Tax & Business tips from the Futcher-Henry Group

Top IRS Audit "Red Flags"

2011-03-18T10:41:00.000-07:00

While audits of individual tax returns are relatively uncommon, the rate has been increasing recently. According to recent statistics, 1.11% of individual returns were audited last year, the highest rate since 1997. If you've ever wondered what kinds of things might get you audited, check out this list of "red flags" from Kiplinger.

Summary of the December 2010 Tax Act

2011-01-18T08:50:00.000-08:00

The newly passed and signed 2010 Tax Act, formally named the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, includes several provisions that will affect taxpayers. Here is the information you need to know now about this legislation, formally named the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Major Provisions
The new law

postpones the sunset of the 2001 and 2003 tax cuts;
reduces the estate tax;
extends unemployment benefits;
includes an alternative minimum tax (AMT) patch;
continues through 2012 the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003; and
extends for two years the repeal of the itemized deduction phase-out and the personal exemption phase-out.

Provisions That May Affect You
Estate Tax
The Act temporarily reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011).

Payroll Tax
For 2011, the Act reduces the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2%. The employer’s portion remains 6.2%.

Family
The Act extends several expired or expiring provisions affecting families, including the following:

• The increased standard deduction for married taxpayers filing jointly, which is scheduled to expire after 2010, continues for two years.
• The $1,000 child tax credit amount continues for two years instead of reverting to $500.
• The increased starting and ending points for the earned income credit continues for two years.
• The $3,000 amount for the child and dependent care credit, which was scheduled to revert to $2,400 after 2010, continues for two years.
• The American Opportunity Tax Credit continues for two years.

The Act also makes adjustments to the gift exclusion and generation-skipping transfer (GST) tax that will affect family giving:

The federal gift tax exemption is increased to $5 million for 2011 and 2012, up from $1 million in 2010.
The GST tax exemptions are set at $5 million for 2011 and 2012. The exemption limit is scheduled to drop to $1 million beginning in 2013.

Business
The Act extends the 100% bonus depreciation for business property acquired after September 8, 2010, before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). It also sets the expensing limitation under IRC §179 at $125,000 and the phase-out threshold amount at $500,000 for 2012. The Act then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.

The temporary 100% exclusion of gain from the sale of certain small business stock under IRC §1202, enacted by the Small Business Jobs Act of 2010, is extended through 2011.

AMT
The Act includes an AMT patch for 2010 and 2011.

Needless to say, the 2010 Tax Act is still very new. It is only just being analyzed by professional advisers. The law is potentially subject to modifications by technical correction acts. In addition, provisions of the law may be interpreted by the Treasury Department issuing regulations and by the IRS issuing forms and instructions.

Returns Won't Be Accepted Before Mid-February

2011-01-07T14:37:00.000-08:00

Due to the spate of last-minute changes to the tax rules, the IRS has said they need until mid-February to reprogram their computers before they can accept some returns. Returns for anyone who itemizes deductions or claims certain other deductions cannot be filed until that time. So, if you have to wait longer for your refund, thank a congressman!

IRS Issues 2011 Mileage Rate Update

2010-12-03T12:07:00.000-08:00

Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

51 cents per mile for business miles driven
19 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Details from the IRS

Summary of the Small Business Jobs Bill of 2010

2010-11-11T16:06:00.000-08:00

There's still a lot of work to be done before we have the certainty we need for tax planning in 2011 and beyond, but the Congress got a start with the Small Business Jobs Bill of 2010. ADP/CCH have a nice summary of the provisions on their site.

A quick synopsis:

Section 179 expense limits are restored to their higher levels
Bonus depreciation is back
Sole proprietors now save SE tax on their health premiums
Some sales of small business stock become tax-exempt

Here's a Tax Simplification Proposal to Watch

2010-08-06T09:43:00.000-07:00

Tax simplification is on the minds of legislators these days. It might not be the best thing for a CPA's business, but I'd love to see the tax code become more understandable. Here's one proposal that's being considered.

Only three tax brackets: 15% for the first $75,000 of taxable income for couples, 25% on the next $65,000, and 35% over $140k. Cut those brackets in half for singles.
Bigger standard deductions: $30,000 for married, $15,000 for singles. That means far fewer people will itemize deductions.
Alternative minimum tax is eliminated, as are phaseouts of itemized deductions and personal exemptions on higher income taxpayers.
35% of your dividends and capital gains would be excluded. That would put those items at a maximum 22.75% tax rate, versus the current 15% rate that's already set to expire at year end.
Municipal bonds would be less favored. You'd get a credit for 25% of the interest on new bonds, instead of the full exemption they enjoy now.
Some tax breaks would be eliminated. These include flex plans, miscellaneous itemized deductions, moving expenses, the foreign income exclusion, and some tax-free benefits like group term life insurance, employer-provided meals and employee awards.

Some S Corporations To Incur Additional Taxes

2010-06-01T15:00:00.000-07:00

Owners of small S corporations will begin paying some self-employment tax on the corporate earnings under a Senate bill expected to pass shortly. Personal service corporations who have three or fewer employees will face the 15% SE tax in addition to regular income tax, as will any S corporations who are partners in a service business.

S Corporations have long been a popular tool for saving self-employment tax. They can still serve this purpose in larger settings or in non-service businesses. Set up correctly, the owner is paid a "reasonable wage" that is subject to payroll taxes. Any remaining profits can be distributed to the owner, who pays only regular income tax on those profits.

The problem? Too many hogs screwed up the whole deal for the rest of us. The IRS notes 35,000 one-employee S corporations with income of more than $100,000 who showed no wages. Another 40,000 S firms with income of $50k-$100k also paid no wages, and therefore, no payroll taxes. The IRS has long argued about what is "reasonable compensation," but no one can argue that zero is reasonable.

As is often the case in tax law, pigs get fed, but hogs get slaughtered. The hogs who thought they could abuse the SE tax provisions are on their way to the slaughterhouse.

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2010-04-28T16:06:00.001-07:00

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Auto Deductions Need Documentation

2009-03-13T10:41:00.000-07:00

Auto deductions are one of the most frequent business deductions, but is the amount you claim really deductible? Not if there's no documentation, say the laws and recent court cases.

Once recent case involved a man who could absolutely establish that his travel was for business purposes, and not reimbursed. However, he didn't have a log that showed when and to where his trips occurred. The IRS and the tax court denied him any deduction.

Keeping a log can be a tough habit to get into, but without one, your auto expenses may be completely disallowed. That change could be an expensive one for some of you, especially if you do a lot of travel. Something as simple as a small calendar book with the names of the cities you travel to on that day can save your bacon on this deduction.

Stimulus Summary

2009-03-13T10:36:00.000-07:00

The recently passed economic stimulus bill contained several tax code changes designed to increase our personal and business spending. These include a deduction for sales tax on auto purchases, even for non-itemizers, increased depreciation for business asset purchases, and a credit for first-time home buyers.

A nice summary of these provisions can be found here.

IRS Mileage Rate for 2009 Will Be 55¢

2008-11-26T15:07:00.000-08:00

The IRS announced that the standard mileage rate usable for business mileage reimbursements will move to 55¢ effective January 1. This rate falls in between the early 2008 rate of 50.5¢ and the late 2008 rate of 58.5¢. What's nice is that the stupid half cent is finally gone!

Medical and moving mileage will go to 24¢ per mile, with charitable miles at the good old standard rate of 14¢.

Employers who reimburse their employees should be sure to update their reimbursement systems immediately after year end. If the old rate of 58.5¢ is used instead, the difference of 3.5¢ is technically taxable income to the employee, and payroll taxes would be due on the difference. No big deal if you're a sole proprietor, but for larger companies, a miss on that could be a problem.

McCain & Obama's Plans For Your Tax Bill

2008-08-21T18:29:00.000-07:00

As we head toward the climax of the 2008 presidential election, we'd like to bring you the highlights of some tax-related proposals of each of the candidates. We're not here to promote either candidate. While there are many other considerations in selecting your candidate, few will hit you as directly in the pocketbook as the income tax.

The Washington Post shows a nice summary of the effect the candidates changes would have on your family's income. You can see quickly that Obama favors reducing the overall tax burden slightly, but leans toward increasing the taxes for high-incomers to fund further reductions for those in the lower income levels. McCain's plan would reduce overall taxes further, and would provide some relief for all income levels, with more reductions to the high-incomers who pay more of the taxes.

If you'd like some detail on the proposals, visit the Tax Policy Center. Some of the highlights:

Issue	McCain	Obama
Capital gains/dividend tax rate (currently 15% max)	15%	20%
Max Corporate tax rate (currently 35%)	25%	35%
Estate tax exemption	$5 Million	$3.5 Million
Estate tax rate	15%	45%
Other	Require 60% approval for tax hikes	Impose additional 2-4% Social Security tax on those making over $200k-250k
	Increase dependent exemption by 70%	Increase education, earned income and child care credits for low incomers

IRS Increases Mileage Rate for 2nd Half of 2008

2008-06-23T15:47:00.000-07:00

In case you haven't noticed, fuel prices are up. Oh...you already knew that?

Well, fortunately, the IRS has gotten wind of this trend as well. As of July 1, 2008, they have increased the standard mileage rate by 8¢, to 58.5¢ per mile. This mileage rate is used by employees or the self-employed to calculate deductions for the usage of their personal vehicles.

Also increasing is the medical and moving expense mileage rate, up 8 cents to 27 cents per mile. As always, the charitable mileage rate remains at 14 cents. Isn't that special...

New Rules Tighten Proof of Contributions

2008-01-10T20:36:00.000-08:00

Guidelines issued by the IRS increased the level of documentation required for many contributions to charitable organizations. All monetary contributions must now be supported with either bank records or a written receipt from the organization that gives information about the date and amount of the donation.

Until this change, documentation from the charity was only required for individual contributions over $250. Now that bank records or receipts are required, some smaller cash contributions that we previously deducted are likely not going to qualify. For instance, dropping cash in the collection plate at church, contributing to the Salvation Army's kettle, and pitching in a buck or two at your Rotary meeting will be nondeductible without a receipt from the organization.

Sometimes it seems like the IRS has it in for charities. I'm not sure what that motivation would be, so I'll presume I'm wrong. I just don't see the damage in allowing some minimal threshold for deductible cash contributions with no receipts, if the circumstances seem reasonable.

IRS to Delay Refund Processing for Some Filers

2008-01-02T16:12:00.000-08:00

Because Congress failed to fix the alternative minimum tax (AMT) until the last moment, the IRS announced that it will have to delay processing for some returns potentially affected by the AMT changes. Instead of delaying all returns, as was originally thought to be the case, the IRS will only delay processing of returns that use the affected forms.

The forms that will trigger an e-file rejection until the IRS systems have been updated are the following:

Form 8863, Education Credits.
Form 5695, Residential Energy Credits.
Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.
Form 8396, Mortgage Interest Credit.
Form 8859, District of Columbia First-Time Homebuyer Credit.

This seems to be pretty good news, as these forms are not incredibly common among returns filed by our office. The Education Credit form is probably the one that would affect the most filers, but the IRS still expects to be ready to accept these returns by February 11. The number of returns filed by our office before February 11 last year? Three.

2008 Mileage Rates Released

2007-12-03T11:02:00.001-08:00

The IRS announced that the mileage rate for business use of a vehicle will increase to 50.5¢ per mile for 2008. This is just a two cent increase from 2007.

For moving and medical expenses, you can use a mileage rate of 19¢ in 2008. This is actually a one penny drop from 2007. Apparently there are special, cheaper gas stations you can use when moving or heading to the hospital.

And since the rate is set by statute, the charitable mileage rate of 14¢ remains another year.

Business or Hobby?

2007-04-30T14:34:00.000-07:00

Is raising pigs for your kids' 4-H project a business? How about selling kitchen supplies just so you can buy at wholesale prices? In many cases, the IRS has found activities like these to be hobbies, not businesses. The IRS has issued fact sheet FS-2007-18 to explain the rules for determining if an activity qualifies as a business and what limitations apply if it's a hobby.

Basically, if you don't have a realistic chance of making money, the IRS will want to call your activity a hobby. The big downside of this treatment is that your expenses have to go on your Schedule A, in the section that's reduced by 2% of your gross income from all sources. The expenses also can't be more than the gross income from the activity. Don't worry too much about how to report it; just know that it's a lose-lose situation if your activity is deemed a hobby.

Oh, and even if you don't get any benefit from your deductions because of the rules above, you still get to pay tax on the revenue from the activity. Isn't that generous?

Things you can do to help your activity seem more like a business include having a business plan that realistically shows you could make money on the deal, handling things in a businesslike manner (business cards, advertising, etc.), and, well, making money! If you have a profit three out of five years, the IRS will leave you alone. Of course, you can be in a legitimate business and lose every year; the burden of proof is yours, though.

Tax Preparers Gone Wild

2007-02-12T15:44:00.000-08:00

Nothing against our friends in the transportation industry, but if your school bus driver is preparing your tax return, you might have a problem. Such was the case for over 300 individuals in Missouri

A daytime bus driver and nighttime tax preparer, Yolanda White, has been accused of filing scores of bogus tax returns for people. Apparently, the IRS audited 30 of her clients, and they all contained fraudulent deductions. Guess who else the IRS will be auditing? That's right, the other three hundred clients of hers.

So when it comes to taxes, remember that the same person who gets you bussed can also get you busted.

Do You Owe Tax on eBay Sales?

2007-02-02T22:56:00.000-08:00

The friendly folks at the Internal Revenue Service want to make sure you know that if you sell things on eBay, you might owe them money. They issued a summary that gives some guidelines on whether you're in the 'business' of auction sales.

Basically, if you're just selling things occasionally, in the online equivalent of a garage sale, you're clear. But if your activity is repetitive, or you buy items with the intention of reselling them for a profit, you could well be in business, whether you know it or not. In addition to regular income tax, the Service could want an extra 15% self-employment tax.

They just wanted to make sure you know! ;)

New Rules for 2007

2007-01-04T11:40:00.000-08:00

As we begin the new year, you'll want to keep in mind some of these new or updated tax law provisions that take effect January 1:

Individuals

Charitable contributions have to be documented in order to count. Cancelled checks or receipts can fill that requirement. No more deductions for cash in the offering plate or Salvation Army kettle, though.
Private Mortgage Insurance (PMI) is now deductible if you get your mortgage in 2007 or beyond.
You can contribute an extra $500 to your 401(k) plan with a new maximum amount of $15,500.

Businesses

Maximum amount of equipment purchases you can immediately expense instead of depreciate increases to $112,000.
Standard mileage rate is up to $0.485 per mile.
For contractors and manufacturers, the pruduction activities deduction increases from 3% to 6% of your income.

IRS Gives Business Formula for Telephone Tax Refund

2006-11-22T13:14:00.000-08:00

The IRS has announced a formula that businesses can use to determine the amount of a telephone tax refund. A while back, I discussed the fact that individual taxpayers will receive refunds of telephone taxes that were determined to have been illegally charged by the government. Individuals were given a formula based on the number of dependents that would determine their refund amount, but businesses were supposed to add up the tax from their phone bills.

Instead, the IRS has issued an easier way to calculate a refund amount. It's still a little complicated, but better than having to dig out all your old phone bills. You're supposed to figure the percentage of your bill that was made up of the tax, based on your September and April 2006 bills, then apply that percentage to your total phone bills for the refund period, March 1, 2003 to July 31, 2006.

The bottom line is that when we prepare a business's tax return, we're going to need those two months' phone bills in order to figure the refund that's due you. A business, for this purpose, is a corporation or partnership

Here Come the Dems

2006-11-20T14:55:00.000-08:00

With the new regime about to take over Washington, tax proposals that would probably not have passed in a Republican-controlled Congress are already flying around. One idea on self-employment tax for S-corporation owners is particularly scary.

S-corporation owners are subject to payroll taxes on their wages, but not to the 15% self-employment tax on the income their company earns. One proposal would end that treatment for all S-corporations. Another more limited proposal would end it only for personal service companies: doctors, attorneys, ACCOUNTANTS, and the like.

This area is being addressed because of abuse in the S-corporation arena. Many owners will unrealistically lower their wages in order to increase company income. This saves them about 15% on the income. Handled appropriately, S-corporations have become a significant planning tool for businesses. Removing their advantage for everyone seems like a little overkill.

Welcome to life in a Democratic congress!

2007 Mileage Rates Released

2006-11-13T08:57:00.000-08:00

Mileage rates will be back up to 48.5 cents per mile for business miles driven in 2007, according to the latest figures issued by the IRS. Medical and moving miles will be deductible at 20 cents per mile.
The increase for business miles is 4 cents over 2006. For medical miles, the increase is 2 cents, from 18 to 20.

Of course, charitable mileage rates have remained steady at 14 cents per mile.

Retirement Contribution Limits for 2007 Announced

2006-10-23T14:48:00.000-07:00

The IRS has issued the latest limits on retirement plan contributions for 2007. While past years increased because of changes in the law, the 2007 increases are due to inflation adjustments.

Plan	Limit
401(k)	$15,500 (up $500) $20,500 if born before 1958
SIMPLE plans	$10,500 (up $500) $13,000 if born before 1958
Keoghs, profit sharing	$45,000 (up $1,000)

Another Tax Scam Sniped

2006-10-20T22:04:00.000-07:00

Folks, we'd love to tell you you've got a $12 million refund coming to you. But when you hear things like that about your tax situation, take them with a ~~grain~~ pound of salt. Otherwise, you might end up indicted like Wesley Snipes!

Snipes bought into a scam that claimed only income earned outside of the United States is taxable under the Internal Revenue Code. Obviously, the scam and its purveyors were full of, well, hot air (this is a family-friendly blog!)

Snipes and his (former) CPA have been indicted on eight counts of tax evasion. With his current career status, I'm just trying to figure out how many decades it will take him to pay back the $12 million.

New Installment Payment System from the IRS

2006-10-20T13:19:00.000-07:00

The IRS announced that they have a new, easier system for arranging payments on delinquent taxes. Taxpayers can now go online and arrange for a free 120 day extension of time to pay (interest and penalties will still apply), or for $43, can request to pay their balance on a monthly payment plan (again, with interest and penalties).

While this simplifies the process of applying for an installment payment arrangement, the fact remains that the IRS is not a low-cost lender. Between the interest and late payment penalties, you're going to pay over 13% finance charges. The best bet is always to pay the Service as quickly as you can, and let us help you avoid situations where you would have a delinquent balance in the first place.

Bottom line is, paying the IRS late is bad...almost as bad as paying your CPA late!

Check Your Credit for Free

2006-09-26T08:26:00.000-07:00

AnnualCreditReport.com

Thinking about applying for a loan or refinancing your house? Make sure you know what the bank will see before you go. Federal legislation requires Experian, Equifax and TransUnion to allow you to get a free copy of your credit report each year.

The site is sponsored by the three companies, easy to use, and will give you your information without subjecting you to a hard sell for some kind of credit monitoring service. (You know the kind--"you can cancel in the next 30 days, but it's $40 if you don't"!)

You're eligible for a report from each agency each year, which means you can receive three free reports. If you want the FICO score, which many mortgage lenders use to evaluate you, it's a small charge.

Refunds for Everyone!

2006-09-01T12:04:00.000-07:00

That's right, everybody's getting a refund! And they could be as much as ... (drum roll) ... sixty dollars!

Okay, maybe that's not much to get excited about.

The federal government has had its hand slapped in court over collecting a tax on telephone service since 1898. The courts decided that the Treasury Department should not have been collecting this tax on long distance service, just on local service. As a result, the IRS will refund $13 billion of the collected tax to taxpayers.

The refund will be claimed on your 2006 tax return, where it will be treated as a payment towards your tax bill. Individuals will receive a refund ranging between $20 and $60, based on the number of exemptions they claim on the return.

Businesses will also receive a refund, but right now, the IRS says businesses must prove the amount of tax paid based on phone bills since 2003. It's likely that they will come up with a method of estimating this amount instead, so you business owners don't need to go digging through your old invoices just yet.

No Receipt? No Contribution!

2006-08-16T08:41:00.000-07:00

Contribution documentation will be tightened down in 2007 under the new tax bill passed by congress. To claim a deduction, a donor will be required to have a canceled check, bank record or receipt listing the name of the charity, the date and the amount of the contribution.

Current rules require a receipt from the donor only for contributions exceeding $250. Contributions for less than that amount have been documented in some instances by taxpayers keeping logs of their contributions. That's not going to cut it under the new rules.

Low Capital Gains Rates Extended

2006-06-15T15:39:00.000-07:00

Taxes on capital gains and dividends have been locked in at their current low rates in the recent tax bill, at least for another two years.

Capital gains on assets held more than one year and dividends received from qualified corporations have been taxed at a maximum rate of 15% since the 2003 tax bill was passed. However, these rates always had an expiration date of 2008. With the recent changes, the rates are good through 2010.

One other interesting provision of the 2003 capital gains rate changes that will soon take effect: a 0% rate on low-income individuals. Between 2008 and 2010, these individuals will be allowed a certain amount of capital gain with no tax whatsoever! A planning opportunity may exist here...giving appreciated assets to your children (18 or over), who may have low enough income to take advantage of the 0% rate.

Kiddie Taxes Increased in New Tax Bill

2006-06-13T08:43:00.000-07:00

The 'Kiddie Tax', which taxes children's unearned income over $1,700 at the parents' rate, has been extended to apply to children up to the age of 18. Until 2006, the additional tax only applied through the age of 14.

One consideration of this new law will be educational savings accounts. Custodial accounts (such as UTMA accounts) typically have the child named as the owner, and may result in income being subject to the Kiddie Tax. However, other college savings vehicles such as Section 529 plans are sheltered from current taxation, and may be a better option.

This is one of the provisions of the new tax bill signed in May. We'll provide more details on other facets of the bill over the next few weeks.

Social Security benefits reduced for upper-income retirees.

2006-05-05T16:03:00.000-07:00

2007 will bring with it what is essentially a new tax on seniors with high income. Retirees with income over $160,000 in 2005 ($80,000 if single) will face a soaring Medicare Part B premium beginning in 2007, and increasing in 2008 and 2009.

Will this affect you? First, find your 2005 adjusted gross income - the last line on the front page of your 1040. Then, add tax exempt interest to see if you exceed the income threshhold. If you do, you will face a surcharge ranging from 13% to 73% of the Medicare Part B premium, depending on income levels.

The surcharges will double in 2008, and triple in 2009. By 2009, couples with income over $400,000 will be paying a surcharge equal to 220% of the Part B premium. And you thought all those Medicare taxes you paid were enough to give you coverage in your golden years!

Audits on the Rise

2006-03-17T12:08:00.000-08:00

The Internal Revenue Service announced today that the 2005 IRS Data Book is available at IRS.gov. The publication contains tables detailing, among other subjects, the amount of revenue collected, the number of audits (examinations) conducted, and the number of refunds issued between October 1, 2004, and September 30, 2005 – Fiscal Year 2005.

IRS Releases Latest "Dirty Dozen"

2006-02-15T11:44:00.000-08:00

The IRS released their 2006 version of the top 12 tax scams they run across in their enforcement duties. Basically, if you hear someone promoting a tax strategy that sounds too good to be true, it's probably on this list.

A couple areas that we've had clients ask us about are on this list: offshore bank accounts and misused trusts. As you can see, these are clearly on the radar screen of the IRS. If you participate in any of these types of schemes, just be ready to pay the penalties when the Service comes knocking!

How Tax Brackets Work

2006-02-13T13:43:00.000-08:00

One of the most misunderstood areas of the tax system are the tax brackets. People often assume that being $1 into the next highest bracket results in all of your income being taxed at the higher rate. In reality, only that $1 would be taxed at the new rate. I ran across a helpful article discussing the details.

Self-directed IRA Can't Be Self-Serving

2006-02-10T09:48:00.000-08:00

A business owner thought he had a pretty good idea about using his IRA. He wanted to purchase real estate in his IRA and lease it to his company. The Labor Department says that kind of plan won't work, and would be subject to penalty.

Some clients have asked us about moving IRA funds into self-directed accounts that can be used to purchase real estate and other investments. While these accounts are allowed under the law, we don't advise their use for a number of reasons. One of these is that most taxpayers aren't savvy enough to negotiate the myriad rules related to appropriate uses of these funds. Besides, we want your IRA to be there for you at retirement - use other funds for land speculation!

2006 Mileage Rates Released

2005-12-08T08:48:00.000-08:00

The standard mileage rate falls to 44½ cents for 2006 business driving. While that's 4 cents higher than 2005 began, an increase in September brought the rate for the last part of 2005 to 48½ cents.

Medical miles decrease from 22 to 18 cents each, though they had started 2005 at 14 cents.

And of course, charitable miles remain flat at 14 cents. This article offers some insight into the reason for the charitable mileage rate remaining unchanged every year. Apparently the medical and business rates are based on actual operating costs, while our congressional representatives have to manually set the charitable rate. Apparently, having to consider the issue more than once every five years is too much of a strain on them.

Individual Tax Extensions Extended

2005-12-05T09:51:00.001-08:00

The IRS recently issued new regulations which will allow for a streamlined extension process for individuals. Instead of receiving a four-month extension on April 15th, individuals will now be able to extend their due date to October 15th with one filing.

While individuals could already extend six months to October 15th, the process required an initial four-month extension to August, then an additional two-month extension to be filed by August 15th. The second extension request also wanted an explanation of the reason you needed a second extension, while the new system provides for automatic extensions of six months right off the bat.

One important item to remember about extensions is that they're always extensions of the filing deadline, but NOT the payment due date. Even if you need an extension, you must pay your tax in full by April 15th to avoid late payment penalties.

Increased Gifting Limits, More Updates For 2006

2005-10-28T20:23:00.000-07:00

The IRS released further updates for 2006 today, updating various amounts that are supposed to increase each year based on inflation. One key change was an increase in the gift exclusion from $11,000 to $12,000.

The gift exclusion is the amount of money you can give to another person without affecting the amount you can leave tax free at your death. If you and your spouse both choose to each give the maximum of $12,000 to one of your children and their spouse, you can basically give $48,000 to a married child next year.

Other regular annual changes include increasing the standard deductions and widening each of the tax brackets, so that you can enjoy a little more income at each of the lower brackets.

Retirement Contribution Limits for 2006 Announced

2005-10-21T14:53:00.000-07:00

The IRS recently released the updated limits on contributions to retirement plans effective January 1, 2006. These limits define the amount you can contribute to a 401k or similar plan during a year. There are a lot of obscure amounts in their information, so we'd like to highlight the key numbers for you.

Maximum contributions to a 401(k) plan - increases from $14,000 to $15,000.
Additional contribution allowed for those over 50 - increases from $4,000 to $5,000.
Total amount allowed to be contributed for an employee, including their deferral and company match - increases from $42,000 to $44,000.

The full details of the release can be found at this site. When it comes to retirement savings, I always like to remind clients that I've never run across anyone who complained about having saved too much. Consider increasing your savings, and you can probably save some tax at the same time.

Katrina Relief Bill Signed by Bush

2005-09-30T19:24:00.000-07:00

President Bush recently signed a bill containing tax relief provisions for those affected by or volunteering to help with relief from Hurricane Katrina. While many of these provisions will have more effect in my old hometown in Mississippi, there are some provisions that will help us in Washington who help personally or financially.

The main provisions that affect us outside of the Katrina devastation involve new breaks for contributions. The limits on contributions as a percentage of income are lifted for the remainder of 2005.

Another nice break for anyone who has traveled to affected areas to give relief is the increased mileage deduction for hurricane relief. As I've written before, the oddity is that charitable miles are a 14 cent deduction, while business miles apparently cost 48.5 cents. This bill, however, increases the charitable mileage deduction for hurricane relief efforts to 70% of the business rate. That should come out to about 34 cents per mile - a nice bump from the regular rate.

Quite a few people have asked if my family and friends were affected by the hurricane. While everyone I know is safe, there was some pretty serious devastation in my old hometown of Hattiesburg, Mississippi. My old high school caught a good bit of the blow - here are some pictures if you're interested.

For more details on the tax bill, click here.

Your Estimate Payment May Be Lost!

2005-09-23T13:52:00.000-07:00

Did you make an estimated tax payment in September? You might have to do it all over again!

September 11th is just not a good day for the federal government. On that date two weeks ago, there was apparently an accident on the San Mateo bridge involving an truck transporting estimated tax payments to the IRS lockbox. The payments were blown all over the bridge and into the bay. The IRS thinks it lost between 30,000 and 46,000 estimate payments in the accident.

These payments were those made from residents of western states, including Washington and Oregon. If you made a payment before September 11, watch your bank statement or online banking system to see if it clears. If you see nothing by September 30, the IRS would like you to call them at 800-829-1040 for further instructions.

Any underpayment penalties will be waived for payments they receive late because of this accident. That's great, but another issue that strikes me is the opportunity for identity theft with all these payment checks blowing around. As always, keep a close eye on your bank account to make sure things look right.

https://www.wscpa.org/wscpa/ShortForm/050923/0923sf3.htm

IRS Realizes Gas Price Increasing

2005-09-21T14:16:00.000-07:00

With the recent spike in fuel costs, the IRS has increased their standard mileage rate for the last four months of the year. The new rate as of September 1 will be 48.5¢, up from the 40.5¢ rate set for January 1.

The standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

But the really big news? Charitable mileage can still only be deducted at 14¢ per mile. What's up with that? The rate hasn't increased for years. If any one can point me to the charitable gas station where I can fuel up that cheaply, please drop me an email.

The New Cost of Dying

2005-08-22T15:35:00.000-07:00

If you didn't already fear dying, the Washington state legislature has given you a new reason: estate taxes.

The legislature passed a bill that creates a new state-level tax on folks with more than $1.5 million in their estate. Beginning in 2006, the threshhold increases to $2.0 million. Rates will range from 10-19% of the estate.

The tax took effect May 17, 2005, and replaces a state-level estate tax that was declared invalid by the Washington Supreme court earlier this year. I guess the pot of dead peoples' cash was so attractive to legislators, they couldn't help but try to grab a piece. The estate tax has always seemed patently unfair to me, as estates are composed of assets purchased with money that has already been taxed once. The logic behind death being a taxable event escapes me.

Anyway, here's a link to the bill.

A Hybrid Credit, Courtesy of the Energy Bill

2005-08-17T22:58:00.000-07:00

I've written previously about tax advantages of purchasing a hybrid vehicle. The attractive tax aspects of these vehicles were enhanced by the energy bill signed by President Bush on my birthday, August 8.

The energy bill replaces the old deduction with two new credits for the purchase of a hybrid under 8500 lbs GVW. The credits vary based on the efficiency of the hybrid vehicle. For the first credit, fuel efficiency is compared to the 2002 average fuel efficiency for a vehicle type (car or light truck) and weight class. This credit ranges from $400 for a vehicle that gets at least 125% of the 2002 average, all the way up to $2,400 for one with average mileage 250% of 2002.

The second credit is based on the 'Lifetime Fuel Savings' of the vehicle, which they calculate as the estimated number of gallons you'll save over a 120,000 mile life. This credit adds between $250 and $1,000 (available when a vehicle should save 3,000 gallons over a lifetime).

As you can see, the total credits here can be as much as $3,400, and they're a pain to calculate! I suspect that vehicles will eventually be prequalified for a certain credit amount, and you'll know that amount from the dealer when you purchase the vehicle. Still, these credits are a nice enhancement from the $2,000 deduction (not credit) that was previously the code.

Offers In Compromise May Be Severely Curtailed

2005-07-18T11:29:00.000-07:00

Pending legislation may well put a stop to offers that would be submitted under the IRS' offer in compromise (OIC) program. The OIC allows a taxpayer to offer an amount to the Service in full payment of their IRS debts. Last year, the Service added an application fee to reduce the number of offers they receive, but that must not have been enough for them.

The Service would like to require a 20% nonrefundable down payment be made with any offer. It's feared that this would be a disincentive to submissions, as there's no guarantee your offer will be accepted, and taxpayers would be out their down payment. I suppose the funds would be applied to the debt already owing, but this still stands to curtail a program that has been a lifesaver for many taxpayers.

A New Deduction For Your Production

2005-07-14T17:55:00.000-07:00

Beginning in 2005, companies engaged in 'domestic production' will be allowed a new deduction for their efforts. The deduction will be 3% of the income generated by qualified production activities (increasing to 6% in 2007 and 9% in 2010).

There are still a lot of details to be worked out regarding eligibility for the deduction, but some industries that qualify are construction (in the US), manufacturing, and farming. You don't have to be incorporated to benefit, either.

While this might not be a huge deduction for most companies until the rates increase, I'd put this one under 'Every little bit helps'!

IRS Wants More From S-Corporations

2005-06-07T17:00:00.000-07:00

A disturbing recommendation from the IRS suggests that the income of S corporations should be subject to self-employment tax, as is the case with unincorporated sole proprietorships.

Fortunately, the commissioner of the IRS branch dealing with small businesses and the self-employed disagrees with this recommendation. It is far too soon to tell whether this proposal has a chance in Congress, though with the current efforts needed to increase the solvency of Social Security, any proposal that increases Social Security taxes will likely receive serious consideration.

For years we have advised individuals that using S corporations instead of sole proprietorships can save significant taxes by allowing the gain remaining inside the business to be free of self-employment taxes. The owner is required to take a 'reasonable' salary, upon which payroll taxes are paid, but the remainder of the profits can be taken as a distribution, exempt of self-employment tax. This proposal would eliminate that exemption.

We will watch this issue carefully as it progresses. You may wish to contact our federal legislative representatives and express your feelings, though this has not yet come up as a bill in Congress.

Hate Penalties? This Can Help

2005-06-07T09:07:00.000-07:00

What You Don't Know About Paying Federal Taxes Electronically Could Cost You Money

Did you know that non-users of the Electronic Federal Tax Payment System (EFTPS) are 31 times more likely to be assessed an IRS penalty than users of EFTPS?

Why? Because taxpayers and tax professionals that use EFTPS can schedule payments in advance to avoid missing deadlines, and they can double check their work before submitting a payment.

EFTPS is a secure service provided free by the U.S. Department of the Treasury, through which taxpayers make payments by Internet or phone. More than 3 million people are already using EFTPS to their benefit. To visit EFTPS go to: http://www.eftps.com.

All businesses and especially individuals making estimated tax payments with Form 1040ES can use EFTPS to avoid penalties.

Schedule one or even all estimated payments for the entire year up to 365 days in advance (120 days in advance if it's a business tax payment)
Cancel a payment up to 48 hours before it's scheduled payment date
Receive an immediate Acknowledgement Number for every payment, which is a receipt for your payment.

EFTPS uses the highest level of security; plus it's convenient, easy-to-use, exceptionally accurate...and it's free.

Business Trip or Personal Vacation?

2005-05-23T22:02:00.000-07:00

As I sit in a hotel room about to head on an overseas trip, I'd like to know how much of my impending expenses might benefit me come tax time. Fortunately, the IRS has some detailed, if not exactly easy to read, guidance on what's deductible.

Here are the facts: I'm traveling to Austria to visit a client of mine to whom I provide web design services. My wife is joining me, and we've stopped in the Atlanta area to drop off our children at my mother's. What portion of my expenses count for tax purposes?

First, I'm traveling outside of the USA, and will be pursuing some non-business activities. If I want my travel expenses to be fully deductible, I must meet one of four requirements:

No control over the trip - This one's out the door. I planned the whole thing myself
Outside US no more than a week - I think I'll be able to use this one...my stay is exactly one week.
Less than 25% time on personal activities - I don't think my wife will let this one happen. She's not coming with me to Europe to watch me mess with my laptop!
Vacation is not a major consideration - I can't legitimately argue this one.

Even if I can't use one of these exceptions to be able to deduct all of my travel expenses, I can allocate the expenses based on the ratio of business days to total days. A business day is any day that I spend most of the work day (probably at least 5 hours) on business, travel days, days my presence is required, or holidays/weekends that fall between business days. Sounds like I better have my client 'require my presence' every day, right?!?

I expect I'll be able to legitimately meet one of the above scenarios and deduct my travel expenses. Notice I said 'my', and not my wife's!

There are a lot more details regarding travel deductions available in the IRS publication on travel expenses.

Sales Tax - Due on Internet Sales?

2005-05-18T15:38:00.000-07:00

As more businesses make sales or provide services via the Internet, we're often asked wether Internet-based businesses are taxed differently from other businesses. The answer is no.
The following discusses the tax application for internet businesses:

Items delivered in Washington
Washington sales tax must be collected on all sales delivered to customers in Washington. Income from these sales is also subject to B&O tax, though items delivered outside of Washington are not subject to B&O.
Items delivered outside of Washington
When items are delivered to the buyer at a location outside of Washington, the sale is an interstate or foreign sale and exempt from sales tax, as well as B&O tax.
Services performed in Washington
Providing services in Washington, such as web design, is subject to B&O tax, regardless of the customer's location.

Out-of-state businesses are required to collect Washington sales tax if they have a physical presence in the state of Washington.

For more information, check the Department of Revenue's website.

Clean Up With A Hybrid

2005-05-15T18:30:00.000-07:00

Hybrid vehicles have become very popular recently, especially given the increase in fuel prices. The government has a special deduction available for purchasers of these vehicles, but it may not be what the salesman promised.

Hybrid vehicles are eligible for the clean-fuel deduction of up to $2,000 for vehicles placed in service in 2005. In 2006, the maximum is scheduled to be $500, and the deduction terminates after 2006.

Note that this is a deduction, and not a credit. As such, it will reduce your taxable income, but is not a direct credit back to you. For instance, if you were in the 25% tax bracket, the clean fuel deduction would save you $500.

We wanted to clarify this provision, as some clients have understood when purchasing these vehicles that they come with a $2,000 credit, which is not the case. A list of the vehicles that qualify for this deduction can be found on the IRS website.

The Facts About Extensions

2005-04-07T23:31:00.001-07:00

As we near the due date for individual income tax returns, extensions become a necessary tool for those clients who may still be waiting on information, or who just haven't gotten around to visiting us yet!

Many clients have questions about the implications of extending their returns. One misconception is that extending the return extends your time to pay your tax. The reality is an extension simply gives you an extra four months to file the return, but taxes are due by April 15, whether your return is filed or not. Anything you owe will incur additional interest after April 15th.

For more information on extensions, we have made available a brochure that can answer common questions.

Sales Tax Rises April 1

2005-03-02T09:04:00.000-08:00

Sales Tax Rate Hike Information

Go dig up that manual for your cash register - you'll need to reprogram it on April 1st, when the sales tax rate in Cowlitz County increases by .1%. As a result, sales tax inside Kelso and Longview will be 7.7%, and 7.6% in the rest of the county.

Interestingly enough, the Department of Revenue's flyer linked above states mistakenly that the increase was approved in the November 2004 elections. In fact, it was imposed by the Cowlitz County Board of Commissioners.

The Commissioners yesterday began a push for consideration of ANOTHER sales tax increase, this one up to .2%. The proceeds would be used for criminal justice, and the citizens would have to approve it at election time. I'm not sure if drawing more money out of the pockets of our already financially-depressed citizens is the answer to anything, but the commissioners seem determined to at least try.

As a side note, have you ever heard anyone propose a decrease in sales tax??

How Long Do I Have To Keep This?

2005-02-22T09:02:00.000-08:00

Record Retention Schedule

If you're in business, you know that space costs money. As a result, businesses often try to eliminate as much historical paperwork as possible to more effectively use their office or storage space. When working on a project like this, our clients usually want guidance on what to keep, and for how long.

We've developed a record retention schedule that gives suggestions on how long to keep various documents. Essentially, you need to keep things as long as they may be relevant to taxing or regulatory authorities, and certain other items just need to be kept indefinitely. For instance, if you're considering selling your business, the seller might want to see an in-depth financial history of many years. Some payroll records need to be kept indefinitely as well.

The retention schedule is available in our Forms area. If you have a question on an unlisted item, please feel free to drop us a line or add a comment here.

Reduce Junk Mail and Identity Theft

2005-02-15T08:30:00.000-08:00

We all know about the rash of identity theft that has hit our community and others nationwide. One of the key sources for the data that is used to commit these crimes is unsecured mail. More than 400,000 Americans each year can trace falsely-opened credit accounts to stolen mail. Reducing the excess mail can help you reduce your exposure to this type of crime.

There are three key places you should contact to help tame the junk mail in your box.

Remove your name from this list sold by consumer reporting agencies to credit card companies for preapproved offers.
The Direct Marketing Association's removal tool can pull your name off of the mailing lists used by their 5,200 members - most of the junk you get. Obviously, they're not really concerned about getting your name off the list; they charge $5 to submit your request online, although you can print your request from their site and mail it to them.
Remove yourself from unsolicited mortgage and home equity loan offers by visiting the DataQuick website.

Take 10 minutes to visit these sites, and you'll be on the way to protecting your identity.

Death Now Less Taxing in Washington

2005-02-04T09:34:00.000-08:00

The Washington Supreme Court eliminates state's estate tax

The Supreme Court eliminated the differences between State and Federal rules regarding taxable estates in Washington. You probably remember that the Congress passed legislation in 2001 that raises the threshhold for a taxable estate over the next several years, and eliminates estate taxes in 2010. Washington had never increased their threshhold accordingly, so individuals were having to deal with two different sets of rules for estate taxes. Even though an estate was exempted from federal tax, it could have a Washington liability.

This difference complicated financial planning and prevented Washington residents from enjoying the estate tax relief contemplated by Congress. The Supreme Court decided that Washington was only ever entitled to a portion of the federal tax. If there were no federal tax, Washington had no right to collect the state's portion.

As a result, estates that paid Washington will receive at least a partial refund of their estate taxes. If an estate was completely exempt from Federal tax, it looks like they will receive a full refund from Washington.

This is the type of change that makes a huge difference here in the financial and estate planning community. Differing sets of standards complicate the planning substantially, and simplification will help individuals better understand the rules.

Don't Forget the Sales Tax!

2005-01-20T01:13:00.000-08:00

As we've discussed in previous postings, the new Sales Tax deduction is a boon to Washington taxpayers. Just remember to let us know about any major purchases you've made in 2004 that would qualify for an additional deduction. Sales taxes paid on (non-business) purchases of vehicles, boats, planes, and home improvements can be deducted in addition to the base sales tax deduction given by the IRS.

Many clients tell us that they have purchased their home building materials tax-free in Oregon. These expenses aren't deductible -- no tax was paid, so there's no tax to deduct.

We'll be glad to help you with any questions you have on this new deduction!

Tsunami aid donations could be tax-deductible for 2004

2005-01-06T21:55:00.000-08:00

Tsunami aid donations could be tax-deductible for 2004 - coshoctontribune.com

The congress has passed a bill that would allow contributions made in January for tsunami relief to be deducted on your 2004 income tax return. Usually, contributions are only deductible in the year that they're made. With the massive size of this disaster, and the timing being so close to year end, Congress wanted to encourage people to contribute to the relief efforts.

The bill has not yet been signed into law, but should be shortly. We'll provide any other relevant details as they're released.

Credit Where Credit Is Due

2005-01-05T23:41:00.000-08:00

We all know about the IRS and their tendency to take, take, take. Did you know they also hand out money to businesses? Here's a list of some business credits they award. Are you missing out on any of them?

Work Opportunity Tax Credit - Hire certain food-stamp or SSI recipients, disabled vets, or ex-felons, and you can receive up to $2,400 per employee.

Welfare to Work Credit - Employing individuals who had been on welfare for at least 18 months can get you as much as $8,500 per employee.

Small Employer Pension Plan Credit - Small companies who have expenses related to establishing a new retirement plan can get up to $500 credit if they spend at least $1,000.

Tip Credit - Businesses in the food and beverage industries can claim a credit for payroll taxes the business has paid on tips reported by the employees, under certain circumstances.

Also, credits are available for things like employer-provided child care facilities, research and development, and creating electricity from renewable sources.

Working at home? Make it pay!

2004-12-26T20:10:00.000-08:00

If you operate your business from your home, you may be entitled to claim the "Home-Office Deduction".

To qualify for the home-office deduction, the portion of your home that is used for business purposes must be:

used "regularly and exclusively"

your "principal place of business"

used for the employer's convenience (in the case of an employee)

You can also claim the deduction for any space you use "regularly and exclusively" to conduct administrative and managerial activities when you have no other fixed location to do so.

The deductions are limited. The office-in-home deduction can never create or increase a loss. Any disallowed expenses can be carried forward to future years.

We can help you determine whether you qualify for this deduction and the tax consequences if you eventually sell your home.

Do You Know How Much Sales Tax You Pay?

2004-12-17T14:52:00.000-08:00

Sales Tax deduction tables issued

As promised, the IRS has finally given us the tables we can use to calculate the sales tax deduction. (See our previous post on this deduction).

I'm a little underwhelmed at the tax from the table; for instance, a family of four that makes $70,000 is only given a $1,001 sales tax deduction. At 7.6% tax, that means the IRS assumes you only spend $13,100 each year on sales-taxable items. I guess if you back out all of the non-sales-taxable expenditures you make (rent/mortgage payments, groceries, utilities, etc.) it might approach reality.

Of course, you also get to add the tax paid on certain major purchases. These are now spelled out by the IRS as the following:

Motor vehicles - (including car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van, and off-road vehicle)
Aircraft
Boats
Homes or home building materials

Specifically excluded -- sales tax paid on business purchases.

Last-Minute Tax Tips for 2004

2004-12-12T08:20:00.000-08:00

Gail Buckner from Fox News provides some good Last-Minute Tax Tips for 2004

Keeping Track of Your Employees

2004-12-08T11:28:00.000-08:00

A recent workshop that some of our team attended reminded us of the importance of maintaining the appropriate information in your employee files. Did you know that you could be assessed a $250 penalty for each employee file that does not contain the correct information?

The employee files should contain, at a minimum, federal forms W-4 (wage withholding information) and I-9 (proof of employment eligibility). Also, form I-9 requires you to review copies of the employee's documents verifying eligibility. Most businesses should protect themselves by keeping copies of the documents reviewed. (You can find copies of forms W-4 and I-9 in our forms section.)

If you use a payroll service (even from our office), keep in mind that the responsibility for maintaining these files still rests with the employer. Payroll services are not required to keep this type of information on file.

Year End Reporting Requirements

2004-12-08T09:21:00.000-08:00

As we head toward the end of the calendar year, we like to remind businesses of some of the more obscure requirements they face in year-end reporting. These are things you don't want to miss, or you risk exposing yourself to potential penalties.

1. 1099's: Generally, you must issue a 1099-MISC to individuals or unincorporated businesses who you paid more than $600 in rent or services during the year. A 1099-INT should be issued for interest or dividends paid in excess of $10.

2. Employer-provided vehicles: If employees (including owners!) are allowed to use a company vehicle for any personal use, the value of that use must be included in the employee's W-2 at the end of the year. We can calculate the inclusion amount for you; just use our form to send us the information.

3. Fringe benefits to owners: If an S-corporation shareholder receives certain fringe benefits, such as health or disability insurance, the amount must be included on their W-2.

4. Group life insurance: If you provide more than $50,000 of group term life insurance to an employee (again, including owners), there's a small amount that should be added to the employee's W-2.

This is just intended to be a heads-up to help you remember these requirements. If you need help with any of these calculations, please give us a call!

Canadian Prescriptions Now More Taxing

2004-12-03T13:35:00.000-08:00

Living in a state that borders Canada, we've all heard about the inexpensive prescription drugs available just north of us. Did you know that there can be a hidden expense to those prescriptions?

A recently released publication from the IRS regarding Medical Expenses reaffirms their position that the cost of buying medicine from Canada is NOT deductible. That's because importing medicine from foreign countries is technically illegal. Also, since the cost of these drugs is not deductible, the prescription expenses are not eligible for reimbursement from an employer's flex plan or medical reimbursement plan.

Eventually, you may see changes in the laws governing Canadian medicine imports. For now, though, if you're buying prescriptions from Canadian medical suppliers, be sure to exclude those costs from summaries you provide us for your tax return.

Federal Unemployment Deposit Requirements Lowered!

2004-12-03T09:16:00.000-08:00

According to the latest news from the IRS, life gets a little simpler for small employers as the federal unemployment tax deposit requirement is raised to $500 for 2005. This is a nice increase from the $100 deposit requirement in effect SINCE 1970!

The federal unemployment tax (FUTA) is charged on the first $7,000 of wages for each employee, each year. A business has to calculate their liability each quarter, and deposit the tax when their liability exceeds the IRS threshhold.

While this change doesn't reduce the amount of tax a business will owe, it will reduce the number of deposits required for many small businesses. Essentially, most businesses with less than 10 employees will only deposit annually...not a life-changing rule, but a definite timesaver.

Of course, the best timesaver is to hire your payroll out. Give us a call if you're interested in finding more on our payroll services.

Make a New Plan, Stan

2004-12-01T18:44:00.000-08:00

The foundational step to effective, year end tax planning is the creation of an accurate tax projection. The time spent compiling information for the projection is not lost time, as the information will also be used in the preparation of your final return. Jerri & I would like to help you with your year end projection. For many taxpayers, the cost of the consultation will be more than offset by the tax saved.

If you feel comfortable doing your own year end projection, be sure you consider the potential effects of the Alternative Minimum Tax (AMT) and the effect which the amount of your Adjusted Gross Income (AGI) has on the various phase-outs of deductions and credits. The amount of your AGI and your potential liability for AMT are basic to any decisions you make to minimize taxes.

Name That Baby, With Help From the SSA

2004-11-26T21:55:00.000-08:00

Want the government to help you name your newborn? Probably not, but while reviewing the Social Security Administration's website for my previous post, I stumbled on an interesting page. The SSA maintains a list of the most popular baby names each year. I guess it makes sense, as they're the first to hear about most births.

I was pleased to discover find David still in the top 15 names!

http://www.socialsecurity.gov/OACT/babynames/

Get Paid for Working AND for Being Retired

2004-11-26T09:54:00.000-08:00

Working While Collecting Social Security?

You can earn as much as you want once you reach full retirement age. Full retirement age is 65 for those born in 1938 and earlier (that age gradually increases to 67 for people born after 1959). An earnings limit applies for each month prior to attaining full retirement age.

If you're reaching full retirement age in 2005, you can earn $31,800 without having to repay any Social Security benefits. Exceed this limit and you'll have to repay $1 for every $3 earned above the limit. If you'll be below retirement age all year, the most you can earn is $12,000, or else you'll repay $1 of benefits for every $2 you exceed the earnings limit.

For more details on how this works, check the SSA's website.

Stop Draggin' Your Car Around...

2004-11-25T09:25:00.000-08:00

...and donate it to charity.

Recently, we've received many questions about contributing vehicles to charity for a tax deduction. These types of contributions became more visible when they were restricted in the recent tax bill. As a result, you've got until December 31, 2004 to contribute a vehicle under the old law.

What's the difference? Through 2004, you simply claim only the fair market value of the car. Note that according to the IRS, "the fair market value may differ substantially from the car’s “Blue Book” value."

Beginning in 2005, charities will be required to let you know how much they eventually sold your car for, and that sales price will be your deduction. (There may be different results if the car is going to be used by the charity instead of resold.) The government is trying to prevent the types of situations where taxpayers deduct $2000 while the charity only receives $200 when they sell the car subsequently.

More information on the problems that caused this change.

Free & Easy W-2's for Small Businesses

2004-11-20T19:38:00.000-08:00

If you have ever prepared W-2's for your employees, you know it can be a real hassle. You've got to get the right forms, get them printed (or typed!) correctly, and remember to mail everything off in time to the government.

Want an easier way? The easiest is to hire us to prepare your forms, but if you want to do it yourself, here's a great tool.

The Social Security Administration has a great, free online system for electronically filing up to 20 W-2's. After you sign up with them, just fill out on screen the necessary W-2's. The online system will even print for you on plain paper the right forms to distribute to the employees. When you're done, a couple more clicks will file them with SSA immediately! Also, because the system will check for mismatched names and social security numbers as you're entering information, you might save yourself some love letters from the IRS down the line.

Visit the SSA's easy-to-use site at http://www.ssa.gov/bso/bsowelcome.htm.

IRS mileage rates for 2005 released

2004-11-18T10:40:00.000-08:00

Hot off the presses are the new 2005 mileage rates, just released by the IRS. Business miles will be deductible at 40.5 cents per mile in 2005, a nice bump up from 37.5 cents in 2004. The mileage rate for medical and moving expenses will increase $.01 to $.15/mile, but the rate for charitable use will remain at $.14.

Isn't it incredible that gas prices for charitable use didn't increase at all last year?!?

Trucks vs. SUVs

2004-11-18T09:51:00.000-08:00

A well-publicized change in the recent tax bill was the reduction of the write-off allowed for SUVs. In an effort to raise revenue and assuage the environmental lobby, Congress reduced the Section 179 deduction to $25,000 for SUVs.

This begs the question, what's an SUV? Well, for this purpose, it's any vehicle between 6,000 and 14,000 lb. GVW, except for the following:

Vehicles that seat more than 9 passengers behind the driver (think shuttle vans)
Vehicles with a separate cargo area at least six feet long. (Most full-size pickups, but possibly not some quad-cab/extended-cab or short bed trucks.)
Delivery vans
Ambulances, hearses, and vehicles-for-hire used to transport people or items.

While this reduces what can be expensed under Section 179, SUVs still are exempt from the luxury auto limitations, so they generate much higher deductions than similarly-priced cars. And since it's not always the best move to fully deduct an SUV or any vehicle in the first year, this limit really isn't too restrictive.

Paying tax...means saving tax?

2004-11-17T09:48:00.000-08:00

The New Sales Tax Deduction

You've probably heard that residents of states with no personal income tax will now be able to deduct sales tax on their returns. It sounds like they've gotten this one right, folks. The IRS will provide a table for us to use to calculate your deduction, based on household size and income level, so you don't have to keep each receipt for the year (and you definitely don't need to bring them all to your tax appointment!)

In addition to the table amounts, you'll be able to deduct sales tax on any big ticket items like cars, boats, etc. We have to leave it at "etc." for now, because the IRS hasn't yet issued their final rules detailing this deduction. Be sure to check back later for more on this new savings opportunity.

A daily piece of our mind

2004-11-16T16:24:00.000-08:00

Welcome to our new tax and business tips blog! We'll try to keep you up to date with potential or enacted changes in the tax law, and we'll explain how they apply to you. Also look for general business advice and tax planning ideas to help you save money.

Check back often for our latest thoughts and additions!