The New Cost of Dying

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

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

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

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.