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.

• 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.

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.

The questions:

1. Did you make any payments in 2011 that would require you to file Form(s) 1099?
2. 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.

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.

• 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.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.

Recently, we posted about the first part of the presentation, in which Mr. Yamarone analyzed several macroeconomic indicators. He continued his talk with looks at specific industries that closely track the larger economy.

• The trends of real GDP and railcar loads of waste are correlated; after a steady uptrend, both indicators are turning flat, indicating economic deceleration.
• The construction industry is operating at 1996 levels and not growing in the residential sector, although commercial construction is seeing slight improvement.
• Home prices are flat, and may remain depressed for years.
• FedEx package shipments are negative compared to the previous year, indicating a similar trend for GDP.

Mr. Yamarone told us that people tend to mentally allocate their money for different uses, either consciously or subconsciously. The following trends indicate that people are allocating less funds to non-essential spending because real disposable personal income is not growing. In most households, the women hold the purse strings, so they decide how the money gets spent. Here are some of Mr. Yamarone’s favorite indicators for predicting turning points in the economy:

• The “misery” index (consumer price index plus unemployment) is at a higher level now than at the worst period of the financial crisis in 2008.
• Dining out: year-to-year growth is starting to turn down.
• Spending on jewelry and watches is weak and volatile; likewise for cosmetics.
• If the wife feels comfortable about the family’s finances, she will buy that outfit she has been eyeing. Growth in spending on women’s clothing has fallen to recessionary levels.
• Similarly, people gamble more when they feel they have more money to “play” with. Growth in casino gambling has been near zero for some time.

In addition to key economic indicators, Mr. Yamarone reads about 2,000 annual reports and other such documents over the course of a year. Using this information, he forms and tweaks his outlook for the future of the economy. We can tap into his insight as we make strategic decisions about the future of our own businesses.

Mr. Yamarone, who appears regularly on Bloomberg TV and recently revised his book The Trader’s Guide to Key Economic Indicators, studies many different charts to discern trends and create forecasts for companies, industries, and the economy as a whole. He told us that during the last few months, the uptrend in many key indicators has flattened or even turned negative, leading him to forecast a coming recession. He is quick to say that this is one expert’s opinion, and there are other experts who disagree. But as he laid out his case, many in the audience saw the logic behind his projection.

Here are some of his thoughts, based on macro- and micro-economic indicators:

• The economy is not advancing fast enough to engender job creation at a meaningful level.
• While the economy is growing at its historic pace, it is operating well below its potential, and it is not making up for the substantial loss incurred since 2008.
• The lag between the ends of recessions and recovery of lost jobs doubled the historic average in the previous recession (2001). With job loss dwarfing all but the Great Depression, the time it will take for jobs to recover from the most recent downturn is unknown, but it could be several years.
• When industrial production has revived following recent recessions, manufacturing jobs have not returned to pre-recession levels.
• If gross domestic product (GDP) growth drops below 2% on a year-to-year basis, recession follows; GDP growth has been hovering at that level since mid-2011.
• The government has been propping up the economy, but even as jobs begin to recover in the private sector, governments at all levels are reducing staff and services.

How do these predictions affect your business? Should you adjust your forecast and budget for next year?

Next time, we’ll look at some of Richard Yamarone’s favorite industry indicators that he uses to predict turning points in the overall economy. His insights come from some surprising sources.

• 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.