two years, through 2012, the 2009 ARRA provisions that increased the credit for families with three or more children and increased the phase-out.
TEMPORARY EMPLOYEE PAYROLL TAX CUT
Temporary Employee Payroll Tax Cut: For 2011 only, the Act reduces the Social Security (OASDI) tax rate on employees to 4.2% (from 6.2%) and reduces the self-employment tax (SECA) rate to 10.4% (from 12.4%). The employer OASDI tax rate stays at 6.2%. Also, the Act does not reduce the OASDI contribution base, which is $106,800 for 2011.
TEMPORARY EXTENSION OF INVESTMENT INCENTIVES
Bonus Depreciation: The Act provides for a temporary 100% bonus depreciation for property acquired and placed in service after September 8, 2010, and before January 1, 2012. This means that taxpayers are able to claim a 100% depreciation deduction for property acquired and placed in service in the latter third of 2010 and all of 2011 (and 2012, for certain property); property placed in service during 2012 (2013 for certain property) is eligible for 50% bonus depreciation.
Temporary Extension of Increased Small Business Expensing(Sec 179) For taxable years beginning in 2010 and 2011, small businesses may elect to expense up to $500,000 of capital investment. The Act provides a $125,000 maximum cost of §179 property that may be expensed rather than depreciated in tax years beginning in 2012. The Act also provides a $25,000 maximum and $200,000 phase out threshold for tax years beginning after 2012; these figures are not to be adjusted for inflation.
These two provisions both provide a way to expense capital purchases of equipment and furniture in the year purchased rather than depreciate over the life of the asset.
Recently I made the visit to the downtown office of the IRS to assist a taxpayer through a very extensive audit. The process of dealing with the IRS can cause stress and sleepless nights for the taxpayer. The reason the IRS causes such fear is that they can be a real bully. My client can attest that the auditor will ask pointed questions and make you feel frazzled and on edge. IRS auditors are trained to find errors in your tax return and they will dig hard to find things that they determine to be non-deductible. Statistically less than 2% of taxpayers are subjected to a full IRS audit but it is still worth the effort to be prepared for the worst case.
Here are some tips for you should you ever receive the dreaded letter:
Don’t try to handle the audit yourself. You may feel that you are saving some money by trying to handle the audit yourself, but you could get hit with a much higher tax deficiency (in other words you will owe much more to the IRS) than if you had the assistance of a professional who knows the tax laws.
Keep good records. The auditor will disallow your deductions if you don’t have good substantiation. Keep cancelled checks, invoices, bank statements, receipts for meals and travel documenting business purpose, mileage logs, etc. In this case, the IRS is not going paperless anytime soon! Their systems are so antiquated that you can’t even send documents by email. You will need paper proof. Or you will need the ability to drag your computer with you to the audit.
Keep check copies or use your debit/credit card. The IRS will want to see that your payments cleared the bank and the best way to show that is with a cancelled check, bank statement or credit card statement. The advantage to using your debit card or auto payment through your bank account is that your bank statement will show the payee right on the statement. If you use a lot of checks you will need copies of those checks. Most banks don’t send check copies any more. You might want to check with your bank to see how best to store that information. Most banks can send “copies” of the checks 10 to a page with your statement. That is a good option.
Keep written contracts with those that you pay, especially your independent contractors. You will need to prove that your relationship has a “business purpose” and that you pay for a service or product.
Stay away from audit “red flags” if possible. Make sure your expenses are in line with your income. Large travel and entertainment expenses are a favorite trigger for audits. Auto expenses and auto depreciation can also be a trigger. Be sure to document on your credit card statement the “business purpose” of your meals and travel expenses.
As the saying goes, if you are prepared you have no need to fear. Simple practices now will save you a lot of headache if you ever become part of that 2% audited group. You might sleep better too!
We are closing in on that time of year when cool weather moves in and we know the holidays are around the corner. It is also the time to get serious about utilizing some tax laws to your advantage as we head into the home stretch of 2010. Here are a few key ideas to think about:
1. Consider a Roth Conversion if you have money in an IRA account and you are willing to pay the tax now on the conversion amount. Take advantage of this especially if you are a high income individual because there is no income limit during 2010. Pay tax now on the conversion amount and get tax free distributions during retirement.
2. Hire your children to do work in your small business. The work must be legitimate, in other words you must document hours and pay, but you can pay your child $5,700 in wages tax free to them and tax deductible to you. If you are a sole proprietor you don’t even have to pay employer taxes on those wages. Your child can then make contributions to a Roth IRA. You must report wages paid to the IRS on appropriate tax forms such as W-2 and Form 941.
3. Pay for qualified tuition and and related college expenses during the first four years of post secondary education for yourself or a dependant and get up to $2,500 in an American Opportunity Credit.
4. Put in a new energy efficient furnace, air conditioner, windows or insulation in your home during 2010 and you can get energy credit of up to $1,500 or 30% of the cost of these improvements. You must act quickly because after 2010 this credit goes away.
5. Consider a setting up a Health Savings Account for you or your employees. Contributions to an HSA are tax deductible and distributions are tax free if you pay for qualified medical expenses. Employer contributions to an HSA are not subject to FICA/Medicare tax and are one way to get tax free benefits to your employees. To be eligible to set up an HSA you must be enrolled in a high-deductible health insurance plan.
6. Establish a health insurance plan for your employees. If you are an employer with less than 10 employees and you pay for at least half of the health insurance premiums for your employees you may take advantage of up to a 35% tax credit on the amount of premiums paid. To qualify for the maximum credit the average annual wages paid to employees must be $25,000 or less.
7. Forecast your income for 2011 and consider showing more taxable income (more revenue and less deductions) during 2010 because tax rates are scheduled to go up in 2011.
If any of these tax savings tips are interesting to you or if you have questions, please call me for more information. Be smart about your financial decisions and put some extra money in your pocket.
Today I was researching my options for health insurance coverage for me and my employees. I realized that this would be a good time to address some of the changes from the 2010 Health Care Act and how several of the tax provisions might affect your 2010 and 2011 federal income tax liability and reporting requirements.
If you run a business or small business, or if you’re self-employed, the following legislation may affect you:
• Credit for Employee Health Insurance Expenses of Small Business — Beginning in 2010, eligible small businesses can receive a nonrefundable tax credit of up to 35% (25% for tax-exempt small employers) of the total premium cost of providing health care to their workers. The credit will be taken when you file your 2010 tax return.
• Trade or Business Expenses — Effective March 30, 2010, self-employed taxpayers can deduct amounts paid during the taxable year for medical insurance covering the taxpayer, the taxpayer’s spouse, dependents, and children under age 27.
Changes impacting individuals include:
• Expansion of Adoption Credit and Adoption Assistance Programs — Effective for taxable years beginning after 2009, the adoption credit and adoption assistance programs are expanded by increasing the maximum amount of adoption expenditures that may be claimed as a credit to $13,170, including a child with special needs. Other changes apply as well.
• Amounts Received Under Accident and Health Plans — Effective March 30, 2010, you are no longer required to include in your income employer-provided accident or health plan reimbursements for medical care expenses paid on behalf of your child up to the age of 27, a big change from the current age of 19 or 24 if the child is a full time student.
Are you still wondering how health care legislation will impact you and your employees? This is a confusing law and though some provisions will not take effect for several years, many changes could affect you today. Also, some tax-planning opportunities and requirements become effective in 2010 or 2011.
Below are some key provisions of the health care acts (P.L. 111-148 and P.L. 111-152) that impact employers and health plans and generally are effective in 2010 or 2011. Note that some effective dates apply to plan years or taxable years.
Effective September 23, 2010:
• Insurers and group health plans that offer dependent coverage are required to allow uninsured children to remain on their parents’ health insurance through age 25.
• Small and large group market plans are prohibited from imposing lifetime limits on coverage.
• Plans must provide coverage, without cost-sharing, for preventive services and immunizations.
• Insurance companies are prohibited from rescinding coverage, except in cases of fraud or intentional misrepresentation of material fact.
• No discrimination based on the wages of employees.
• All health insurance plans are prohibited from excluding children under age 19 on the basis of a pre-existing condition.
Effective 2011:
• Employers must report on Form W-2 the cost of employer-sponsored health insurance.
• Health flexible spending accounts, health reimbursement arrangements, health savings accounts (HSAs) and Archer medical savings accounts (MSAs) may reimburse for medications that are prescribed drugs or insulin only (no over-the-counter medications).
• The tax on distributions from an HSA or Archer MSA that are not used for qualified medical expenses is raised to 20%.
• Small employers (average of 100 or fewer employees in either of two preceding years) may establish “simple cafeteria plans.”
Correct information is the key to good planning and these changes will affect most American taxpayers in one way or another. If you have questions about how health care reform will affect you, please give me a call.
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.
