tax preparation

Service charge reporting deadline postponed

Tuesday, December 18th, 2012 | consulting, tax | No Comments

The Internal Revenue Service has given businesses an extra year to comply with new rules on how to treat service charges, until January 1, 2014. The new rules had been scheduled to take effect January 1, 2013, but the deadline was extended in response to public comments to allow companies time to make their accounting systems compliant.

If you operate a restaurant or other business where the receipt of tips is a part of the operation, this ruling is important to you. Last summer, Rev. Rul. 2012-18 defined the differences between tips and service charges, including illustrative questions and answers. Answer 1 contains the meat of the rules for determining whether a payment is a tip or a service charge. To be considered a tip to the employee:

  1. the payment must be made free from compulsion;
  2. the customer must have the unrestricted right to determine the amount;
  3. the payment should not be the subject of negotiation or dictated by employer policy; and
  4. generally, the customer has the right to determine who receives the payment.

Otherwise, the payment may be considered a service charge, even if it is called a tip or gratuity and distributed to employees. The amount is added to each employee’s wages, rather than tips.

Here’s an example: If your restaurant adds a gratuity of a specified amount, such as 18%, to a check for large parties, that gratuity is actually a service charge, not a tip. The amount is specified, compulsory, and dictated by policy.

Why is this important? A credit is available for employers who overpay their share of FICA taxes based on employees’ unreported tip income. A reclassification of payments as service charges rather than tips changes this calculation, because service charges are reported as wages and not tips.

Contact us for help to make sure your bookkeeping properly distinguishes between tips and service charges before the new year begins. This rule change will be much easier to manage if any needed adjustments are in place before your first payroll of 2013.

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Medicare premiums are business deductions

Wednesday, July 18th, 2012 | tax | No Comments

A self-employed person may get a business deduction for health insurance premiums. The IRS has clarified that Medicare premiums paid by self-employed persons qualify as deductible health insurance premiums.

If you did not include Medicare premiums in your self-employed health insurance deduction, you may want to consider amending your tax returns to include them.

Before 2010, IRS instructions said that Medicare premiums could not be included in the self-employed health insurance deduction. In 2010, the instructions (and Publication 535, Business Expenses) were changed to say that Medicare premiums can be used to figure the deduction, but the IRS did not explain the change.

The IRS Office of Chief Counsel advised IRS attorneys in Chief Counsel Advice (CCA) 201228037 that Medicare is similar to other health insurance. Therefore, Medicare premiums for the self-employed taxpayer, taxpayer’s spouse, and qualifying child or other dependent can be deducted as business expenses just as other health insurance premiums. All Medicare parts are deductible.

The deduction is limited to the taxpayer’s earnings from the trade or business. The business may be a sole proprietorship, partnership, or S corporation. Specific reporting rules for partners and S corporation shareholders must be followed to secure the deduction.

If you had Medicare and self-employment income in 2008 or after, it may pay to take another look at your returns and see if this deduction was taken. If not, call us to “run the numbers” and help you decide whether to file amended returns and recover overpaid taxes.

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Effective audit representation saves money

Thursday, March 15th, 2012 | consulting, tax | No Comments

The local IRS office has stepped up its audits on individuals and businesses. More and more people are coming to us for effective audit representation. Several of them had suffered costly outcomes after their initial meetings with auditors, and they came to us for help. We were able to improve upon their original assessment through effective management of the audit process.

In one case we finished recently, a business owner had relied on a seasonal tax preparer to prepare his tax returns. You know them, advertising like crazy until April 15, and then disappearing until next year. He paid extra for audit protection, which turned out to be useless. They do not represent their clients before the IRS, but merely advise them how to respond to an audit notice. Facing an IRS auditor without experienced help is asking for trouble and an inflated tax bill. This taxpayer learned the hard way that seasonal tax preparers are not equipped to deal with the IRS.

When the taxpayer missed the first deadline, the IRS disallowed all of his business deductions. This forced him to provide documentation for the entire business operation. He ran out of time and presented as much as he could gather to the auditor, who assessed tax and penalty based on the partial documentation. When he received the bill, he came to us in the nick of time. We were able to get the case pulled from the IRS legal department for reconsideration. Then we helped our client organize his documents, persuaded the auditor to agree to a plan for reviewing them that would be fair to our client, and provided immediate answers to the auditor’s questions during the examination process. As a result, we were able to save our client over $49,000 in tax, penalties, and interest, and keep his case out of Tax Court.

This is only one case among several in which taxpayers have suffered due to poorly prepared tax returns. If you find yourself in an IRS jam, we can help you. But we would rather help you prevent such disasters by helping you to conduct your business and record-keeping in a way that reduces your risk of having to face the IRS. Contact us today to find out how to reduce your audit exposure, or if you need help facing the IRS.

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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.

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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.

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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.

  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.

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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.

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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.

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Standard mileage rates change

Friday, July 1st, 2011 | consulting, tax | No Comments

The IRS has adjusted the standard mileage rates beginning July 1, 2011, in response to higher gasoline prices. The new standard mileage rates will apply through the end of 2011.

Mileage Rate Changes

Purpose

Rates 1/1 through 6/30/11

Rates 7/1 through 12/31/11

Business

51

55.5

Medical/Moving

19

23.5

Charitable

14

14

You have the option of tracking actual vehicle costs or using the standard rates to calculate your vehicle expense deduction. You may deduct parking fees and tolls under either method. Remember to write down your odometer reading today and at year-end to help track total miles for each half of the year.

You do keep a mileage log, don’t you? The IRS has been finding easy money by increasing audits of business mileage because many taxpayers do not keep adequate records. You may keep your mileage log in any format that is convenient for you. IRS dictates that the log should contain the number of miles (beginning and ending odometer readings are best) for each business trip, the destination(s), and the business purpose of the trip. Anything less, and the deduction may be disallowed. If you spend the day on the road going to multiple work locations, a daily total is adequate along with a list of the locations you visited.

Another business mileage trip-up relates to commuting miles. If you do not report expenses for business use of your home, you had better report commuting mileage with your business mileage deduction. IRS says that mileage from home to the first work location of the day and from the last work location to home is non-deductible commuting mileage. If you do have a home office, then your home office is your first and last work location, and all mileage to other work locations throughout the day is deductible.

For more details about business, medical, moving, and charitable mileage deductions, feel free to call or email us. As with all things tax-related, special rules abound related to company expense reimbursement plans, personal use of company vehicles, depreciation, and other vehicle-related issues. We can help bring you  peace of mind by setting up a reporting system that will pass muster with the IRS.

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Chevy Volt tax credit may not be yours

Monday, June 6th, 2011 | tax | 1 Comment

The Chevy Volt, General Motors’ electric car, may bring a $7500 tax credit to the original purchaser of the car. But is that you or the dealership? Stories are surfacing that dealers are using the common practice of dealer trades to get the cars titled, claim the tax credits for themselves, and then sell the cars as ‘used’. This maneuver subverts the intent of the credit to subsidize retail consumers’ purchases of the vehicles. It also inflates the sales numbers that GM reports.

The National Legal and Policy Center reported (here and here) on this practice, and the story has been picked up by automobilemag.com and Fox Business Network. IRS Form 8936, used to claim the credit, does not contain a space to record each vehicle’s VIN, raising the possibility that the credit could be claimed twice (that’s $15,000 of our taxpayer dollars) for vehicles involved in such actions. The IRS may also disallow the credit claimed by the retail customer, forcing repayment plus penalties and interest by the taxpayers for whom the credit was intended.

If you are considering buying a Chevy Volt, Nissan Leaf, or other plug-in electric vehicle, make sure you are buying the vehicle new in order to claim the credit. If the vehicle has been previously titled, you are not eligible. We also suggest saving your paperwork. We anticipate that the IRS will demand various forms of proof that you are eligible to claim the credit. In a similar manner regarding the first-time homebuyer credit, we have seen many taxpayers’ refunds held up for many weeks while the IRS demands and examines stacks of records to ensure that the credits are paid only to those who are eligible.

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Van Elkins & Associates, CPAs

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Knoxville, Tennessee 37929

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