Corporate Returns Due - Late Filing Penalties Getting Steep!

Remember to file either your corporate tax returns or file for an extension - TODAY!

Corporate tax returns are due March 15th. The late filing penalty (which also applies if it does not include the required information) amount for an S-Corporation return is $195. This penalty is calculated based on the total number of shareholders during any part of the tax year multiplied by each month-or partial month-the return is filed after the due date, or extended due date (up to 12 months). If the return is properly extended, the return is due September 15th. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. If you don't file AND don't extend the return, it is late!

Another note: For each failure to furnish Schedule K-1 to a shareholder when due and each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information), a $100 penalty may be imposed with respect to each Schedule K-1 for which a failure occurs. If the requirement to report correct information is intentionally disregarded, each $100 penalty is increased to $250 or, if greater, 10% of the aggregate amount of items required to be reported.

The same penalty applies for partnership returns. The normal deadline for partnership returns is April 15th. In 2012, it's April 16th. Partnership returns may be extended until September 15th. Make sure that you note this extended due date. It used to be October 15th.

The penalty will not be imposed if the corporation can show that not furnishing information timely was due to reasonable cause. There is no telling what the IRS will consider reasonable cause, but it doesn't hurt to try!

To Refund or Not Refund; THAT is the Question!

I just had a conversation with a client about their income tax withholding. They owed approximately $1,000 and asked what they should change.

My response is this:

Using the US Treasury as a savings account is a very bad financial plan. It's better to have use of your money throughout the year - you aren't earning a penny on the money the you get refunded, but you may be saving interest costs by paying down a credit card or your mortgage. You can earn by investing that money. If you have direct deposit, have your employer deposit part directly into a savings or investment account (an investment account may prevent you from dipping into it for impulse expenditures). I'd prefer to see you owe up to $1000 rather than have a refund - as long as you are able to set aside those funds to pay your liability. YOU get to use the $1,000 that you may owe without any penalty from the IRS. Time to turn those tables!

Some Items to Check Before Filing Your Return

Here's a quick and dirty list of things that are commonly missed or done incorrectly, and should be checked before filing your return:

1. If you are self-employed and pay Medicare premiums, be sure to include the costs in the calculation of your self-employed health insurance deduction.
2. Bonus Depreciation:
• Is allowed only on new purchases;
• Items purchased between January 1 and September 8, 2010, are eligible for 50% bonus depreciation;
• Items purchased between September 9 and December 31, 2010, are eligible for 100% bonus depreciation;
• You can elect out of the bonus depreciation. You need to assess your business tax situation and determine if taking the bonus deprecation will be a waste in the current year. You may need the depreciation more in future years.
3. Schedule A, State Taxes - I have often seen a deduction taken for vehicle tax renewals. This tax is only deductible on Schedule A if is based on the value of the vehicle. If you see "Ad Valorem", this is the portion that is deductible. This applies to your property taxes as well. Non Ad Valorem taxes are not deductible.
4. Mortgage interest deduction is limited to the interest on $1,000,000 of home aquisition debt ($500,000 for MFS). Home equity debt is limited to interest on $100,000 ($50,000 for MFS). 
5. Before taking losses related to S-Corporations or Partnerships, it is CRITICAL that you have the basis to take the losses.
6. There are many opportunities for errors with rental properties, as well as some rule changes. I'll cover rentla properties in the next blog.

Form 941 News and Highlights

You have no doubt heard of the changes to the Form 941 and the filing.  I've compiled a list of the highlights you may want to pay attention to before filing this year.

• One of the biggest changes - and hopefully you are already aware of this change - the EMPLOYEE tax rate for social security withholding is 4.2%.  The "matching" EMPLOYER tax rate remains the same at 6.2%.  Medicare remains at 1.45% for both.
• Also note that wages subject to social security maxes out at $106,800.
• Advance payment of earned income credit is no longer available - as of December 31, 2010. 
• I can't resist some editorial comment on this:  While I understand there has been some abuse of the EIC, I fail to see how requiring families to wait until after the end of the year and filing their tax return will do anyone much good. Many folks are struggling to survive - to keep a roof over their heads and feed their families - without this reduction in their monthly income. Decreasing the monthly income of families will do nothing to help our continued failing economy. And worse, while the US Treasury has made an effort to stop lower income families from getting large refunds when the file the taxes because they've found the refunds get spent on unneeded luxury items rather than needed to sustain a household, this change will do nothing to assist in alleviating this concern.
• Your payroll tax payment MUST, I repeat MUST, be made via the Electronic Federal Tax Payment System (EFTPS). You can no longer take a paper coupon (Form 8109) to your bank with a check.

To enroll in EFTPS

Are Payments to Financially Distressed Homeowners Taxable?

According to an IRS ruling yesterday, Federal payments are NOT taxable to homeowners. That's good news for many taxpayers. This ruling doesn't come as a big surprise. The IRS has consistently ruled that assistance payments for general welfare from the federal government are not taxable. However, this ruling specifically addresses the HFA Hardest Hit Fund and the Emergency Homeowners' Loan Programs (EHLP). 

The HFA Hardest Hit Fund provides funds to states to assist in preventing avoidable foreclosures and to stabilize housing markets.  It's available in states where unemployment meets or exceeds the national average, or where housing prices have declined more than 20% from peak prices. Florida and Georgia are two of the nineteen states eligible for funding.

Part of the Dodd-Frank Wall Street Reform and Consumer Protections Act, the EHLP provides assistance to homeowners that have experienced a substantial reduction in income as a result of involuntary unemployment or underemployment due to adverse economic or medical conditions, and are at risk of foreclosure.

Notice 2011-14 recognizes that both of these programs promote general welfare, and therefore the payments made to or on behalf of a homeowner are excludable from the taxpayer's gross income. However (and there's always a "however"), the homeowner's Form 1098, Mortgage Interest Statement, will reflect the total of all payments. Taxpayers need to be aware they cannot deduct any amounts on those statements that were not paid by their own funds, including interest, property taxes and mortgage insurance.

In the state of Florida, see Florida Hardest Hit for more information.

First Time Homebuyer Credit - Helpful Hints

If you're planning on claiming the First Time Homebuyer Credit when filing your 2010 tax return, there a few things to keep in mind:

• You must have purchased or entered into a contract to purchase your home by April 30, 2010.
• The definition of a first time homebuyer is you did not own a principal residence for three years prior to the date of purchase.
• The definition of a long term resident homebuyer is you must have lived in the same principal residence for five consecutive years during the eight year period prior the purchase date.
• The maximum credit for the first time homebuyer is $8,000, or $4,000 for individuals who are married filing separate.
• The maximum credit for the long term resident homebuyer is $6,500, or $3,250 for individuals who are married filing separate.
• Claiming the credits will require that you file a paper return, along with Form 5405 and supporting documents, such as properly executed settlement statement, copy of dated certificate of occupancy for new construction homes or retail sales contract for a mobile home purchase.
• In the case of the long term resident credit, it is suggested you attach copies of Form 1098, Mortgage Interest Statement and/or property tax records.

NOTE:  Members of the military have an extra year to purchase a qualifying residence.

Just the Facts on Health Care Reform, Part Deux

These are some of the items that slipped in as part of Health Care Reform that you may not be aware of just yet. In true political form, some items were slid in from both sides that have no bearing on health care.

• Form 1099-Misc: We have come to know and love the requirements for the Form 1099-Misc over the years; businesses are required to report payments that are not to corporations that exceed $599 on those pretty little pink forms. Starting in 2012, the reporting requirements will require that all payments, corporate or not, over $599 be included. This requirement includes payments for property and services. 
• I would suggest that your business begin to work on that compliance in 2011 to ensure that you work out any kinks in your internal processes. This will indeed become a costly and cumbersome process for small and large businesses alike, but small businesses will face the largest hardship.
• The adoption tax credit has been extended through 2011, increases to $13,170 and is now refundable. This is big news for those involved in or considering the adoption process.
• SAFRA – The Student Aid and Fiscal Responsibility Act: If you go to the Committee on Education and Labor website (http://edlabor.house.gov/blog/2009/07/student-aid-and-fiscal-respons.shtml) you will clearly see the villagers rejoiced! However, according to Neal McCluskey of www.forbes.com, “Contrary to what Kline suggests, guaranteed lending is about as close to a free market as a biplane is to the Starship Enterprise. Under FFEL, Washington guarantees lenders--including Fannie's cousin, Sallie--a profit on student loans, reimbursing them almost completely on defaults and paying big subsidies.”
• The Doughnut Hole Provision: It’s a $250 rebate in 2010 to seniors participating in Medicare Part B prescription coverage. For 2010, there is a coverage gap in Medicare Part B, referred to as the Doughnut Hole. This rebate is intended to assist seniors with their cost of prescription medications. In 2011, when a senior reaches the doughnut hole, they will be given a 50% discount on the cost of brand name drugs while in this gap. 
• Calorie Count: If you’ve been to a fast food restaurant lately, you may have noticed calorie counts next to menu items. I noticed this recently at a visit to Panera Bread. I was quite surprised at the information those calorie counts provided. I’m sure the plan is to make us consider better options when visit a fast food joint, but I suspect that most of us are aware there are few great caloric options before we visit such an establishment. This provision also applies to food and drinks in vending machines. Be prepared for guilt to accompany your mid-afternoon calorie laden boost!

Gov't Website on Health Care Reform


*****Remember, the new credit card laws go into effect today, August 23, 2010. Be vigilant about watching your statements!

Health Care Reform Tax Implications

Although health care “reform” has been passed, there is still considerable debate that rambles on (makes a little Led Zeppelin run through my mind! “And to our health we drank a thousand times, it's time to ramble on.”). Rumors float around, often based on party lines and party objectives. While I do indeed have my opinions on the health care situation, there are tax facts that are simply facts, regardless of my political leanings. As a result of one of the rumors spreading like wildfire, I’ve decided to make today’s topic about health care reform.


Just the facts:

• There are a number of aspects in what has passed as health care reform. First, I’ll address the rapidly spreading rumor. 
• Part of the bill the bill that passed: TITLE IX REVENUE PROVISIONS- SUBTITLE A: REVENUE OFFSET PROVISIONS-(sec .9001 , as modified by sec. 10901) Sec.9002. "requires employers to include in the W-2 form of each employee the aggregate cost of applicable employer sponsored group health coverage that is excludable from the employees gross income."
• This would be the rumor going around: “Starting in 2011—next year—the W-2 tax form sent by your employer will be increased to show the value of whatever health insurance you are provided. It doesn't matter if you're retired; your gross income WILL go up by the amount of insurance your employer paid for. So you’ll be required to pay taxes on a larger sum of money that you actually received; take the tax form you just finished and see what $15,000.00 or $20,000.00 additional gross income does to your tax debt. That's what you'll pay next year. For many it puts you into a much higher bracket. This is how the government is going to buy insurance for fifteen (15) percent that don't have insurance and it's only part of the tax increases, but it's not really a "tax increase" as such, it a redefinition of your taxable income.”
• Providing this information on a W-2 gives the IRS the ability to cross reference claims for health insurance credits (which will be addressed later) claimed by employers. By putting it on an employee’s W-2, it will have a tendency to make employers honest. Many employees would question an entry for health insurance premiums on their W-2 if they did not receive the benefit. 
• Beginning in 2011, you can no longer receive reimbursements for over-the-counter medications from your health savings accounts, flexible spending accounts or health reimbursement arrangements. Given the number of medications that are now available OTC, this is probably the hidden little gem that will have a large impact on your pocketbook.
• In 2013, if you itemize, the floor for medical expenses will jump to 10% from 7.5%. Individuals 65 and over will not be affected until 2016. I’ll be interested to see how a married couple is to handle the circumstances if one of them robbed the cradle! 
• Also beginning in 2011, the penalty for nonqualified distributions from health savings will double to 20%. That’s just the penalty. You will still have to pay income tax at your applicable rate on the distribution.
• Beginning in 2013, there will be a Medicare tax of 3.8% on INVESTMENT income of high income individuals. It will apply to the lesser of an individual’s unearned income or the amount their adjusted gross income exceeds threshold amounts ($200,000 for single or $250,000 for married filing joint).
• Another whopper in 2013; for taxpayers having wages in excess of $200,000 for single or $250,000 for married filing joint, there will be a 0.9% Medicare surtax applied to those excess wages.
• For you tanning bed worshippers, there is NOW an excise tax of 10% on indoor tanning services. This went into effect July 1, 2010.
• Also beginning in 2013, there will be a substantial drop in the amount employees can contribute to their health care flexible spending account – from an employer decided limit down to $2,500. If there has been some major surgery you’ve been putting off, I would plan for it before 2013 begins and utilize the FSA as best you can!
• In 2014 we have a refundable tax credit available to assist low income taxpayers with the purchase of health care coverage. The credit will phase out completely at $44,000 for single and $88,000 for married filing joint. 
• In 2010, there is a credit of up to 35% of health insurance premium costs available to small companies with 10 or fewer employees with average annual wages of less than $25,000. It is completely phased out if a company has more than 25 employees and the average annual wage is above $50,000. In 2014, things change!!! Each state will be required to provide a marketplace, Small Business Health Options Programs (SHOPS), where small businesses, self-employed taxpayers and individuals can purchase coverage. Small businesses that participate will be eligible for a credit of up to 50% of the costs (has the same phase outs). The opportunity for the credit ends after 2015.
• The “Individual Mandate” goes into effect in 2014. Individuals that do not acquire adequate health insurance coverage by 2014 will be subject to a tax that is the greater of $95 or 1% of adjusted gross income. In 2016, that rises to the greater of $265 or 2.5% of adjusted gross income.
• The whopper of 2014; the “Employer Mandate”. There will be a non-deductible fee imposed on business with 50 or more employees and the company does not offer the option of adequate coverage. The fee???? $2,000 per employee (although the first 30 employees do not figure into the fee calculation).

There is much, much more to the health care reform, but this is probably more than enough to digest at one sitting. Keep an eye out for the sequel!

“Mine's a tale that can't be told, my freedom I hold dear.”

What to Watch for with Business Auto Expenses….. Mileage or Actual Expenses?

The other day, I was having a casual conversation with someone who was repeating “expert advice” they had read on-line regarding business related auto expenses. I was certain they had interpreted said “expert advice” incorrectly. I informed them of the proper rules, but thought I should check what is indeed out there on-line from these “experts”. The information available on numerous sites (do they just copy each other?) was erroneous, hence today’s blog topic was born.


By far, the most common misinformation out there is regarding what is allowed the first year you claim auto expenses for a particular vehicle in your business. Many claim that you MUST claim actual expenses the first year of business use of a vehicle. This cannot be further from the truth (except when you have more than four vehicles, then do must use actual expenses). As a matter of fact, using actual expenses your initial year means you have to use actual expenses on the vehicle for the rest of time you own that vehicle!!!!

You DO have a choice (with 4 or less vehicles) between actual expenses and standard mileage, and that choice needs to be made the first year. If you choose actual expenses, you are married to that for the life of the vehicle. This may be the best option if you won’t have the vehicle beyond a few years. It enables you to take accelerated depreciation (Section 179 or bonus depreciation) in addition to the costs of running and maintaining that vehicle. One caveat, if you sell the vehicle, you may be subject to some recapture of that accelerated depreciation, which creates taxable income. If you trade-in the vehicle, the accelerated depreciation transfers to the new vehicle (you cannot take it again on the new vehicle with the trade-in), and that recapture gets deferred until you sell the new vehicle.

If you will have the vehicle for a number of years, standard mileage will usually be the better option for the long run. You may end up taking mileage expenses beyond the actual cost of the vehicle. If you choose standard mileage, you have the option of changing to actual expenses at a later date. Depreciation needs to be calculated for prior years in which standard mileage was taken, using straight-line depreciation to determine the remaining useful life of the vehicle. Items such as tolls and parking may be deducted in addition to the standard mileage.

The best thing to do for record keeping purposes is to keep some sort of log book in your car (if you use your cell phone, but sure to sync it with your computer in case you lose your phone!) and record the following information each time you drive the car for business reasons:

                                       • Date
                                       • Beginning odometer reading
                                       • Ending odometer reading
                                       • Business purpose
                                       • Place visited

Remember to check with a qualified tax advisor, discuss your future plans and determine the right choice for your business.

*A little known fact about mileage: generally miles commuting to work are NOT deductible, but if you have a second job, those commuting miles are deductible. This would be claimed on Form 2106 and Schedule A. If you don’t itemize (file a Schedule A), then it probably will not be of value to you.

What's Deductible in Your Job Search?

Job hunting. It may be the most commonly used phrase in the country at the moment - okay, maybe after "healthcare reform". If you aren't looking for a job, someone you know is.  We've all seen the ad with the seemingly lost gentleman in the barber chair, asking if the hair cut is a deductible job hunting expense. There is a lot of confusion as to what is deductible and what is not. I'm going to do my best to make things clear.


Let's talk about where on the tax return job hunting costs are reported. It's on Schedule A - Itemized Deductions. If you don't already itemize, it's very unlikely that you will be able to deduct the costs of job hunting. Additionally, before the costs can even begin to be deductible they, along with other miscellaneous expenses, must exceed 2% of your Adjusted Gross Income (AGI). Your AGI in the number at the bottom of page one of your Form 1040. So, if you and/or your spouse have wages, interest and dividend income, unemployment, etc. equal $50,000,  your miscellaneous itemized deductions would not kick in until they exceeded $1,000.


Items that ARE considered deductible job hunting expenses:

• Travel and meals
• You can deduct mileage at standard rates (2009 is .55 cents) while job hunting for a new job in your present occupation. If you travel somewhere for your job search, you may deduct those costs as well. However, and that's a big however, only if the purpose is truly job hunting. One day of job hunting and 3 days of recreation will make the travel expenses non-deductible. Meals are only deductible at 50%. If the travel itself is not deducitble, expenses directly related to job hunting on the trip (such as cab fare to an interview) are deductible.
• Employment and outplacement agency fees
• You can deduct employment and outplacement agency fees you pay in looking for a new job in your present oocupation. If you get a new job, and an employer reimburses you these fees, they are not deductible. If you deduct the fees and are reimbursed in a subsequent year, you will need to add the amount you were reimbursed (up to what you deducted) to your gross income. You cannot deduct fees paid on your behalf by an employer.
• 
  
   Resume Preparation and Distribution
• You may deduct the costs of having your resume prepared, printed, and mailed while looking for a job in your present occupation.

Items that ARE NOT considered deductible job hunting expenses:

• Personal Appearance
• The answer to the television ad mentioned earlier is no. No to dry cleaning, suits or any other clothing, manicures, hair cuts or any other personal item.
• Not Your Present Occupation
• You cannot deduct the costs looking for a job in a new occupation, you are looking for a job for the first time, or if there has been a substantial break in your employment. An example of this would be if you were a stay at home mom or dad, and have decided to re-enter the workforce.
• Anything not mentioned above!!!

A few other helpful hints:

• If you have child care expenses while job hunting, those expenses can be deducted as a Child Care Credit on Form 2441.
• Job relocation expenses are deductible, but the new job must be full time and at least 50 miles farther from your current home than your old job was. Types of expenses that qualify are the costs of packing and moving your belongings, and the cost of transporting you and your family to the new location. If you travel in your vehicle, you may deduct mileage at .24 cents/mile. You cannot deduct meals.
  For more information, see Publication 521, Moving Expenses.
• Normally commuting miles are not deductible. However, if you have more than one job, travel to your second, or even third job, on the same day is deductible at standard mileage rates. If you work the second job on a day off from the first, it is considered commuting and not deductible. See Publication 463, Travel, Entertainment, Gift and Car Expenses for more information.

Monster.com
Careerbuilder.com
USA Jobs - The Federal Government's Job Website

Independent Contractor vs. Employee

In these difficult economic times, it's easy to fall into the trap of paying workers as independent contractors as opposed to employees to help to ease the cash flow burden. The topic is one that I am asked about in just about every social situation. The majority of the time my answer is, "No, they are NOT an independent contractor."  One of the first questions I ask is if this person puts themselves out for hire to anyone else. Do they have a business card, yellow page ad, web site, etc. advertising themselves as an independent contractor? If you can't answer "yes" to this question, it's a strong indication that you have an employee and not an independent contractor.

One of the pitfalls of this shortcut is that the employee realizes when it comes tax time they owe self-employment tax in addition to income tax. Regardless of how strong an employer believes the relationship or friendship is with the person in question, things become sticky.

The "employee" feels they should not have to carry the burden of the additional tax, and as a result, will inform the Internal Revenue Service, or their respective state agency, that they were indeed an employee under the complete control of the employer. Business owners often kid themselves into thinking this situation would never happen. It can, and it will.

Please see the following links for more information. The article on CFO.com stresses the IRS's current crackdown.

IRS - Employee vs. Independent Contractor

Cracking Down on Independent Contractors - Careers - CFO.com

IRS Increasing Investigations of Preparers of Fraudulent Tax Returns

According to the IRS, the service is stepping up the investigations of fraudulent preparers. Unfortunately for taxpayers, they are often unaware of the intent of the preparers, and generally just happy that they have received a refund. But, with that comes risk. The taxpayer will still have the tax liability, penalties, and interest to pay, causing great financial burden for the taxpayer.

According to the IRS, return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits, or excessive exemptions on returns prepared for their clients. Abusive preparers may also manipulate income figures to obtain fraudulent tax credits, such as the Earned Income Tax Credit.

The IRS has found that these preparers derive financial benefit from a number of ways, including diverting a portion of the refund for their own benefit; charging inflated fees for the return preparation services; and increasing their clientele by advertising guaranteed larger refunds.

The following are signs of a fraudulent preparer:

           • Claims to be able to obtain larger refunds than other preparers;
           • Fee is based on a percentage of the refund obtained, and:
           • Refusal to sign the return or provide the taxpayer with a signed copy of the return.

The IRS reminds us, “Taxpayers need to keep in mind that they are ultimately responsible for their tax return.” The IRS recommends following these tips when hiring a preparer:

           • Get referrals from satisfied clients (hint: the amount of the refund should not be a factor – a high
                    refund return does not indicate it was prepared properly);
          • Ask the preparer about their training, experience, and current knowledge of tax law;
          • Find out if the preparer can represent taxpayers in an audit. Only Certified Public Accountants,
                    Enrolled Agents, and lawyers are authorized to represent taxpayers in front of the IRS;
          • Consider whether the individual or the firm will be around to answer questions about the
                    preparation of the tax return months or even years after the return has been filed;
          • Always review the return before signing, ask questions on entries you don’t understand, and get a
                    copy of the return for your records;
          • Never sign a blank tax form or one completed in pencil.


Anyone who suspects tax fraud or knows of an abusive tax preparer should fill out Form 3949-A
Form 3949-A

Head of Household When and You're Married?

How can that be right?? A person can claim "Head of Household" while married???

Odd as it may seem, it is quite true. But it's not as simple as just being married. The married taxpayers need to be legally separated AND not have lived together for the last six months out of the tax year. The household must be the principal home of the child(ren). The person claiming Head of Household must furnish over half of the cost of maintaining the household.

The spouse who files head of household may also use the full standard deduction, even if the other spouse itemizes deductions (or vice versa). If you are legally separated, be sure to let your tax preparer know of your status.