Here is a list of some common small business tax misconceptions:

1. All Start-Up Costs Are Immediately Deductible

Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.

You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation. You can elect to deduct up to $10,000 of business start-up costs and $10,000 of organizational costs paid or incurred in the year that you start a business. The $10,000 deduction is reduced by the amount your total start-up or organizational costs exceed $60,000. Any remaining cost must be amortized and you must spread out the remainder of your start-up costs over 15 years (180 months).

2. Being incorporated enables you to take more deductions.

Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are very similar to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden..

3. The home office deduction is a red flag for an audit.

This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.

4. If you don’t take the home office deduction, business expenses are not deductible.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

5. Taking an extension on your taxes is an extension to pay taxes.

Extensions enable you to extend your filing date only.  If you do not pay taxes on time, penalties and interest begin accruing from the due date.

• Charitable Contributions* – You must have a written acknowledgement from the charitable organization to support donations of $250 or more.

• Medical Expenses* – If you believe your unreimbursed medical expenses for 2011 exceeded 7.5% of your adjusted gross income, you will need to add up the receipts for all of these out of pocket costs.  If your medical expenses weren’t that much, don’t bother.

• Sales Tax* – You can elect to deduct state sales tax paid during 2011 in lieu of state income taxes.  The IRS provides a table for calculating your state sales tax deduction based on your income for the year.  If you prefer, you can add up the actual sales tax you paid on all of your 2011 receipts to calculate your deduction.  If you made a major purchase, like buying a car, the actual sales tax paid on this transaction can be added to the amount from the IRS table.  So, you should at least find the receipt from your car purchase.

• Real Estate Taxes* – Keep the receipt for the real estate taxes you PAID in 2011.  If your real estate taxes are paid through your escrow account, your deductible amount will probably be reported on the 2011 Form 1098 that you receive for mortgage interest.

• Unreimbursed Business Expenses – Receipts are needed to claim this deduction.

• Child or Dependent Care Expenses – Request a statement from the care provider reporting the expenses you paid during 2011.  You may be eligible for a tax credit.

• Energy Efficient Home Improvements – You may be eligible for a tax credit if you made energy efficient improvements to your home during 2011.  You will need the receipt evidencing payment for these improvements as well as a tax credit certification statement from the manufacturer of the improvement property.  Here are more details on the credit: http://www.irs.gov/newsroom/article/0,,id=249922,00.html

*Note: These deductions are only applicable if you can itemize.

• If you are a business owner, landlord, or farmer, hopefully you have kept track of all of your 2011 income and expenses from these business activities.  At the very least, you should use a separate checking account for each business you operate.  There are many types of accounting software that can help you record the business activity.  Talk to your CPA if you have questions about accounting for your business income and expenses.

• Keep the 2011 year end statement from your Health Savings Account and Individual Retirement Account.  Your contributions for 2011 may be tax deductible.  Also, you have until the due date (without extension) of your income tax return to make deductible contributions for 2011.

• If you made quarterly estimated income tax payments to the US Treasury for 2011, list the dates paid and amounts paid.  These will be subtracted from your total tax liability.  Remember that the fourth quarter estimated tax payment for 2011 is due January 17^th, 2012.

These steps will help you whether you prepare your own return or provide this information to your CPA.  Don’t hesitate to ask your CPA if you have any questions.  Good luck!

It’s that time of year again!  The New Year starts the countdown until April 17^th, 2012 (i.e. the due date of your 2011 individual income tax return).  The best way to make the preparation of your income tax return as painless as possible is to be organized and thorough.  Here are some steps for doing so:

Collect all of the tax documents mailed to you in one file. Some common forms you may receive:

• Form W-2, Wage and Tax Statement – If you were an employee during 2011, this document must be provided to you by January 31^st, 2012.

• Forms 1099-INT, Interest Income, 1099-DIV, Dividends, 1099-B, Proceeds – You probably won’t receive these documents reporting your 2011 investment income until the middle of February.

• Form 1099-MISC, Miscellaneous Income – If you were an independent contractor during 2011 or received rents, royalties, etc., this document must be provided to you by January 31^st, 2012.

• Form 1099-R, Distributions from Retirement Plans, IRAs, etc. – This document must be provided to you by January 31^st, 2012

• Form SSA-1099, Social Security Benefit Statement – This document must be mailed to you on or before January 31^st, 2012.

• Form 1098, Mortgage Interest State – This document must be furnished to you by January 31^st, 2012.

• Schedule K-1 – These forms are issued to S Corporation shareholders, beneficiaries of trusts, and partners in partnerships/LLCs.  You could receive these forms anytime from February through October.  It just depends on when the tax return for the S Corporation, partnership, or trust is prepared.  Thus, you may need to extend your individual income tax return if you are waiting on a Schedule K-1.

These steps will help you whether you prepare your own return or provide this information to your CPA.  Don’t hesitate to ask your CPA if you have any questions.

Cross Train Employees

Just because an employee goes on vacation does not mean that the work can stop.  A company has to have the ability to shift the responsibilities of the person to others in the department.  The best way to ensure that a person going on vacation does not impact your business is to cross train your employees.  It is also a good idea to have a trial run.  Have a week where everyone will perform other people’s jobs.

Enable employees to make decisions

As a business owner you will also need to get away at some point.  Just as you cross train employees you will have to enable your employees to make the critical decisions necessary while you are gone.  Giving employees the skills and ability to make these decisions will also benefit the company even when the owner is not on vacation.  As an owner you will not be present on every phone call, customer visit or meeting with a supplier.  Your employees will be is situations where a quick response will be very beneficial to the company.

How often to check in

As a business owner on vacation you will find yourself tempted to constantly check in while you are gone.  But if you are constantly checking email, voicemails or calling the office by the end of the vacation it will seem like you never left.  There is a reason you went on vacation to begin with.  Make the decision before you leave how often you will check in with the office and stick to it.  Now with everyone owning a smartphone, iPad or laptop you may find yourself constantly being pulled to work.  Also, be sure your employees know not to bother you unless it is an emergency.

Visit a customer or supplier

While you are on vacation you may find yourself near the location of one of your key customers or vendors.  Take a couple of hours and drop in or schedule a dinner with the management.  This could go a long way with strengthening the relationship with this company. This will also give you an idea of how this company operates if you do not know already.

Under the agreement, for the first two months of 2012, a 4.2% Social Security tax would continue to apply to workers’ pay (10.4% OASDI tax for self-employment income).

However, the agreement calls for new language to be inserted into the tax relief bill to prevent a potential payroll tax problem for employers. According to information provided by the House Ways & Means Committee, the revision would allow employers to withhold employee payroll taxes at 4.2% (instead of 6.2%) on all wages paid during the two-month extension period, subject only to the full 2012 wage base ($110,100) and without regard to the $18,350 cap (two-twelfths of the wage base of $110,100) on wages earned through the end of February, 2012.  If an employee’s wages during the first two months of 2012 exceed $18,350, and the payroll tax reduction is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012.

Both the Senate and House approved the bill on the morning of December 23.  It will now be sent to the President for his expected signature.

Under the agreement, both Republicans and Democrats in the Senate and House will immediately appoint negotiators to a conference to forge a full-year extension of the payroll tax reduction.

Detailed Update to Post below:

Payroll tax cut temporarily extended; employers instructed on how to implement new rate

IR 2011-124

On December 23, Congress passed, and President Obama signed into law, H.R. 3765, the “Temporary Payroll Tax Cut Continuation Act of 2011” (the TTCA). The tax provisions of the TTCA consist of a two-month temporary extension of the payroll tax cut that’s in place for 2011, plus a parallel extension of a lower Self-Employment Contributions Act (SECA) tax rate on self-employment income. In a related news release, IRS also provided guidance to employers on how and when to implement the new rate.

Overview. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

Before passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312), the FICA tax rate for employees and employers was 7.65% each—6.2% for OASDI and 1.45% for HI. Under the SECA tax, self-employment income of self-employed taxpayers was subject to a tax of 15.3%—12.4% for OASDI and 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax (the wage base), but no maximum for HI. (The wage base is $106,800 for 2011 and $110,100 for 2012.) Similar rules apply under the Railroad Retirement Tax Act (RRTA).

Under pre-2010 Tax Relief Act law, for computing the income tax of an individual, Code Sec. 164(f) allowed an above-the-line deduction equal to 50% of the amount of the SECA tax imposed on the individual’s self-employment income for the tax year.

Under Code Sec. 1402(a)(12), a taxpayer is allowed a deduction in computing net earnings from self-employment equal to: (1) net earnings from self-employment as determined before taking the Code Sec. 1402(a)(12) deduction into account, multiplied by (2) one-half the sum of the OASDI tax rate and the HI tax rate. This deduction is allowed in computing net earnings from self-employment in lieu of the Code Sec. 164(f) above-the-line deduction of one-half of the self-employment tax. Thus, the Code Sec. 164(f) deduction can’t be taken in computing self-employment tax liability. The Code Sec. 1402(a)(12) deduction is designed to put the self-employed in the same position as employees in that they don’t have to pay self-employment tax on about half of the amount of the tax itself.

Temporary tax cut for 2011. For remuneration received during 2011, the 2010 Tax Relief Act reduced the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduced the OASDI tax rate under the SECA tax by two percentage points to 10.4% percent. As a result, for 2011, employees pay only 4.2% Social Security tax on wages up to $106,800 and self-employed individuals pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.

The 2010 Tax Relief Act provided rules for coordination with deductions for employment taxes, as follows.

The Code Sec. 164(f) income tax deduction allowed for tax years beginning in 2011 is computed at the rate of 59.6% of the OASDI tax paid, plus one half of the HI tax paid.

A new percentage (59.6%) replaces the rate of one half (50%) allowed under pre-2010 Tax Relief Act law for this portion of the deduction. The new percentage is necessary to continue to allow the self-employed taxpayer to deduct the full amount of the employer portion of SECA taxes. The employer OASDI tax rate remains at 6.2%, while the employee portion falls to 4.2%. Thus, the employer share of total OASDI taxes is 6.2% divided by 10.4%, or 59.6% of the OASDI portion of SECA taxes.

However, the two-percentage-point reduction is not taken into account in determining the Code Sec. 1402 SECA tax deduction allowed for determining the amount of the net earnings from self-employment for the tax year.

New law. Under the TTCA, the reduced employee OASDI tax rate of 4.2% under the FICA tax, and the equivalent employee portion of the RRTA tax, is extended to apply to covered wages paid in the first two months of 2012. (Sec. 601(c) of the 2010 Tax Relief Act (P.L. 111-312), as amended by TTCA Sec. 101)

The TTCA also provides for a recapture of any benefit a taxpayer may have received from the reduction in the OASDI tax rate, and the equivalent employee portion of the RRTA tax, for remuneration received during the first two months of 2012 in excess of $18,350 (i.e., two-twelfths of the 2012 wage base of $110,100). (Sec. 601(g) of the 2010 Tax Relief Act, as amended by TTCA Sec. 101) The recapture is accomplished by a tax equal to 2% of the amount of wages (and railroad compensation) received during the first two months of 2012 that exceed $18,350.

RIA observation: A highlight of the TTCA issued by the House Ways & Means Committee on December 22, indicates that the recapture provision would apply only if the temporary payroll tax cut ends on Feb. 29, 2012. A House-Senate Conference will convene soon to consider extending the temporary payroll tax cut for the remainder of 2012.

For tax years beginning in 2012, the TTCA provides that the OASDI rate for a self-employed individual remains at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower OASDI rate for 2012). (Sec. 601(f) of the 2010 Tax Relief Act, as amended by TTCA Sec. 101) Related rules for 2011 concerning coordination of a self-employed individual’s deductions in determining net earnings from self-employment and income tax also apply for 2012, except that the income tax deduction allowed for the OASDI portion of SECA tax paid for tax years beginning in 2012 is computed at the rate of 59.6% of the OASDI tax paid on self-employment income of up to $18,350. For self-employment income in excess of this amount, the deduction is equal to half of the OASDI portion of the SECA tax paid. The Joint Committee on Taxation explanation of the TTCA says that the 59.6% used for the first $18,350 of self-employment income is necessary to continue to allow the self-employed taxpayer to deduct the full amount of the employer portion of SECA taxes. The employer OASDI tax rate remains at 6.2%, while the employee portion falls to a 4.2% rate for the first $18,350 of self-employment income. Thus, the employer share of total OASDI taxes is 6.2% divided by 10.4%, or 59.6% of the OASDI portion of SECA taxes, for the first $18,350 of self-employment income.

Guidance to employers. IRS instructed employers to implement the new payroll tax rate as soon as possible in 2012, but not later than Jan. 31, 2012. If there is any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible, but not later than Mar. 31, 2012. (IR 2011-124)

Further guidance will be issued by IRS as necessary to implement the provisions of the two-month extension, including the issuance of revised employment tax forms and instructions and information for employees who may be subject to the new recapture provision. (IR 2011-124) For most employers, the quarterly employment tax return for the quarter ending Mar. 31, 2012, is due Apr. 30, 2012.

Effective date. The above TTCA changes are effective for remuneration received during the months of January and February in 2012 and for self-employment income for tax

Taxpayers who deduct these expenses must exclude personal expenses when computing their deductions and must have documentation for the expense, including statement of the business purpose, names of the persons being entertained, date and location. In addition, generally only 50 percent of business meal and entertainment expenses can be deducted.

Travel

Taxpayers who travel away from home on business may deduct related expenses, including the cost of reaching their destination, the cost of lodging and meals and other ordinary and necessary expenses. Taxpayers are considered “traveling away from home” if their duties require them to be away from home substantially longer than an ordinary day’s work and they need to sleep or rest to meet the demands of their work. The actual cost of meals and incidental expenses may be deducted or the taxpayer may use a standard meal allowance. Regardless of the method used, meal deductions are generally limited to 50 percent as stated earlier. Only actual costs for lodging may be claimed as an expense and receipts must be kept for documentation. Expenses must be reasonable and appropriate; deductions for extravagant expenses are not allowable.

Entertainment

Expenses for entertaining clients, customers or employees may be deducted if they are both ordinary and necessary and meet one of the following tests:

• Directly-related test: The main purpose of the entertainment activity is the conduct of business, business was actually conducted during the activity and the taxpayer had more than a general expectation of getting income or some other specific business benefit at some future time.
• Associated test: The entertainment was associated with the active conduct of the taxpayer’s trade or business and occurred directly before or after a substantial business discussion.

You cannot deduct amounts that you approximate or estimate.

You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You must generally prepare a written record for it to be considered adequate. This is because written evidence is more reliable than oral evidence alone. However, if you prepare a record on a computer, it is considered an adequate record.

More information is available in Internal Revenue Publication 463, Travel, Entertainment, Gift and Car Expenses.

With all of the added responsibilities and stress it is easy to lose focus and miss a customer or client deadline, a child’s Christmas party or program, or forget a present for that special someone.  Also, for more on how to swing the Christmas Holiday financially please see  – 6 Ways to Budget for the Holidays. Here are some ideas on how to manage everything on our plate and still hit those targets at work.

1)     Scheduling – We all try to work from a schedule at the office or workplace, and do a pretty good job of planning and putting all the projects/tasks on a schedule.  Whether it’s a sales meeting, customer or client deadline, or month-end financials are due; we schedule our time to get these things done accordingly.  You should include your personal items on the schedule as well.  Block out specific time for all of your tasks both work and personal and stick to the schedule.  A calendar or schedule helps us to stay efficient because we only have a limited amount of time for each task/project.  You don’t want to be doing work or all of your shopping once your Christmas vacation starts.

2)     Prioritize – Make a list of what you need to get done (one for work and one for personal) prior to your Christmas vacation.  When you are making your list, think about what has to get done and the consequences if it doesn’t get done.  This will help you prioritize the most important things – do them first.

3)     Focus – Do one thing at a time and stay focused.  It’s easy to lose focus at work and start thinking about all the things you have to do at home or other projects at work.  Remember you have a calendar with dedicated time blocked to handle each project.  Check things off the list as you complete them, and don’t try to juggle everything at once.

4)     Manage days off – Plan for the vacation days at work.  Put in the extra time at work throughout the month or with shorter breaks, so you aren’t trying to put five days of work into just three days on the Christmas vacation week.

5)     Delegate – It’s easy to get overwhelmed and let your mind race, which has an impact on your efficiency and effectiveness.  Stop, organize, and delegate what you can.  Remember the employees working for and with you were hired because they are good at what they do.  They can handle the extra responsibility.

6)     Stress relief – Keep time on the calendar for stress relief. It’s easy to go a little crazy when everything at work is due yesterday, you’ve put up a million lights on the house and none of them work, the extended family is taking over your house, and things don’t work just like you expected financially for the Christmas vacation.  Next thing you know you have cut the post on your inside staircase with a chainsaw, the turkey is burnt, your great uncle burns down the tree and a squirrel is loose in the house.  These are the times when you will wish you had taken that jog or time to sit and relax.

It can be difficult to handle the stress and expectations during and leading up to your Christmas vacation.  Keep a good home and work balance and stay focused with your tasks.  Plan for an efficient and productive December, so that you can be rewarded with a great Christmas vacation.

1) Start Early

Starting early gives you the flexibility to choose the gifts you want to give (rather than picking through the leftovers that remain the week of Christmas).  This will also give you the time to shop smart – the more time you have, the more patient you can be, the more opportunities you will have to find the best deals.

2) Make a List

By making a list of people you are buying for, you can make sure you stick to your plan.  This will allow you to stay on task and not purchase unnecessary gifts.   Make sure your list is complete – you don’t want to be on Aunt Helen’s naughty list.

3) Set a Limit

Before you head out into the “lion’s den,” figure out the amount you want to spend.  Make sure your budget is sufficient to allow for your planned spending.  Once you have settled on a total (this should be a negotiation with yourself…do not go with the first number that comes to mind.  TRIM THE FAT), allocate the total against the list of people you want to buy for.

4) Cut out Unnecessary Spending

Leading up to Christmas shopping, it is helpful to cut out unnecessary spending to soften the blow of the Christmas splurge.  Try cutting out your daily skinny cinnamon dolce latte from Starbucks, protein bar, or your stop at the local Baskin Robbins.  Five dollars a day is five dollars a day.

5) Use Coupons

Don’t be ashamed…no one will know.  It is ok to open the Sunday paper to peruse for coupons.  Groupon is also a great option for cost cutting for Christmas gifts.  Also, many coupon sites online offer gift cards for discounted rates.

6) Try Online

Before you shop, check out competitor’s ads and go online.  Checking out the best deals from several stores will save you time and money.  Many items are not available in stores, and pricing can be different if you make your purchase online.  No lines to wait in and no hustle and bustle.  Shopping online (or at least doing your research online prior to venturing out) can and will help you save money.

This gift-giving season, try a thoughtful, planned out approach to your Christmas shopping and you may find a surprise for yourself in your pocketbook.

The answers to these questions are dependent upon several factors, such as:

1. What does it cost to meet my basic needs?
2. Will my health hold out until my expected retirement age?
3. Will my job be more demanding as I age and will I be able to deal with the additional stress?
4. Are my co-workers counting the days until I leave?  I feel that I am productive, but when will I no longer be able to produce quality work?
5. Will I have enough money to travel and to enjoy other luxuries?
6. Should I live in my home after retirement or move to a retirement center?
7. Should I live closer to my family?

All of these questions are important in determining when, where and if you can retire.  Each individual or couple is unique in this planning process.  It is best to start with a basic set of financial statements, which show what assets you own, what liabilities you owe and the type and amount of income you earn each year.

It is important to be out of debt before retirement, if possible.

An analysis of your debts is helpful in determining if better interest rates are available and if you can alter your current budget to reduce your debt.  Not all seniors will be debt-free by the time they retire, which is a big concern for many.  Looking at your financial situation, now, is important to give you a clear picture of how you can pay down your debts prior to retiring.

Taking care of your health is not an area about which accountants can give advice, but it does have a tremendous impact on your financial situation.  Maintaining good health is like putting money in the bank.  It is very expensive to pay for sitters and other care providers on a long-term basis.  There are several products available to help with this cost, such as long-term care insurance and annuities structured for medical care.  Whether you can afford these types of products or not does not prevent you from being faced with the expenses.  The cost of long-term care can be an eye opener to encourage you to take better care of yourself.

Personal preference will dictate your living arrangements.  Grown children are usually busy with their own careers and family and being closer to them may be an emotional blessing as well as a financial benefit.  Your social life and convenience to others will play a big role in making that decision.

Although your decision to retire may be based on health or family needs, you need to be prepared for it.  Always be conscious of your financial situation and keep in mind that we all will face retirement some day.  Depending on your circumstances, thoughts of retiring can be scary or delightful.  The planning you put in place now can make all of the difference in what it will be.

Our staff is available anytime to discuss your financial and retirement needs.

One of the biggest hurdles you’ll face in running your own business is how to stay on top of your obligations to federal, state, and local tax agencies. A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records.

Here is a list of some common small business tax misconceptions:

1. All Start-Up Costs Are Immediately Deductible

Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.

You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation. You can elect to deduct up to $10,000 of business start-up costs and $10,000 of organizational costs paid or incurred in the year that you start a business. The $10,000 deduction is reduced by the amount your total start-up or organizational costs exceed $60,000. Any remaining cost must be amortized and you must spread out the remainder of your start-up costs over 15 years (180 months).

2. Being incorporated enables you to take more deductions.

Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are very similar to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden..

3. The home office deduction is a red flag for an audit.

This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.

4. If you don’t take the home office deduction, business expenses are not deductible.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

5. Taking an extension on your taxes is an extension to pay taxes.

Extensions enable you to extend your filing date only.  If you do not pay taxes on time, penalties and interest begin accruing from the due date.