tax tips
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.
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.
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.
Bathroom as home office?
Thursday, August 18th, 2011 | consulting, tax | No Comments
The Tax Court ruled that a taxpayer cannot claim his bathroom as a home office in Bulas v. Commissioner, T.C. Memo. 2011-201 (Aug. 17, 2011). (Insert your own joke or mental image here….)
The taxpayer had a home-based business, a tax practice for which he used one bedroom of his home as an office. He built a bathroom adjacent to the office for his clients to use. He argued that the bathroom and the hallway between the rooms should also be considered part of the home office, which would increase the deductible percentage of his home-related expenses.
According to the IRS, in order for a home office to be claimed on your tax return, it must be exclusively used on a regular basis
- (A) as the principal place of business for any trade or business of the taxpayer,
- (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business.
In this specific case, the taxpayer admitted to the court that his daughters and house guests sometimes used the bathroom. This occasional use by the family caused the bathroom to fail the “regular and exclusive use” test. The taxpayer might have successfully included the bathroom and hallway as part of the office if access by non-clients was limited, perhaps by a lockable door that separated the office “suite” from the rest of the house.
We can help you with creative and legitimate strategies for using your home office to save taxes. This deduction is subject to greater scrutiny from the IRS, so we can also help you maintain proof that your home office meets the requirements. With proper setup and records, the home office deduction can make a difference in your tax bill.
If you operate a company out of your home that is set up as an S-corporation, ask us about a plan that can secure the benefits of the home office deduction for your business.
Plan now to save taxes
Tuesday, August 9th, 2011 | consulting, tax | No Comments
Summer is a good time to talk with us about planning to save taxes next year. We have more time to help you take stock of the first half of the year and explore options before it’s too late in the year for them to make a difference.
Among those options:
- Consider equipment purchases, to take advantage of tax incentives that may expire soon.
- Improve facilities and depreciate them under accelerated schedules set to expire at the end of 2011.
- Take advantage of hiring incentives if you need extra help.
- Consider hiring your children and pay less employment taxes.
- Set up and contribute to a retirement plan, or consider whether your present plan is the optimum choice, to defer paying tax on income.
- Make sure your records support deductions for vehicle use, travel and entertainment.
- Look into net operating loss carrybacks to recover taxes paid in prior years.
- Adjust your estimated tax payments for the second half of the year.
Consult with us to gauge the tax impact of various options you are considering. And remember, don’t let the tail wag the dog. No one wants to pay more taxes than necessary, but first consider the questions, “Is this the best decision for my business? Will this help my company achieve its goals?”
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.
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.
Filed an extension - now what?
Thursday, April 28th, 2011 | consulting, tax | No Comments
You pulled your records together and worked on your tax return, maybe using an “easy-to navigate” software program. But you were left with a nagging feeling that there may be something you missed, so you filed an extension.
Now what?
We’ve received calls from several people in this situation, asking us if we would take a look at their returns. This is a smart call if you have items on your return that are new for this year, or if an unusual event occurred in 2010. The mainstream tax software is designed to be easy for the average user, with questions that take you step-by-step through your return. In their effort at simplicity, sometimes the questions gloss over details in the code that might be important in your particular situation. Sometimes your answer directs the software to another module and list of questions, or to skip some questions. If you answer incorrectly at this stage, you may be messing up without knowing it.
In one recent case, a husband and wife used one of the name-brand tax programs to do their return, which included a business. Because of the way the software asked the questions, they inadvertently entered the same business information in two places on the return, doubling their income. Because of the software’s design, they did not become aware of the error until after they had e-filed the return.
The errors prompted a barrage of notices from the IRS and an audit of their return. They are now spending a lot of time, effort, and money to resolve these issues. The excuse, “it was the software’s fault,” has been tried all the way to Tax Court, and it has failed at every turn.
So if you are not confident that your self-prepared tax return is correct and that you have claimed all the deductions and credits to which you are legitimately entitled, you are smart to have filed an automatic extension. The next step is to gather your records and make an appointment with a tax expert like us. We can review your return and your financial situation to make sure your tax return is accurate and complete and your tax bill is as low as possible.
We’ll also advise you about the possible audit risk of your return. The IRS has been stepping up its examination of such items as employee business expenses, businesses reported on Schedule C of Form 1040, business mileage, and other areas. This means that good recordkeeping is more important than ever to prove that your deductions are legitimate.
Contact us today to quiet those nagging doubts about your return.
Paperwork cloud lifts
Wednesday, April 27th, 2011 | consulting, tax | No Comments
A paperwork cloud has hung over business owners and landlords for much of the last year. A clause in the health care reform law (Patient Protection and Affordable Care Act) required businesses to report payments of more than $600 to corporations (not required under prior law) on Form 1099. It also added reporting of payments for goods. Then last summer, the Small Business Jobs Act extended the reporting requirements to landlords.
Together, these provisions threatened to dramatically increase the compliance workload of companies both issuing and receiving these documents. The extra load would have fallen disproportionately on small businesses, because they typically have less cushion to absorb such changes. Some suggested that the additional burden and its costs could stymie the economic recovery.
We brought you the news in posts here and here, but we did not post about the expansion in the Affordable Care Act because talk of repealing that provision had begun shortly after the act was signed into law. We had anticipated that the expansion of the requirements to landlords would stick, but we learned long ago that we stand a fairly high chance of being proven wrong when we try to predict the actions of Congress.
Late in tax season (when we were too busy to post about it) came the news that Congress had agreed on language to repeal the new 1099 reporting requirements, reverting to the rules in effect before the two new laws. For landlords, the repeal is retroactive to January 1, 2011 (when the new rules for this group of taxpayers took effect). The expansion under the Affordable Care Act was to have taken effect after December 31, 2011.
1099 reporting in a nutshell: Code Sec. 6041 generally requires payments totaling at least $600 in a single calendar year to a single recipient to be reported to IRS. Reporting on Form 1099 is required only when the payor is considered to be engaged in a trade or business and has made the payment in connection with that trade or business. The type of payment that most commonly triggers the reporting requirement is payment for services. Payments to corporations are exempt, and a number of other exemptions apply. Contact us to make sure your 1099 reporting is compliant.