tax return
Payroll tax credit
Wednesday, July 7th, 2010 | tax | No Comments
It is time to prepare your second quarter payroll tax returns, due August 2, 2010 (July 31 falls on Saturday). If your company or tax-exempt organization has hired employees this year, you may be eligible for the HIRE Act new hire tax credit. You should check before filing Form 941. We previously posted about this and other tax credits in the spring.
Here is a checklist (but consult your tax adviser for specifics related to your situation):
- Was the new worker hired to fill a new position, or to replace someone who quit voluntarily or who was terminated for cause? The new worker may not be related to you or to another owner of the business.
- Was he/she hired after February 3, 2010, and before January 1, 2011?
- Did he/she work less than 40 hours during the 60 days ending on the hire date?
- Did he/she sign and give you the required Form W-11 certifying these facts? (Do not send this form to the IRS.)
If all of the above conditions are met, you qualify for an exemption of 6.2% (the employer share of Social Security tax) of wages paid between March 19 and December 31, 2010. This reduces the amount of your tax deposits for this year. It does not affect amounts withheld from the employee’s pay.
Form 941 has been modified to report wages to qualified employees starting with the second quarter. The IRS has provided more information in the instructions to the forms, and in a question-and-answer format at their website.
Congress helps homebuyers
Friday, July 2nd, 2010 | tax | No Comments
Homebuyers who were unable to close before July 1 have been granted a reprieve to claim the homebuyer credit. If the contract on their house was signed before May 1, they now have until September 30 to close on the purchase.
The homebuyer credit in its present form (it’s been amended three times now) is a tax credit of 10% of the home’s purchase price, up to a limit of $8,000. It is available to buyers who have not owned a principal residence in the last three years. A similar credit, limited to $6,500, is available to “long-time residents” who have lived in their old house for 5 consecutive years in the last eight before buying their new house.
In order to claim the credit, the buyers must have bought the house or signed a binding contract before May 1, 2010. The deadline to close the deal was June 30, but many buyers could not meet the deadline because of backlogs at lenders and federal agencies, construction delays, and difficulties working out terms of short sales. The extension of the closing deadline allows three more months to settle and close those deals, but it does not change the April 30 deadline for signing contracts.
There are limits and prcoedural rules to claiming the homebuyer credit. It is reduced or eliminated as income rises, and it cannot be claimed for homes whose purchase price exceeds $800,000. Dependents and purchasers under 18 cannot claim the credit, and it is not available if the house was purchased from certain relatives. Proper documentation must accompany Form 5405. Consult your tax advisor (our number is 865-523-8700) to make sure you follow all the rules to get your credit.
Tax code as cash flow tool
Thursday, July 1st, 2010 | consulting, tax | No Comments
Has your business suffered a net loss during the recession? A tax refund may give you a needed cash infusion. The federal tax code provides a means to smooth out the business cycle. If your company reports a net operating loss on this year’s tax return, you can recover tax paid in prior (or future) years when the company reported a net profit.
The technique is called a net operating loss carryback. You must elect to carry a loss back on a timely filed return, otherwise the loss may be carried forward to as many as twenty future tax years to reduce taxable income. Normally, the loss may be carried back two years. For either 2008 or 2009 (not both), a loss may be carried back up to five years. If the loss is not used up in the prior years, it may be carried forward.
The IRS provides a method to quickly recover taxes to be refunded because of the loss carryback. By properly filing an Application for Tentative Refund (Form 1139 for corporations, Form 1045 for individuals, estates, and trusts), you can recieve a refund within ninety days of filing. This can provide a relatively quick cash infusion to help pull your company through the rough patch.
If a coroporation expects a loss this year and has not yet filed its return for last year, it can apply on Form 1138 for an extension to pay last year’s tax. When the net loss for this year is calculated, the company will pay last year’s tax (plus interest) after applying the net operating loss.
A corporation that has paid more estimated tax than necessary in light of adjusted income or loss projactions may apply for a quick refund of those payments on Form 4466.
These techniques can return cash to the company for daily operations rather than tying it up until after the year’s tax return is filed. Other types of carrybacks are also available, such as casualty and theft loss, farming loss, foreign tax credit, and loss attributable to a federally declared disaster.
As usual, there are technical details and caveats to the use of these techniques. Some of these details are discussed in this article. You should consult your tax advisor to determine the most appropriate action for your situation. We will be happy to help you with these tools, and to find other ways to improve your cash flow.
Renting to relatives
Monday, June 28th, 2010 | consulting, tax | No Comments
Renting property to your relatives can be a good thing. You know them, and you probably have a good idea of how they will take care of the property. You may consider renting to your retired parents or to your children attending college. You must play by IRS rules to retain the tax advantages of renting out property. If you don’t, the deductions will be disallowed while the income is taxed - a double tax hit. You may also suffer unfavorable tax consequences when you sell the property.
Special rules apply to rental of a residence (rental house or apartment) and to vacation home rental.
You must charge a fair rent to your relative on a residence to avoid having that property reclassified as a second home (and losing rental deductions).
- Prove fair rent by collecting third-party documentation about rents for similar properties in the area from the want ads and craigslist. Letters from property managers and independent appraisals are good evidence to support fair rent.
- Do not make gifts to help your tenant pay the rent. The gift will be deemed to reduce the rent, putting it below fair value and jeopardizing the rental claim.
- One alternative for your relative who needs rent money is gifting business assets and having your company lease them back so that your tenant receives rental income. Another option is to hire your relative, although that generates payroll taxes.
- You may consider a good-tenant discount of no more than 10%. One justification for this discount is that there is no need for a rental management company, passing the savings to the tenant.
- If you wish to set up a rent-to-own situation, you must follow the rules for a shared-equity financing agreement for the rental to stand.
- Your relative must use the rental property as a principal residence.
If you have a vacation home that you rent for part of the year and also use personally, the tax code provides a break on rental income. Your personal use of the vacation home must not exceed the greater of 14 days or 10% of rental days per year. If your relatives use the vacation home, their use counts toward these limits even if you charge fair rent. If your combined use exceeds these limits, the property becomes a second home, which makes the rent income taxable while eliminating the usual rent expense deductions.
If you are considering renting to relatives, a call to us will help ensure that everything is done in a way that secures the greatest tax advantages and best financial outcome for your family.
IRS Open House
Wednesday, May 5th, 2010 | tax | No Comments
The IRS will hold open houses on Saturday May 15 from 9 AM to 2 PM at their offices across the nation, including the Knoxville office at 710 Locust Street. This quote is from the IRS release:
“Our goal is to resolve issues on the spot so small businesses and individuals can put any issues they have with the IRS behind them,” IRS Commissioner Doug Shulman said. “If you have a problem filing or paying your taxes or resolving a tough tax issue, we encourage you to come in and work with us.”
Generally, we recommend that you hire a good tax professional to deal with any IRS matters. Not just to pad our pockets, but because those agents are wily. They have ways of asking seemingly friendly, innocent questions that can corner you and get you in trouble. You need the firewall of a representative between you and them, especially if you have “a tough tax issue” to resolve. Working out your tax problem at the open house may turn out OK, but before you go, call a CPA or tax professional and find out what is at stake.
March Madness
Wednesday, March 3rd, 2010 | tax | No Comments
One of our CPAs is a member of a local service club. She heard from another member about someone who received an audit notice from the IRS. He knew his return was correct and he had nothing to hide, so he took ALL of his records to the auditor. The auditor thanked him and said he would contact him in a couple of weeks.
Two months later the auditor called and asked for documentation for certain expenses. The taxpayer told him he already had sent that documentation, but the auditor said he did not, please send the records. The auditor would not admit this, but he had lost the records. What is worse, the taxpayer had given the auditor the original documents instead of copies. So now, the taxpayer is faced with the task of proving items on his tax return by reconstructing the documentation that the auditor lost. It’s a nightmare that’s causing his own version of March Madness.
It’s a cautionary, but true, tale to remind you to keep your originals, and engage a pro to represent you before the IRS.
Oddball Deductions
Monday, March 1st, 2010 | tax | No Comments
Sometimes it pays to think outside the box about deductible expenses, as reported in this post on Kiplinger.com. These taxpayers probably had to fight the IRS to keep their deductions, but the payoff apparently was worth the cost of engaging effective representation.
Which brings up an important point - for your protection, you should never deal with the IRS without representation by someone who knows how to respond to their tactics. I have a horror story to tell you in another post.
1099 Traps
Monday, March 1st, 2010 | tax | No Comments
The IRS computer-matches Forms 1099 with your tax return, so it’s important that you gather 1099’s from all sources and report them on your return even if they contain errors. There are ways to correct errors, but if the computers cannot match the numbers in the first place, they will automatically generate tax-due notices that are time-consuming to clear up. Read more in this article from Forbes magazine.
Audits On the Rise
Wednesday, February 17th, 2010 | tax | No Comments
The news has hit the mainstream in this article from CNNmoney.com. Karen Hellmund is a member of the TSCPA IRS tax liaison committee. We learned from the horse’s mouth several months ago that more audits were coming, and we have been working to get the word out to our clients and friends ever since. See our October 2009 email letter. We found out that the Knoxville local office received a very substantial staff increase of fourteen new auditors.
Here are some general points to keep in mind (consult your tax advisor for specifics pertaining to your situation):
Keep good records. You should be able to prove every amount on your tax return.
Don’t ignore a letter from the government. They won’t stop, and they will get meaner.
Don’t assume that your return is wrong. IRS computers choose returns to audit based on formulas, not just errors.
Don’t respond without professional representation. We’re not just drumming up business here - the IRS is in the business of collecting money, and they will do all they can under the regulations to maximize the amount they collect.