Dan the CPA

National Survey Shows Small Business Owners Spending More Time on Taxes

noreply@blogger.com (Dan Livengood, CPA) — Fri, 03 Aug 2012 16:29:00 +0000

Working on taxes takes up a lot of time, and a study done by the National Small Business Association shows that small business owners are spending more and more time on it, as tax law becomes more complex and changes come more frequently.

The study, which surveyed small businesses across the country, concluded that two-thirds of small businesses spent more than 40 hours on federal taxes last year. This number is 7% greater than last year’s time spent.

Most business owners surveyed said that the administrative burden of time spent on taxes is more of a challenge than the amount of tax owed. It’s complicated and time-consuming, and most small business owners become frustrated with the process.

As expected, the majority of the owners surveyed said that they support reforming the tax code. Seventy-three percent favored reducing corporate and individual tax rates and deductions, and 53% supported a solution similar to the "fair tax," which would replace all income and corporate taxes with a national sales tax.

Breaking Out of the Lifestyle Inflation Cycle

noreply@blogger.com (Dan Livengood, CPA) — Fri, 03 Aug 2012 16:27:00 +0000

U.S. News posted an insightful article recently titled “4 Ways to Minimize Lifestyle Inflation.” It offered practical ways to address the spending/saving problem that most people deal with as they progress through life. As we earn more, we tend to spend more, largely because that’s what modern society expects (and what a lot of people around us are doing). But if we want to get to retirement with enough money to live comfortably on and anticipate unexpected expenses, we need to do a few things differently than most people today do.

Here’s a summary of the advice U.S. News offered to minimize lifestyle inflation:

Housing. There’s actually an entire movement that started out West toward smaller houses. People are realizing they don’t need a huge house, not only because of money savings, but also because of a desire to make a smaller impact on the environment. It’s time to rethink the push of the past toward larger and larger houses.
Car. If you can avoid financing, you can save a lot of money. Paying for a car with cash is ideal. If you love expensive cars, you may want to consider saving for one rather than financing it.
Food. Eating at restaurants is expensive, particularly if you have a family. If you’re at all interested in cooking, making your own meals can be a fun way to save money. You can experiment with your creativity and often, get better nutrition in the process. When you make your own meals, you know what went into the dish and what health benefits you’re getting. And you’re avoiding a lot of fat and sodium that goes into many restaurant meals.
Save first. For most of us, if we don’t have a plan to save, we end up spending what we make. The best way to ensure that we have adequate money for retirement is to plan for it, setting aside our savings and investing before we consider using the money for a vacation or a new car, or a myriad of small things that we don’t even think about.

It’s possible to break out of the lifestyle inflation cycle, and you will likely find that you actually have a better quality of life as a result.

Minimize Your Stress If an Audit Comes Calling

noreply@blogger.com (Dan Livengood, CPA) — Wed, 01 Aug 2012 19:21:00 +0000

We wouldn’t wish an audit on anyone. But if an audit comes calling on you, you should know what to do. Taking a few measures and steps will save you a myriad of headaches further on in the process.

Get professional representation. If you’re selected for an audit, you’ll be notified by either phone or mail. The IRS will ask to schedule an interview. Even if you’re an accountant or CPA yourself, you’ll want to get a professional to handle the interview for you, because it will give you time to collect yourself and prepare. The IRS may give you some resistance, but know that if you sign over power of attorney, you’re perfectly within your rights to be represented by whomever you choose.
Document everything. If you’re audited, you’ll find yourself wishing you’d been diligent with documentation. Having everything documented and organized will make your life much easier if you’re ever called upon for an audit. The IRS will want everything from mileage records to evidence related to money you’ve loaned to family members.
Be honest. This goes without saying, but if you’re tempted to cheat on your taxes just keep in mind the nightmare that will result by trying to defend a dishonest return. Also, if your returns are squeaky clean, there’s a smaller chance that you’ll be audited because the IRS won’t have red flags alerting them to problems.
Be precise. If you’re sloppy, an audit can be triggered by bad math or failing to report income that someone else reported. Be as accurate as possible, keep good records, and you’ll make your life easier.
Don’t be a pain. An audit is a huge inconvenience at best. You’ll probably feel like the IRS isn’t polite, doesn’t value your time, and may even be out to get you. Whatever you do, don’t get an attitude with auditors. It won’t help you.
Know your rights. You can appeal. If the IRS makes a determination you don’t agree with, you have several avenues to exhaust before accepting it. You can negotiate with the field agent, then appeal to a manager, then take it to the appellate level, and finally present your case at a tax court.

If you get audited, don’t panic. Take a deep breath and follow these measures to keep your stress to a minimum.

Reprogram Your Inner GPS and Take Control of Your Life

noreply@blogger.com (Dan Livengood, CPA) — Wed, 01 Aug 2012 19:21:00 +0000

There was an article in The New York Times recently by Tim Kreider, called “The ‘Busy’ Trap.” It described the prevalent problem of people today being overly busy. In modern America, it’s almost a badge of honor to be stressed-out and so busy you can barely hold it together. The more you can accomplish, the more you are admired (supposedly).

Adding to this problem is our tendency to do whatever people want us to do, particularly when it comes to business. A client wants to meet at an inconvenient time, a customer wants a product or service in an unreasonable time frame. Our natural instinct is to say, “I’ll make it work,” even if it means that we neglect our family or damage our health.

What’s the root of this problem? We want to be admired, we want to please people. That’s really the reason we rush around and say “yes” to too many things. We care too much what other people think. Sometimes we care so much that we don’t believe we have a choice.

We always have a choice. We need to prioritize the things going on in our lives, reprogram our inner GPSs, and take control. Here are some ways to help that reprogramming process:

Realize that being admired isn’t fulfilling. Frequently we say “yes” when when should say “no” because we want to be admired. We need to realize that living according to our priorities is much more fulfilling than being admired by people that don’t really matter to us that much in the grand scheme of life.
There are very few “musts.” Our default is to assume that we have to do what we’ve been doing, or what’s on our to-do list. Stop and evaluate if each thing is really important or really “must” be done. Could you make better use of your time, your life, by doing something else?
Realize that by saying “no” to someone’s request, you’re not saying “no” to the relationship. Sometimes even people we love will ask us to do things that we know shouldn’t be on our plates at the current time. Just because you decline a request doesn’t mean you love someone less. Figure out how to communicate lovingly that what’s being asked needs to wait.
Choose to work with people who share your values. It’s going to be more difficult to say “no” to a client’s request that you work through your son’s soccer game if that client is a workaholic. If you make strategic decisions to work with people who understand your priorities, it will be easier to say that you will need to work around the soccer schedule.

It’s possible to take control. It requires reprogramming, but you’ll find yourself much happier and more fulfilled as a result.

IRS is Ramping Up Compliance Measures to Fill Under-reporting Gap

noreply@blogger.com (Dan Livengood, CPA) — Wed, 01 Aug 2012 19:20:00 +0000

IRS is Ramping Up Compliance Measures to Fill Under-reporting Gap

The IRS sends more notices annually than the total number of taxpayers. That’s a lot of notices. The U.S. has a large and complex economy to support, and the combined cost of noncompliance from under-reporting, non-filing, and nonpayment is projected to be $450 billion annually. The IRS has been going into overdrive to enforce compliance to collect some of that $450 billion, so that Congress doesn’t have to increase tax rates or cut more programs than needed.

The IRS’s latest study shows that the projected federal tax gap has three causes. 84% is related to under-reporting of taxable income and taxes on returns. 10% is related to underpayment of taxes reported by taxpayers or assessed by the IRS. 6% is related to non-filingof tax returns.

According to Jim Buttonow of Beyond415, who presented at the AICPA Practitioners Symposium in June, here are a few things that the IRS will be focusing on in the near future:

Doing more with less. The IRS has experienced budget cuts during the economic downturn, but they’ll be making up for it by using technology.
Increasing compliance rates to 90% by 2017. If the IRS is able to reach its goal, the current $450 billion tax gap would be reduced by about 40% to $266 billion. Every 1% increase in compliance would generate at least $27 billion.
Focusing on high-yield assessments. The IRS has kept stats on areas that continually see significant underreporting noncompliance and has committed to focus on these areas:

High-income individuals.
Worker classification: W-2 vs. independent contractor.
S corp. losses claimed in excess of basis.
Rental property losses: passive vs. active, as well as basis issues.
General small business underreporting of taxable income.
Form 1099 filing compliance.
Review of international taxpayers/FBAR, etc.

Increasing tax document matching. Computer matching technology is currently in place for many tax forms, including Forms 1099 and W-2, which results in a 99% compliance rate in reporting those amounts. However, computer matching technology is not in place for others, and the compliance rate is only 44% in these cases. The IRS is going to focus on technology as a solution to effectively and efficiently increasing compliance.
Regulating and deputizing tax professionals. The IRS focusing on requiring tax preparers to meet certain requirements and register to be part of a database to help ensure that preparers are qualified and (hopefully) honest.
Mandating disclosures. The IRS has gradually increased the level of detail that must be included in returns. If preparers fail to make these disclosures, it can result in civil penalties and sometimes even criminal penalties.

Although receiving notices from the IRS can be stressful, be aware that it’s just a part of what the IRS is doing to help close the gap resulting from under-reporting. If the IRS is successful, it could greatly reduce the federal deficit and prevent increased taxes to those who are reporting honestly and correctly.

The LLC, S Corporation, and C Corporation: How to Choose the Right One for Your Business

noreply@blogger.com (Dan Livengood, CPA) — Wed, 01 Aug 2012 19:17:00 +0000

The default business structure for most people forming a business today is the Limited Liability Company (LLC). LLCs are a good choice because in an LLC structure, owners have limited personal liability for the debts and actions of the LLC. But there are two other options most people don’t consider when starting a business: the C corporation and the S corporation. Let’s look at the difference between these two types of corporations.

C corporations are the standard, and if you don’t file specifically for S status when you set up your corporation, it’s automatically a C corp. Both classifications give you limited liability, but when it comes to taxes there is one major difference: distributions of profits from a C corporation are taxed twice. The corporation pays tax on its net income, and shareholders also pay tax on distributions as dividends. The only consolation is that dividends are taxed as capital gains. Income from an S corporation is only taxed once at the shareholder level.
If you’re a small business trying to decide how to set up your business, here are a few things to keep in mind for tax purposes:

A C corporation doesn’t make a lot of sense unless you’re planning to grow very large very quickly, because of the double tax on income and proceeds from sales. There are some benefits that C corps offer but for small businesses the benefits are far outweighed by the double taxation.
An S corporation can be a good choice for owners who prefer the corporate form over the LLC. The S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Instead, with an S corporation, the business profits are taxed at individual tax rates on each shareholder's Form 1040. The accounting rules are more complicated than if you're filing as a sole proprietor, requiring different forms and quarterly filings, but these requirements are fairly easily met, and the tax savings is usually substantial.
Because the federal government does not recognize an LLC as a classification for federal tax purposes, an LLC can file a corporation, partnership, or sole proprietor tax return. It can be advantageous for a business to elect to file an S corporation return, because you get the tax advantages of being an S corp. If your business is an LLC, you may want to talk to your CPA about filing an S Corp return to see how much money it would save you.

How the CPA Came To Be

noreply@blogger.com (Dan Livengood, CPA) — Wed, 01 Aug 2012 19:15:00 +0000

I came across a great article online this week by Mark Murray, J. D., Tonya K. Flesher, CPA, Ph.D. and Dale L. Flesher, CPA, Ph.D. The article outlines the history of how the CPA came to be. Here's a summary:

The First Taxes
No discussion of the milestones for CPA tax preparers would be complete without addressing tax software’s key role. Tax specialists took their first significant step into the technology era in the early 1960s and since then have continued to achieve new levels of speed, efficiency, information sharing, and collaboration with employees and clients alike.
The very first federal income tax laws was signed by President Abraham Lincoln in 1862 to help finance the Civil War. It was actually repealed several years later, after the war ended.
The next significant piece of legislation came in 1894 with the Wilson-Gorman Tariff Act. It imposed a 2% income tax to fund reductions in tariff rates. The Supreme Court later declared that tax to be unconstitutional because it violated the prohibition against unapportioned direct taxes.
The modern individual income tax law was enacted in 1913 after the 16th Amendment made unapportioned direct taxes legal. The Underwood-Simmons Tariff Act created a new income tax law that was designed to more fairly tax those across income brackets and geographic regions.
The Corporate Income Tax Act of 1909 was the first corporate income tax law. The American Association of Public Accountants (AAPA), a predecessor of the AICPA, objected to the law’s requirement that companies use a cash-based, calendar-year system, and campaigned to get the law changed in 1913 so that it made allowances for the accrual method and fiscal year. These 1909 and 1013 laws created a more widespread need for CPAs and created a market for tax-preparation specialists. Income taxes were still primarily paid by the wealthy however.

Taxes for All
the 20th century saw the monumental shift in income taxes being paid by the masses, due to World War I and World War II. The need to pay for World War I led to higher tax rates and an excess profits tax. World War II was even more significant. The existing tax revenues could not pay for the war effort, so the Revenue Act of 1942 was passed, which increased individual and corporate income tax rates. A year later, The Current Tax Payment Act requiremed that employers withhold taxes from their employees’ wages and pay them to the government.
In 1939, only about 5% of workers paid income tax. By the end of World War II in 1945, approximately 90% of American workers submitted income tax returns. Theh need for CPAs and tax preparation assistance had firmly solidified.

Attorney Controversy
Once the Revenue Act of 1942 was passed, tax services were in high demand and people were starting to pay attention to the new market, including attorneys. CPAs had long outnumbered attorneys in the income tax preparation specialty, but attorneys now wanted in on the market. Attorneys declared that CPAs did not have the right to offer tax-preparation services and were, in fact, committing unlicensed practice of law.
The controversy lasted for more than 20 years, and the court system finally declared that both parties were allowed to continue offering the same range of tax-preparation services. In 1965, a law was passed that established that any person who is qualified to practice as a CPA may represent clients before the IRS or Treasury. Now that the controversy has settled, significant progress has been made in the relationship between CPAs and attorneys.

CPA-Client Relationship
CPAs have always seen themselves as an advocate for their clients. As tax laws become more complex, CPAs saw their role not only as representing their clients and assisting them in filing their returns, but also in advising them. The need to respond to constant changes in tax law has made CPAs a valuable partner with their clients. CPAs set themselves apart by providing reliable and experienced guidance.

Interesting Tax Facts From History

The original Form 1040 was merely four pages long.
That original 1040 (no money was required to be sent with the form) was due to be filed by March 1, 1914.
In 1914, a field agent verified each tax return and then billed taxpayers on June 1.
The Revenue Act of 1918 changed the filing date to March 15. April 15 didn't became the filing deadline until 1955.
Revenue Act of 1924 recognized CPAs as a class of professionals. The act was signed into law by President Calvin Coolidge.
Before World War II, in 1939, only about 5% of workers paid income tax. By the end of World War II, in 1945, about 90% of American workers submitted income tax returns.

Kickstarter: what it is and what you should know

noreply@blogger.com (Dan Livengood, CPA) — Thu, 28 Jun 2012 16:19:00 +0000

I’ve been hearing more and more about Kickstarter and how people are using it to fund innovative and exciting projects. I did some research to find out just what Kickstarter is and how business people and non-profits can use it to fund their own projects. Here’s what I found.

Kickstarter is a website that people can browse to find projects that interest them in fields they’re passionate about (like art, music, food, and technology) and then back projects with any amount they choose. As a reward for backing, project organizers give backers a variety of incentives at different levels. For example, there’s a project on Kickstarter right now called “Sunboxes in Vermont State Parks.” It’s a project to develop a solar powered sound installation. It’s a interesting concept, made up of twenty speakers that are powered independently by the sun. A different loop in each box is programmed to play a different guitar note continuously. Combined, these guitar notes make a Bb chord, and because the loops are each a different length, once the piece begins they continually overlap and the piece slowly evolves over time. The rewards for backers of the sunbox project are: a photo of the sunboxes if you pledge $1, a recording of the sunboxes if you pledge $5, a video of the sunboxes if you pledge $10, and so on. Backers of $500 or more receive a triptych of three original prints of the sun boxes in a Vermont State Park, and backers of $2500 or more get their own set of sun boxes installed wherever they’d like them.

So, what does it take to have your own successful project on Kickstarter? There are a few things to shoot for:

A solid idea that’s been mapped out and completely thought through. You want people to understand that you have a fleshed-out concept, not a bare bones idea you just thought of five minutes ago.
A detailed plan. Your plan should include timeframes, necessary partners, and anything else you’ll need.
Qualified experience that shows you’re competent to complete your project. How can you show that your track record proves that you’re the one to do this and succeed?
Necessary skills. What skills will you need? If you don’t have all the required skills, who do you know that does have those skills? You will want to show that you have what it takes to get your project done.
Clear goals and expectations. People want to know if you’re doing this to better the world, for your own profit, to raise money for a cause, or for some other reason. What is your purpose? Where will the money go? Be clear and let people know what to expect.

To check out Kickstarter or read some good information on it, visit the Kickstarter website or this excellent blog post on the subject. If you’ve got a great idea that you know you could make happen if you just had some cash, you might want to take a closer look at what Kickstarter can do for you.

Contractor or Employee? How to Know Which You are and Why It Matters

noreply@blogger.com (Dan Livengood, CPA) — Thu, 28 Jun 2012 16:18:00 +0000

You’ve heard about the independent contractor vs. employee question. Most of the time, discussions revolving around the topic are designed to help business owners determine if someone they’re counting as a 1099 independent contractor (and therefore not required to withhold taxes, offer benefits to, etc.) is actually classified by the government as an employee. But what if you’re in business for yourself and trying to figure out if you’ve set up your arrangement with a large client properly?

The IRS recently came out with a helpful document [This will link to the document] to help people determine if they’re an employee or an independent contractor. There are three main areas that the document looks at in defining the difference.

1) Behavioral Control -- Does your client tell you how to do the work you do for him or her? Does your client tell you what tools or equipment to use or what assistants to hire? Does he or she provide you with training on procedures and work methods? If so, you may be dealing with an employer/employee situation, rather than a client/contractor situation.

2) Financial Control -- Do you have a significant investment in your work? Do you supply your own equipment? Are you not reimbursed for many business expenses? Could you incur a loss or make a profit in your work? If so, this indicates you’re an independent contractor.

3) Relationship of the Parties -- Do you receive insurance benefits or paid leave? This shows that you’re an employee. Do you have a contract that spells out that you’re a separate entity and defines the nature and method of the work you’re doing? This helps to set you apart as an independent contractor.

So why does it matter? Your classification affects several things: how you pay your taxes, what taxes you’re responsible for, how you file your tax return, and your eligibility for social security and Medicare benefits. It also becomes a factor in lawsuits and liability issues. If you’re filing improperly and get audited, you’ll face a complicated mess that you’ll have to sort through, as well as fines and the possibility of being responsible for back taxes. It’s not something you want to ignore.

Mileage Rates for 2012

noreply@blogger.com (Dan Livengood, CPA) — Sat, 17 Dec 2011 22:01:00 +0000

The IRS has released the standard mileage rates for 2012. For business is the rate is 55.5 cents per mile. Driving for charitable purposes is 14 cents and the rate for medical travel and moving is 23 cents. These rates are set by the Internal Revenue Service each year based on a study of fixed and variable costs of operating an automobile.

What will expiration of the Bush-era tax cuts mean?

noreply@blogger.com (Dan Livengood, CPA) — Thu, 02 Dec 2010 15:32:00 +0000

The extension of the Bush-era tax cuts has been featured in the media recently, but the specifics are rarely mentioned. What does the failure to extend these tax cuts really mean? If the Bush-era tax cuts are not renewed the following will happen for the 2011 tax year:
• The 10% tax bracket will dissolve back into of the 15% bracket. For 2009 the 10% bracket was for the first $8,350/$16,750 taxable to single/married filing joint taxpayers respectively.
• The tax rate brackets overall will narrow, requiring less income to reach the next bracket.
• The marriage penalty will return, further narrowing the tax brackets for married taxpayers.
• The reduced limitation on itemized deductions and personal exemptions will be repealed, meaning both of itemized deductions and personal exemptions will be subject to reduction at pre-cut rates.
• The maximum tax rate for qualified dividends and capital gains will increase from 15% to 20%
• Tax credits will be reduced, including the child tax credit, which will decrease from $1000 to $500 per child.

The Alternative Minimum Tax Is Coming For You, or, How Does It Feel To Be Rich?

noreply@blogger.com (Dan Livengood, CPA) — Thu, 04 Nov 2010 13:15:00 +0000

The Alternative Minimum Tax (AMT) will affect 25 million more Americans for 2010 if action is not taken by congress according to a recent article in the Wall Street Journal online. The AMT was originally designed to keep a handful of the wealthiest Americans paying some amount of tax regardless of deductions. The tax involves throwing out most deductions and the benefits of most credits and taxing income at a flat 26 or 28 percent. It’s the original “flat tax” designed to make sure that the wealthiest Americans pay their fair share. Only now it might apply to you.

Rather than completely updating the tax, congress routinely passes a “patch”. The patch is supposed to keep the AMT in line, but they have failed to keep up with inflation, resulting in the AMT applying to 4 million taxpayers in 2009. This doesn’t bother our government too much, because they have gotten use to collecting the extra revenue from the creeping expansion of this extra tax. The critical issue is that with all of the chaos in congress this year there has been no patch. With no patch to the AMT 25 million more taxpayers will get hit with this tax.

To prevent this, I encourage you to contact your representatives and let them know you support an immediate patch to the 2010 AMT. This legislation will likely be voted upon in the lame duck session of congress later this month. They can be reached as follows:

Senator Jim Demit
http://demint.senate.gov/public/index.cfm?p=CommentOnLegislationIssues
340 Russell
United States Senate
Washington, DC 20510
Phone: 202-224-6121
Fax: 202-228-5143
Office Hours:
9am - 6pm (M-F)

Senator Lindsey Graham
http://lgraham.senate.gov/public/index.cfm?FuseAction=Contact.EmailSenatorGraham
290 Russell Senate Office Building
Washington, DC 20510
(202) 224-5972

Small Business Jobs Act of 2010

noreply@blogger.com (Dan Livengood, CPA) — Thu, 07 Oct 2010 13:41:00 +0000

You have probably heard that the 2010 Small Business Jobs Act was recently enacted, but have no idea if there is anything in it for your business. Because many of these opportunities are available for 2010 you might have a limited time to act. Here is a list of its main provisions.

• Larger section 179 expensing for capital assets.

• 100% exclusion of gain from the sale of small business stock acquired after the date of enactment and before January 1, 2011.

• General business credits of eligible businesses for 2010 allowed to be carried back five years.

• General business credits of eligible small businesses in 2010 aren’t subject to AMT.

• S corporation holding period to avoid built-in-gains tax on appreciated assets reduced to five years.

• Extension of 50% bonus depreciation to 2010 (and 2011 for certain property).

• Long-term contract accounting will no longer include bonus depreciation in the calculation.

• Deduction for start-up expenditures increased.

• Limitation on the penalty for failure to disclose certain reportable transactions.

• Cost of health insurance now deductible for determining self-employment tax.

• Cell phones are no longer considered listed property.

Of course, any good tax act must include some provisions that have the opposite effect of the act’s title. The 2010 Small Business Act includes the following “revenue raisers”:

• Rental property owners must now file 1099s on any service provider paid more than $600 in any year after December 31, 2010.

• Increased penalties for information returns (1099s for example) filed after December 31, 2010.

• IRS levy prior to a collections due process hearing for Federal contractors.

• Government 457 retirement savings plans can include a Roth account after December 31, 2010.

• Rollovers from 401(k), 403(b) and 457(b) plans to Roth are only taxable to the extent of after-tax contributions being rolled over.

• Crude tall oil is excluded for eligibility for the cellulosic biofuel producer credit.

• Nonqualified annuity contracts can elect to accumulate undistributed earnings on a tax deferred basis.

• Fees paid by U.S. taxpayers to foreign person for guaranteeing indebtedness will generally be subject to U.S. withholding.

I see some potential tax saving for most of my clients in this act. However, I doubt any of them will create new jobs as a result.

Taking Advantage of a Home Office

noreply@blogger.com (Dan Livengood, CPA) — Thu, 30 Sep 2010 13:57:00 +0000

With the growing mobility of the workforce and the increasing number of home-based businesses more people are working from home. Who can take advantage of having an office in the home? To claim expenses for a home office the designated space within the home must be used regularly and exclusively for one of three things: 1) as a principal place of business, 2) as a place to meet customers in the normal course of business, 3) or if it is a separate structure (such as a storage building or barn) in must be used in connection with the business. If an office is provided at a regular place of business, but the individual chooses to work at home then these deductions are not allowed. There are also some special rules that must be considered based on the situation and nature of business.

The expenses that can be claimed include direct and indirect expenses. Direct expenses are those that are incurred strictly for business purposes, such as a separate business phone line. 100% of direct expenses can be claimed in most cases. Indirect expenses are those that are incurred by the whole household, such as rent, mortgage interest, insurance, and power. Indirect expenses are prorated based on the percentage of the square footage used by the office compared to the total square footage of the home.

What’s the best way to claim these expenses? Sole-proprietors and partners can claim these expenses against self-employment income when they file their tax return. Employees (including corporate shareholder employees) get the most benefit by submitting these expenses on a regular basis, such as monthly, on an expense report to their employer. The corporation gets to deduct the expense, while the employee does not recognize it as income because it is a substantiated reimbursement. If reimbursement is not an option, the employee must claim them as unreimbursed employee expenses as an itemized deduction, subject to the 2% of AGI reduction. So, to get any benefit in this case the employee would have to have enough total deductions to itemize and the amount would still be reduced or eliminated based on their income.

Employee or Independent Contractor?

noreply@blogger.com (Dan Livengood, CPA) — Thu, 23 Sep 2010 12:47:00 +0000

So you need someone to perform some services for your business. The allure of saving employer FICA taxes (7.65%), workers compensations (?%), and other employment compliance costs (????%) causes too many businesses to rush to treat those workers as independent contractors when they should actually be treated as employees.

Unfortunately there is no hard and fast rule, but there are three criteria the IRS uses to make this determination. The first is behavioral control: who controls where, when and how the work is performed. The second is financial control: who makes the financial decisions with respect to the work. And third is the relationship: how do the business and the worker perceive their relationship with each other. Control or confusion in any of these areas means you probably have an employee.

Audits of businesses that treat workers as independent contractors are on the rise, so you had better have a good rational if you decide to go this route. In addition, workers often seek reclassification once they realize the tax implications of being treated as an independent contractor, or when loss of work causes them to seek unemployment benefits (which are only available to employees). This can have a snowball effect as it draws the attention of revenue starved state and federal agencies to your relationship with all your workers. And, once their reclassifications are made, interest and penalties pile on too. Did I mention my fees for defending you in one of these situations?

Fortunately, when adding workers, we can work with you to be sure you make a good well thought out determination. The IRS also offers a form (SS-8) that you can submit with all the facts to get them to make the decision for you. The resources are available to make a reasonable determination and pay the additional costs if necessary form the beginning to avoid crushing costs of a rash decision.

The IRS offers a little more detail here:

http://www.irs.gov/newsroom/article/0,,id=173423,00.html

And a publication giving the detailed rules can be found here:

http://www.irs.gov/pub/irs-pdf/p1779.pdf

IRS Has Put Paper Coupons on the Chopping Block

noreply@blogger.com (Dan Livengood, CPA) — Thu, 26 Aug 2010 14:57:00 +0000

If you pay your estimated taxes, payroll taxes or other tax payments using paper coupons, prepare to be forced into the information age. A new proposed regulation (REG 155340-09) will do away with the paper coupon system effective December 31, 2010. This is part of a larger IRS initiative to reduce errors and improve efficiency. Starting next year all payments will need to be made through the Electronic Federal Tax Payment System (EFTPS).

If this applies to you, you cannot wait until the last minute to enroll as the process involves both internet registration and delivery of confirmation by mail and can take 15 days. IRS Publication 4132 (found here: http://www.irs.gov/pub/irs-pdf/p4132.pdf) summarizes the EFTPS enrollment process.

Good luck! And, as always, don't hesitate to seek help from a qualified professional.

Take Advantage of the Health Care Small Business Tax Credit

noreply@blogger.com (Dan Livengood, CPA) — Mon, 23 Aug 2010 13:23:00 +0000

If you pay part of the premiums for your employee health insurance, be prepared to supply payroll and insurance records to your tax preparer this tax season so they can determine if you qualify and, if so, the amount of credit for your business. The ease the burden of the recent health care legislation congress is offering an income tax credit to small businesses that provide health insurance to their employees. To qualify the business must have: not more than 25 full time employees, and an average annual wage of no more than $50,000, and the employer must pay at least 50% or the premiums for single (employee only) coverage. The maximum credit is 35% the premiums paid by the employer, subject to a list of caveats and reductions.

Beware When You Get a Notice by Email or Fax

noreply@blogger.com (Dan Livengood, CPA) — Mon, 23 Aug 2010 13:06:00 +0000

Getting a threatening email or fax from the IRS often takes an individual off guard and they would do anything to keep the tax man off their back. Or, maybe an email about a lost refund inspires hope of a needed windfall. Unfortunately, bogus email, fax and phishing scams continue to confuse and trap taxpayers. The IRS will never contact you by email, nor will they ever make initial contact regarding an issue via fax. The same generally goes for state and local tax authorities.

These phony notifications are often part of a fraud or identity theft scam and are becoming more frequent. Any response to them could put you at risk. And supplying your information out of fear or optimism could cost you a fortune to fix.

Anytime you receive a notification from a tax authority requesting confidential information beware, they should already have most of your information. If your get any communication you are skeptical about notify your tax preparer. Or, contact the agency directly using their number in the blue pages to be sure you are calling the real agency.

You Might Miss Vital Tax Saving Information

noreply@blogger.com (Dan Livengood, CPA) — Thu, 15 Jul 2010 13:26:00 +0000

When I make a major post to my blog, I usually send an email blast. However, due to the crazy magic of the internet, my email won’t always make it to your inbox. And you could miss an update that could save you thousands in taxes or penalties. To be sure your get my updates I recommend subscribing to my RSS feed. The link is at the bottom of the right column on this blog.
If you are unfamiliar with RSS feeds here are some helpful instructions.

How to add RSS feeds to outlook:
http://office.microsoft.com/client/redir/HA010355679.aspx
How to add RSS feeds using a news reader:
http://rss-tutorial.com/rss-how-to-subscribe-to-feeds.htm
Or, if you are less verbally and more visually oriented check out this YouTube video:
http://www.youtube.com/watch?v=JQCdW0NXRBo

Please forward this information to anyone who could possibly use it. They will appreciate it!

Hiring? You May Qualify For Tax Savings!

noreply@blogger.com (Dan Livengood, CPA) — Thu, 08 Jul 2010 14:07:00 +0000

The economy seems to be turning around and many of my clients are considering hiring new employees. Here are some tax breaks from the HIRE Act you need to be aware of when making hiring decisions this year.

First, there is the payroll tax exemption. The employer is exempted from paying their share of the social security tax (6.2%) on qualifying employees. The employee must: be hired between February 3, 2010 and December 31, 2010; not have been employer more than 40 hour in the last 60 days; not replace another employee unless that employee was terminated for cause or left employment voluntarily. The exemption applies to wages paid between March 19 and December 31, 2010. There is no limit on this savings, other than the maximum employer cost of $6,621.60 for social security matching. As always there are some special caveats. Most payroll software has incorporated this exemption as a option as of this posting. Verify that the employee qualifies by having them complete a W-11, which can be found here: http://www.irs.gov/pub/irs-pdf/fw11.pdf.

Second, there is the Work Opportunity Tax Credit. The employer must choose between this credit and the above exemption. They can’t do both. This credit is available when employing members of nine targeted groups, including unemployed veterans and disconnected youth, with qualification varying by group. The credit is 40% of the first year wages up to $6000 (that’s a $2400 tax credit) for most applicable employees. The 40% credit applies to the first $12,000 of wages for qualified disabled veterans. This is the most technical of the available advantages and you should consult with your tax advisor if you think you might be eligible.

Third, is the credit for retaining qualifying new workers. Now that you hired them, the government is giving you a reason to keep them. This credit applies to any tax year ending after March 18, 2010. This income tax credit applies to any employee that meets the criteria for the payroll tax exemption (see two paragraphs above). This is the lesser of 6.2% of wages or $1000 (so the credit maxes out on wages of $16,129.03). The employee must be employed for 52 consecutive weeks and their wages in the second 26 weeks must be at least 80% of those for the first 26 weeks; to prevent front loading the wages to get the credit.

Keep in mind, each incentive only applies when hiring someone who has been unemployed for some period of time. And, while these incentives alone are no reason to hire, they certainly make it more agreeable. Even if you aren’t hiring, I bet you know someone who is and can use this information.

Hidden Tax Hike For Small Businesses Being Decided - ACT NOW!

noreply@blogger.com (Dan Livengood, CPA) — Thu, 24 Jun 2010 13:18:00 +0000

Today the U.S. Senate will resume consideration of bill H.R. 4213, which has already passed the House. Hidden within the bill, receiving almost no attention from the media, is an $11 billion dollar tax increase for many small businesses. They are calling it “The American Jobs and Closing Tax Loopholes Act of 2010” and in it is a provision that would subject professional service s corporation profits to self-employment tax, even if they are retained by the company. That’s an extra 15% tax for those corporations. Adding to the problem is that “professional services” are broadly defined in the code, including doctors, lawyers, accountants and consultants, with consultants being anyone who earns most of their money through providing knowledge and expertise and not tangible goods. If this passes many small business will see over 15% of their profits that could be reinvested in growing the business and the economy vaporized by the government.

The AICPA, proving that not all lobbyists are bad, has encouraged the Senate to rethink this position. An amendment has been introduced, AMDT 4342, which would strike this section from the bill.

I encourage you to contact your senators and let them know you support Amendment 4342 for bill HR 4213. Act now, this legislation will be voted upon soon. They can be reached as follows:

Senator Jim Demit
http://demint.senate.gov/public/index.cfm?p=CommentOnLegislationIssues
340 Russell
United States Senate
Washington, DC 20510
Phone: 202-224-6121
Fax: 202-228-5143
Office Hours:
9am - 6pm (M-F)

Senator Lindsey Graham
http://lgraham.senate.gov/public/index.cfm?FuseAction=Contact.EmailSenatorGraham
290 Russell Senate Office Building
Washington, DC 20510
(202) 224-5972

For more information on this hidden tax increase check out:

http://www.forbes.com/2010/06/09/tax-increase-congress-hedge-funds-personal-finance-s-corp-payoll-taxes.html?boxes=Homepagelighttop

And what the AICPA proposes:

http://www.aicpa.org/InterestAreas/Tax/Resources/SCorporations/Pages/AmendToHR4213SECT413-EMPLOYMENTTAXTREATMENTPROFESSIONALSERVICEBUSINESSES-SAMDT4342.aspx

1099s All the Time, Everywhere, Without Remorse

noreply@blogger.com (Dan Livengood, CPA) — Thu, 03 Jun 2010 12:31:00 +0000

Beginning in 2012 businesses (including individuals engaged in rental activities) will have to issue 1099s to ALL providers of products and services who are paid more than $600 each that year. Do you have phone, cell phone, insurance or electricity in your businesses name? You’ll have to send those companies and many more a 1099. Have a rental property? You’ll probably need to send 1099s to the mortgage and insurance companies.
This broad requirement was written into the healthcare bill in hopes of closing the tax gap; the billions of dollars people fail to report and pay taxes on each year. That’s how the bill came out relatively cheap with only a few additional taxes. The government expects most of the funds to come from increased tax compliance.

My biggest problem with this is that the IRS matching program is already notorious for causing problems. Simple errors on the part of the issuer or government, such as a mistyped social security number, or a 1099 issued in an individual’s name, instead of their business, can cost hundreds of dollars to convince the IRS that there was an error.

Millions of 1099s going every-which-way, for every imaginable reason hard to believe? See more from money.cnn.com here:

http://money.cnn.com/2010/05/05/smallbusiness/1099_health_care_tax_change/index.htm

IRS Threats to Your Financial Health

noreply@blogger.com (Dan Livengood, CPA) — Thu, 07 Jan 2010 16:07:00 +0000

According to a recent report by the National Taxpayer Advocate the IRS has several practices that may harm you financially while generating little revenue for our treasury.

The IRS has set a target to answer 71 percent of phone calls. That mean 29 percent will go unanswered. Good luck preparing a correct return if you have a question and your call is one of those that goes unanswered.

Their collection practices aren’t going to help either. The IRS uses an automated system to file a lien against you if you have a tax debt, whether there are assets to collect against or not. This damages your credit, which makes is next to impossible to borrow money to pay your tax debt, which is actually what the IRS would rather you do. So, they want you to borrow the funds to pay them off and prevent the lengthy collections assessment process, but then file a lien against you which makes that next to impossible to achieve.

And speaking of the assessment process, to determine the amount you can reasonably against your debt requires hours of gathering paperwork. That time would be better spent allowing taxpayers to earn the funds to repay the debt. The process itself is also wasteful in its results. You have to document all f your debt payments, but the IRS will not consider unsecured debt payments, such as credit cards. How long can they expect someone to comply with a payment plan that is blind to many their other debts?

It’s not all bad news. The IRS is also working to create regulations for “unenrolled preparers”. CPAs, attorneys, and enrolled agents must all meet strict ongoing requirements. Until now, other preparers have had no requirements, and in some cases have little more expertise than the people who come to them to have their taxes prepared. In other cases, unregulated individuals have stressed bigger refunds over correct returns to their detriment of their customers. This has resulted in some of the scandals and lawsuits regarding some of the tax preparation chains. With registration and regulation, taxpayers will have greater assurance that the individual preparing their returns has their best interest in mind and knows what they are doing.

The Tax Payer Advocate Service is a national service, an independent branch within the IRS, that assists taxpayers with problems that have not or cannot be resolved through normal IRS channels and result in economic harm to the taxpayer.

Help with your employees and who’s responsible

noreply@blogger.com (Dan Livengood, CPA) — Mon, 14 Dec 2009 14:55:00 +0000

Do you currently or are you considering using a PEO, employee leasing company, temporary staffing agency, administrative services organization or payroll service provider? I have worked with a number of these companies over the years and know how they operate. I also just finished a continuing education course on these types of arrangements to cement what I have learned in the past decade. I highly recommend having a third party, such as a CPA, check behind them at least once every six months.
Too often, small businesses signup with one of these organizations without realizing how much control they are giving up while still retaining most or possibly all of the liability for tax and labor compliance issues. Unless your business relinquishes all control of wage payments, you can still be held 100% accountable for any problem with your payroll taxes and reports, including penalties and interest. Only if the employer has no control over the actual wage and salary amounts, raises, timing of the payment to employees, etc. does the liability stop with the service organization.

If you think “I hired them to do that so if there if a problem it’s on them” then you are living in a fantasy world that can quickly come crashing down around you. Of course, federal and state tax agencies will pursue anyone involved who they think they can collect from. And, unless your situation meets the above criteria, they can cut right though the service company (who might be broke by the time you discover a problem) to your business. This risk is fortunately very manageable. First, carefully document what risks you might be exposed to. Second, on a regular basis ask for proof that you are in compliance and hire a knowledgeable third party to make sure everything is in balance. Too many small business do not do this small amount of due diligence and it can cost them everything.

2010 Standard Mileage Rate

noreply@blogger.com (Dan Livengood, CPA) — Thu, 10 Dec 2009 13:07:00 +0000

The standard mileage rate for 2010 for business is 50 cents per mile. Driving for charitable puroposes is 14 cents and the rate for medical travel and moving is 16.5 cents. These rates are set by the Internal Revenue Service each year based on a study of fixed and variable costs of operating an automobile.