tax
What’s a 1099-K?
Friday, February 3rd, 2012 | consulting, tax | No Comments
Have you received a 1099-K this year? This new form reports electronic financial transactions. If your business takes debit or credit card payments, then you will receive a 1099-K if you process more than $20,000 AND more than 200 transactions.
Business tax returns contain a new line to report 1099-K amounts. For this tax season though, the IRS is deferring the requirement that you report your 1099-K income on this line. Instead, report your gross receipts as you have in the past on the appropriate line of the form. Forms 1065 and 1120 contain the instruction, “For 2011, enter zero.” The IRS has issued an advisory that tells filers of Form 1040 Schedules C, E, and F to do the same.
We anticipate that this will necessitate some record-keeping changes in 2012; for example, accounting for tips charged to a credit or debit card. We are assessing potential impacts of the new reporting requirements and advising our clients.
LLC vs. corporation
Wednesday, February 1st, 2012 | consulting, tax | No Comments
We received this question from a budding entrepreneur about setting up as an LLC or a corporation:
- I am looking to set up a small business. I am debating on whether an LLC or S-Corp would be better. I am looking to decrease taxes and limit my liability. I, as the owner, will work in the business and will have a very small salary.
Thank you for contacting us with your business question. First of all, we are not attorneys, so we cannot offer you legal advice, and there are legal details to consider. Big-picture though - an LLC or corporation provides a greater degree of protection against personal loss if something bad should happen that affects your company. Taxation is a factor to consider, but it is one of many.
From a federal tax standpoint, if you are the only member (i.e., owner) of the LLC, you use the same tax form as if you were a sole proprietor - Schedule C of your personal tax return. If you have a partner, you report on a partnership return (1065) and report your share of the profits on your personal return. Either way, you pay taxes on the net income, regardless of the amount of money you take out of the company. The taxes consist of self-employment tax (Social Security and Medicare) and income tax.
Owners/partners cannot take a salary; they may take a draw against the company’s profits but that does not affect the net income they pay taxes on. In other words, the LLC does not get a deduction for money its owners take out. A corporation does get a deduction, because it pays everyone (including the owner who works in the business) as employees. An S-corporation’s net income flows through to the owners as a partnership’s does.
In Tennessee, an LLC or corporation must pay a franchise tax based on the value of its assets or net worth, and an excise tax based on its net income. One big difference - for the LLC, you back out the net income that you pay self-employment tax on. This effectively reduces the excise tax to zero for an LLC, whereas a corporation (including an S corporation) does not get this break. This often sways the decision toward the LLC, although you must “run the numbers” to determine which strategy results in the lowest tax at both the company and personal level.
There are many factors and decisions to be made when starting your business. I recommend that you contact the Tennessee Small Business Development Center. These good folks are dedicated to helping entrepreneurs cover all the bases and get started on the right foot with their new ventures. You can reach them at www.tsbdc.org and (865) 246-2663.
We’re seeing quite a few new business owners, and we welcome you. After all, every business starts out small. Where it goes from there depends on many different factors, including good financial decisions.
Employees paid as independent contractors
Friday, January 13th, 2012 | consulting, tax | No Comments
A Knoxville company was paying its workers as independent contractors. It was forced to pay back wages to its workers by the Department of Labor, who determined that they were actually employees subject to minimum wage and overtime laws. The news hit the local paper, no doubt as a warning to other businesses who may be trying similar tactics.
Unfortunately, this may be only the beginning of this company’s troubles. The DOL is likely to share this information with the IRS, the Social Security Administration, and the Tennessee Department of Labor. All of these agencies will dun the company for back payroll taxes and withholdings, charging hefty penalties in the process.
Setting up payroll, tax deposits, and quarterly reporting may be more burdensome to a company than simple annual 1099 forms, but this appears to be one case in which that decision came back to haunt the company in a terrible way. Maybe it’s not too late for them to apply for the IRS voluntary reclassification program.
Contact us if you have concerns about the status of your workers.
New 1099 trap
Tuesday, January 10th, 2012 | consulting, tax | 2 Comments
Business tax returns for 2011 contain new questions about Form 1099 that may trap you if you overlook issuing 1099s this January. The questions appear on Form 1040 Schedules C (sole proprietorships), E (rental), and F (farms). They also appear on partnership (1065) and corporate (1120 and 1120S) returns.
The questions:
- Did you make any payments in 2011 that would require you to file Form(s) 1099?
- If “Yes,” did you or will you file all required Forms 1099?
Like the rest of the tax form, you must answer the questions truthfully under penalty of perjury (read the signature area). So take the time now to determine if you must issue any 1099s and get the process started. The deadline for issuing 1099s is January 31. More info from IRS.gov here.
These tax return questions are part of a larger IRS effort to crack down on the issue of employees vs. independent contractors, which they say costs the government billions of dollars in uncollected taxes. We’ve developed a white paper that helps you learn how to protect your company from this latest compliance push. Just click the email address or fill in the contact form and mention that you would like to receive the white paper, and we’ll send it to you without delay.
Payroll tax cut extension with a lump of coal
Thursday, January 5th, 2012 | tax | No Comments
Congress extended the payroll tax cut for sixty days after weeks of posturing. The 2% reduction in Social Security tax withholding will continue to put a little extra money in employees’ pockets through the end of February 2012, but Congress threw in a lump of coal with its Christmas gift. If you earn too much in January and February, you will be required to pay back part of that 2% tax cut when you file your tax return next year.
Here’s how it works. Everyone pays Social Security tax on earned income up to a yearly maximum ($110,100 in 2012). If you earned that amount equally over the course of the year, in two months you would earn $18,350. This law says that if you earn more than $18,350 in the first two months of 2012, you must pay back the 2% tax cut you received on the excess. You will report that on your tax return for 2012 when you file in 2013.
In other words, if you try to maximize your tax cut by accelerating your earned income for the year into January and February, it’s only temporary. Linda Dyer, our firm’s tax guru, has calculated that the most you will have to pay back is $1,835 if you get paid the maximum $110,100 in January and February [($110,100-$18,350)x2%].
Not even Santa Claus knows what good or bad will come out of the next round of negotiations aimed at extending the payroll tax cut for the entire year. We can hope that this lump of coal disappears in the hot air sure to circulate in the halls of the Capitol this winter.
2012 standard mileage rates
Thursday, December 22nd, 2011 | tax | No Comments
The IRS has announced standard mileage rates for 2012. Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 55.5 cents per mile for business miles driven
- 23 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
Good records are important to preserving your deduction. The IRS requires that you log your miles when you elect to use the standard mileage rate. The log must include the name, location, and reason for the trip. For business miles, your trips from home to your first work location and from your last work location to home are nondeductible commuting miles. The business portion of parking fees and tolls is deductible in addition to the standard mileage rate. Remember to record your odometer reading as the calendar rolls over to the new year.
Because of the specific record-keeping requirements, the IRS has been targeting the mileage deduction for audit. So it makes good sense to keep your mileage log up to date to preserve this often significant deduction.
For business, you may choose to deduct actual expenses instead. These may include gasoline, oil, tires, repairs, insurance, depreciation, parking fees, tolls, licenses, and garage rent. If you also use the vehicle for personal purposes, you still must track your mileage to determine the business portion of these expenses.
Your log may take any form, as long as you can save it and make a copy in case the IRS asks for it. Formats range from sales call sheets on which you enter mileage, to the small booklets you keep in your vehicle’s glove box and fill in each day. There are even smartphone and tablet apps to help you track your mileage and document your standard mileage rate tax deduction.
6 Year-end tax reduction tips
Wednesday, December 21st, 2011 | tax | No Comments
Use these six tax reduction tips to reduce your 2011 tax bill, but act before December 31, 2011.
- Make charitable contributions by December 31. Keep a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn’t paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.
- Install energy-efficient home improvements such as insulation, new windows and water heaters to your main home for a tax credit of up to $500. The work must be finished by December 31.
- Adjust your investment portfolio and consider selling gaining and losing investments. Capital losses offset capital gains. Up to $3,000 of any excess capital loss per year offsets other income, and any leftover loss may be carried forward to reduce future tax bills.
- Contribute the maximum to retirement accounts such as 401(k) and similar workplace retirement programs by December 31 to reduce taxable income. You have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. Generally, you can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over.
- Make a Qualified Charitable Distribution from your IRA to a qualified charity if you are age 70 1/2 or over. The maximum annual exclusion from gross income for QCDs is $100,000. It is available even if you do not itemize deductions.
- Take the Small Business Health Care Tax Credit if you are a small employer who pays at least half of your employee health insurance premiums. This calculation is tricky, so consult your tax professional for assistance.
Remember to save receipts and records related to your taxes so that you can make sure your return is accurate and you can get the maximum tax reduction available to you.
Worker classification crackdown coming
Wednesday, October 26th, 2011 | consulting, litigation, tax | 2 Comments
The IRS recently announced a voluntary worker classification program that provides amnesty from back payroll taxes and penalties for companies who reclassify their independent contractors into employees. While there may be advantages on the federal tax side of this issue, you must consider other factors before deciding on a course of action. Worker classification has been a tricky, murky issue for many years. We will explore several aspects of this issue in future posts, including:
- Deciding whether your workers truly are independent contractors or employees;
- Protection from reclassification under Internal Revenue Code Section 530 or other precedents;
- Consequences at the state level of voluntary disclosure to the IRS;
- Related legal issues such as worker response to reclassification (e.g., retroactive reclassification to apply labor laws and collect overtime pay);
- Potential consequences from other government agencies such as the Department of Labor.
As we have seen before, a voluntary disclosure program is a harbinger of increased enforcement action in this long-contested area of business law. This makes it more important than ever for you to seek consultation from a knowledgeable professional. It is not an overstatement to say that this issue could bring your company to its knees. Unfortunately, we have seen it happen to smart, well-meaning business owners. Contact us today for a detailed analysis of your company’s exposure to the coming worker classification crackdown.
Preserve estate tax portability
Monday, October 24th, 2011 | tax | No Comments
To preserve estate tax portability, executors must file Form 706 Estate Tax Return for decedents dying in 2011 and later. The nine month filing deadline may be extended an additional six months. This election is not available for decedents dying before 2011.
In the law reinstating the estate tax in 2010, Congress established an exclusion amount of $5 million per person in 2011 (adjusted for inflation in future years). An estate with a taxable value below this amount is not subject to federal tax (the limit remains at $1 million in Tennessee). The law also provided for any unused exclusion amount to be passed on to the surviving spouse. The election to do so is made, and the amount is established, by timely filing an estate tax return for the decedent. The return must be filed even though it may not be otherwise required under the estate tax rules.
In a common scenario, the estate assets of the first spouse to die are transferred to the surviving spouse, either through joint ownership with right of survivorship or by will. This may result in accumulation of assets in the surviving spouse’s estate that would exceed the $5 million exclusion, resulting in estate tax liability. The portability election allows the unused exclusion amount of the first spouse to die to be added to that of the second to die, sheltering additional assets from estate tax.
This election is a new estate planning tool that can help a family preserve its assets. Good estate planning may reduce or eliminate the need to take advantage of the portability election. If your family has substantial assets such as a family business or investments, you may benefit from a discussion with an accountant and an attorney who are both familiar with estate planning and tax reduction techniques, as we are. If a loved one passed away in 2011, timing is critical to preserving the estate tax portability election.
Estate tax filing relief
Thursday, September 15th, 2011 | tax | No Comments
The IRS has provided some estate tax filing relief for executors of the estates of those who died in 2010. Notice 2011-76 provides an automatic extension of time to file and pay the estate tax due. The rules generally apply to estates exceeding $5 million.
The estate tax was repealed for 2010 and was replaced with a complicated carryover basis calculation to determine the value of inherited assets. Congress reinstated the estate tax retroactively and let executors choose whether to be governed by the estate tax rules or opt out and use the carryover basis rules, adding another layer of complexity. As a result of the new law, guidance and forms were delayed. Updated instructions for Form 706 were posted only recently, and Form 8939 to make the election is still in draft form.
The IRS has changed the due date of Form 8939 to January 17, 2012. This is not an extension, so an additional form is not required.
For executors who timely filed an extension to file the estate tax return on Form 4768, the extended deadline is now March 19, 2012 for most decedents. For dates of death between December 16, 2010 and January 1, 2011, the extended deadline is 15 months after the date of death.
The notice also provides late-filing and late-payment penalty relief, although interest will still be charged for tax not paid by the original due date of the return.