Category: Business Taxes and Accounting

Learn more about managing Business Taxes and QuickBooks Accoounting

  • Beware the 3.8% Investment Surtax

    Plan now to save yourself from this new tax on investment income. If you meet the income thresholds below and have net investment income, an additional 3.8% tax will be due. This tax went into effect on January 1, 2013.

    I see this coming into play unexpectedly for taxpayers who have gain on a home sale that is above the exclusion amount and for those selling a business. For those with wage or business income normally near or above the thresholds listed below, we’ll need to do some planning to minimize taxes due in those years.

    When Does it Apply:

    Filing Status

    Threshold Amount

    Married filing jointly

    $250,000

    Married filing separately

    $125,000

    Single

    $200,000

    Head of household (with qualifying person)

    $200,000

    Qualifying widow(er) with dependent child

    $250,000

    Source: http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs

     

    Important Points

    Consider re-evaluating passive or investment income if you will be above the threshold in the current year. Active participation in a formerly-passive business could turn investment income into regular income, which might be more beneficial. Be mindful of taking investment gains in a year affected by this tax.

    This tax is not indexed for inflation. Like the AMT before Congress’ recent fix, the Medicare Tax’s grasp on taxpayers will increase in future years.

    Need more details?

    Call me to discuss your specific situation. Forbes also has a nice series with more details.

  • NEW S-Corp Late Filing Election Procedure

    Filing a late S-Corporation Election is now much easier and has a longer or no deadline for many filers. Previously, if a business intending to be taxed as a Sub-chapter S Corporation failed to to file a timely election, but proceeded as one, relief from this mistake was potentially possible under a few Revenue Procedures (Rev.Proc. 2003-43, 2003-1 C.B. 998; Rev. Proc. 2004-48, 2004-2 C.B. 172; and Rev. Proc.2007-62, 2007-2 C.B. 786), though it was rather unknown and obscure. I had detailed one such method earlier.

    However, this is all superseded by the new Revenue Procedure 2013-30. I’ll lay out the new guidelines as to who qualifies, how to apply, and what deadline, if any, applies.

    GENERAL REQUIREMENTS

    1. Intended to be classified as an S Corporation
    2. Relief requested within 3 years and 75 days after the Effective Date. This is essentially the day that if the filer had timely filed that the election would have gone into effect. However, see below for an important exception to this deadline.
    3. The failure to qualify as an S Corporation is solely because the election was not filed. In other words, the company must meet all other qualifications and must be acting as an S Corporation.
    4. Reasonable cause for filing to make a timely election and due diligence to correct the error upon discovery must be present. This can include a mistake upon the part of an employee or another entrusted to file the correct paperwork.
    5. No deadline applies if:
    • The corporation is not seeking a late corporate entity classification election;
    • The corporation fails to qualify as an S corporation solely because Form 2553 was not timely filed;
    • The corporation and all of its shareholders reported their income consistent with S corporation status for the year the election should have been made and all later years;
    • At least six months have passed since the corporation filed its first S corporation year tax return;
    • The IRS did not notify the corporation and the shareholders of any problem with the S corporation status within six months after the return was filed; and
    • The completed election form includes statements from all shareholders from the date the election was to have been effective to the date of the filing stating that they have reported their income consistent with S corporation status.

    HOW TO FILE

    Complete Form 2553. Include “Filed Pursuant to Rev. Proc. 2013-30” at the top of the form. An officer and anyone who was a shareholder from the Effective Date until the Form 2553 is completed must sign. Include signed statements from all shareholders that all income was reported consistent with the S Corporation election since the Effective Date. The statement indicating the reasonable cause must include this language:

    “Under penalties of perjury, I (we) declare that I (we) have examined this election, including accompanying documents, and, to the best of my (our) knowledge and belief, the election contains all the relevant facts relating to the election,and such facts are true, correct, and complete.”

    Those also seeking late corporation classification must include further statements relating to that relief.

    Current Year 1120S
    File Form 2553 with the current year 1120S.  State “Includes Late Election Filed Pursuant to Rev. Proc. 2013-30” at the top of the Form 1120S. If you are subject to the 3 year and 75 day deadline, be aware that an extension of time to file the 1120S does not extend the time under this Revenue Procedure.

    Late- Filed Prior Year 1120S
    File Form 2553 with the late-filed returns. All overdue returns must be included. State “Includes Late Election Filed Pursuant to Rev. Proc. 2013-30” at the top of the Form 1120S. Again, the 3 year and 75 day deadline, if applicable, is not extended.

    Form 2553 Filed Separately
    Form 2553 can be mailed alone to the applicable IRS Service Center.

    If this Revenue Procedure does not apply, relief may still be possible through a letter ruling. Consult a tax professional for help if you need to go that route.

  • 2012 Small Business Calendar Available

    Free IRS Small Business CalendarOrder the IRS Small Business Calendar and keep track of important tax and payroll dates. Did I mention that it’s free? Completely free and very handy to have around the office. I keep a few on hand to give to new small business clients.

    12/29/12 UPDATE – The 2012 IRS Calendar is “sold-out.” Here’s a printable PDF copy and a handy online calendar

  • Good News – Business Cell Phone Tax Deduction

    We love good news that makes tax record-keeping easier! If  your employees use cell phones for business, the rules for deducting the expense have gotten much easier. Previously, a cell phone was considered by the IRS to be “listed property,” a special category for deductions. Listed property includes items that the IRS considers to have potential for personal use that might be inadvertently deducted. So, for computers, camera equipment, certain autos, and formerly, cell phones, it is required to keep records of both business and personal use. If the business use percentage is more than 50%, then the opportunities for deductions and depreciation increase.

    The Small Business Jobs Act of 2010, enacted last year by Congress, removed cell phones from listed property. Recently the IRS issued guidance on how exactly this applies to filing taxes.

    The key point is that the cell phone must be used for business purposes. Here’s the IRS explanation –

    if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone.  For example, the employer’s need to contact the employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day are possible substantial noncompensatory business reasons.  A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes.

    Any personal use by the employee is considered a minimal fringe benefit, not included in wages and not necessary to track or report. Yeah!

    Let’s see how it applies to employee cell phones:

    EMPLOYER-PROVIDED CELL PHONE
    If the cell phone is provided to the employee for noncompensatory business reasons, then it is an excludible fringe benefit.  The business can deduct the expense and it is not compensation for the employee. It is now not necessary to track the employee’s business and personal use.

    EMPLOYEE CELL PHONE REIMBURSEMENTS
    If the business reimburses employees for their personal cell phone, note that per the IRS, “the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone.”

    References:
    IRS Notice
    IRS Notice 2011-72
    IRS Memo SBSE-04-0911-083

     

     

     

  • Beware the IRS Mistake in Your Favor

    According to the National Association of Tax Preparers newsletter, the IRS is issuing refund checks to certain taxpayers …. by mistake! I wouldn’t cash that check you receive (without checking with me or another tax preparer) if the letter that came with it says, “We changed the amount of self-employment tax on Line 56 of your Form 1040 because there was an error on Schedule SE, Self-Employment Tax.”

    The IRS seems to have been making an incorrect calculation in tax returns filed like these:

    • Multiple Schedule C filed
    • Schedule C and an S-Corp K-1
    • S-Corp K-1 with health insurance premiums paid by the S-Corp

    There may be other situations that are triggering this mistaken refund check even though the IRS says they have fixed the error. Keep an eye out and this time, do look a gift horse in the mouth!


  • Tax Savvy for Small Business Book Review

    Tax Savvy for Small Business BookTax Savvy for Small Business is a clear and handy guide to many aspects of small business taxation. If you own a business, I recommend you leaf through it and then sit down and read the sections relevant to your business. It is not a guide to doing your own business taxes; instead this book tells you about everything else you need to decide before your tax return is prepared.

    Let’s face it, most financial decisions in your business have tax consequences, If you can have those consequences in your mind when making day-today choices on spending, hiring, business structure, office space, etc, then you will be way ahead of the game come tax time. Your accountant will be happier and you will get much more out of the the time and money you spend there.

    If you’re just starting out or if your accountant never sat down and explained how and what to deduct, then read the “Basics” section first. Learn the ins-and-outs of deductions and depreciation. Buying things is essential for most businesses to run and whether you lease or buy, and when and where you take the deduction makes a difference to your bottom line. I cannot over-emphasize the importance of keeping good records; if you do not know what you spent, you cannot deduct it!

    The next most important thing to business taxes is the structure of your business. While most of us start out as a sole proprietor or a partnership, there are good reasons to move up the evolutionary ladder and get a bit more formal. Each form of business — sole prop, C corporations, S Corporations, partnerships, LLC, and personal service corporations — are examined along with the good and bad news about each one.

    One reason that small businesses are called the “poor man’s tax shelter” is fringe benefits. The benefits available to you will depend on the business structure that you choose, but they can be financially significant. Read up on them in this book and see if they make it worthwhile to set up a nice tax-advantaged retirement plan, dependent care plan or other snazzy tax deduction. Your favorite tax professional can help you with the nuts and bolts of these types of plans.

    Now business is not all deductions and conventions in Waikiki – sometimes you have to deal with the IRS. There are great tips in this book on how to handle these types of situations. I would never say meet the bogeyman by yourself – but reading this section will make you a more informed participant so you can help your tax pro do the best job for you.

    There are several other sections and chapters I haven’t even mentioned but I think that you can see for yourself that this is an excellent book for any business owner, especially as it has been updated in late 2010.

  • Late Filing Your S-Corp Election Part 1

    Did you just realize that no one filed the one piece of paper that changed your C-corporation or LLC into an S-corporation?

    The election to S-corp should have been filed the year before it applies or within 2 months and 15 days into the year it applies So, if you are an existing calendar year business, file Form 2553 by March 15, or better yet, the year before. If you are a new business, it needs to be filed within two months and 15 days of the first tax year. For example, if you started your business July 1, file by September 15. But that’s probably all past history. You missed those deadlines, so now what?

    Well, there is actually a rare second chance to get the S-corporation election right. How you file does depend on certain conditions and you do need to have a good reason why the S-corp election wasn’t filed or filed correctly. In this first article about late filing S-Corp elections, I’ll cover IRS Revenue Procedure 2007-62 and who can use this very simplified method for obtaining relief.

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