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.
Tuesday, June 01, 2010
Wednesday, April 28, 2010
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Friday, March 13, 2009
Auto Deductions Need Documentation
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.
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
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.
A nice summary of these provisions can be found here.
Wednesday, November 26, 2008
IRS Mileage Rate for 2009 Will Be 55¢
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.
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.
Thursday, August 21, 2008
McCain & Obama's Plans For Your Tax Bill
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:
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 |
Monday, June 23, 2008
IRS Increases Mileage Rate for 2nd Half of 2008
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...
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...
Thursday, January 10, 2008
New Rules Tighten Proof of Contributions
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.
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.
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