A New Deduction For Your Production

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

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

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?

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:

1. No control over the trip - This one's out the door. I planned the whole thing myself
2. Outside US no more than a week - I think I'll be able to use this one...my stay is exactly one week.
3. 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!
4. 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?

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

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

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

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??