Tax Tips

Monday, July 24, 2006

“Retroed” Credits

R&D credits may have expired on Dec. 31, 2005, but there is a strong possibility that they will return. If this is the first you are hearing of this credit, the clock is ticking. You will have only so long to file an amended return. If you already know of this credit and are waiting for its return, keep your records current because there is a history that the R&D credit will be “retroed” back to Jan. 1, 2006.

W.O. Mills III, CPA
Dallas, Texas
http://www.womills.com

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Tuesday, July 25, 2006

Take Smart Deductions

Sometimes it’s better to pay tax than to spend money on unneeded items. It doesn’t make good business sense to spend $10,000 on equipment just to write it off as a deduction. Taking into account the $2,500 tax benefit you may receive, your company is still out of pocket $7,500 unnecessarily.

Don Waters, CPA
Don Waters & Associates
Arvada, Colo.

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Wednesday, July 26, 2006

Had Too Much Taken Out — or Not Enough?

You might be better off if the taxes deducted from your paycheck equal the amount you actually owe — not too much, not too little. For “just right,” adjust your tax withholding on your W-2 (use form W-4). And don’t forget your quarterly estimated tax payments on income not subject to withholding, such as income from self-employment, interest, dividends and alimony. Use the Withholding Calculator and check out Publication 505 to determine the proper amount of withholding or estimated tax.

W.O. Mills III, CPA
Dallas, Texas
http://www.womills.com

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Thursday, July 27, 2006

Form 944

To reduce the burden for certain small-business taxpayers, employers who have an employment tax liability of $1,000 or less for the year will now file Form 944, Employer’s Annual Federal Tax Return, instead of Form 941, Employer’s Quarterly Federal Tax Return. Eligible taxpayers will be notified by mail.

Philippe de Vendegies, Accountant
(773) 764-2100
Chicago, Ill.
commerceoutil@yahoo.com

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Monday, June 26, 2006

Ways to Reduce Operating Costs

Business owners today can reduce operating costs, enhance their financial benefits from operations and possibly improve the bottom line by using the following strategies: Own their commercial building as a separate entity, and lease it back to their business. This income is nontaxable at the personal income tax level, and the entity that receives the income may have no or a low tax rate. In addition, if they were to establish an equipment leasing company and lease the equipment to their own company, it will lower the owner’s salary and still allow the owner to receive financial benefit from operations.

These strategies ensure compensation to the business owner in a low-margin business, provide asset protection, and are a means of improving the bottom line when business owners are in a tough battle to increase gross revenues.

Rosiland Moore, MBA
Moore Systemworks
Phoenix, Ariz.
http://www.mooresystemworks.com

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Tuesday, June 27, 2006

Think Like Corporations Do

Even though your small business is not a corporation, it’s important to think like one when it comes to your finances. Failing to keep a general ledger can cause you to pay more in taxes when April 15 rolls around. If you’re familiar with double-entry bookkeeping, you can maintain a manual general ledger. But it may be easier for you to use a small-business accounting program for the basic structure of the general ledger; at year-end your accountant can review your entries and add the year-end journal entries necessary for taxes. Not only will you have much better records if you need to substantiate your deductions, it will make the chore of assembling records at year-end much easier.

If you’re incorporated and depending on your corporation for liability protection, a general ledger is a must. It’s also a good idea to keep separate checking and credit card accounts for your business so that you can have separate records of business transactions.

Alice Burnett CPA, CFP
The Business Edge Inc.
9192 Red Branch Road
Suite 280
Columbia, MD 21045
http://www.BusinessEdgeInc.com

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Wednesday, June 28, 2006

Tax Warning for Divorcing Couples

As a small-business owner, you are naturally concerned about cash flow and tax implications. Divorce has become far more common today than in the past and can be extremely difficult on the small-business owner. If you are in the process of contemplating a divorce, be aware that the tax implications can be significant in minimizing or increasing the cost of divorce. Failure to give these implications adequate consideration can wreak havoc on the unaware and make a difficult process worse.

First — and most often overlooked — is filing status. Until a divorce is final the parties are still married under the tax code. The tax code looks to state law to determine when the parties are legally divorced. If the resident state law includes a so-called “cooling off” period, the divorce is not final until that period has ended. If this period is stilling running on Dec. 31, the parties are still married and must file a joint return or a married filing separate return. If dependents are involved, head of household filing status should be considered. The rules are complex, but it may well be worth the effort and save significant tax dollars.

Be aware that just because the parties want to categorize payments as either alimony or child support does not mean the tax code will reflect that view. Be sure to consult a tax advisor knowledgeable in divorce matters to make sure the agreement provides the tax treatment desired. Alimony is defined in the Internal Revenue Code, and failure to fit payments within the Code definition can be a costly mistake.

Finally, the issue of the dependency exemption and the associated child credit and earned income credit can become a significant consideration. The tax law awards the exemption to the custodial parent absent an agreement between the parties. If the exemption is to be taken by the non-custodial parent, be sure to file form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents. Many joint custody provisions make the determination of the actual custodial parent difficult. Be sure the written document gets the desired result.

Equally important is the time lost due to court appearances and depositions.

Divorce is a stressful and unpleasant experience in the best of circumstances. Tax planning for the divorce can help to lessen the financial stress.

Wayne E. Krupsky, CPA MST
Wayne E. Krupsky, CPA P.C.
900 Cummings Center, Suite 219U
Beverly, MA 01915
(978) 921-4700
http://www.cpawayne.com

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Thursday, June 29, 2006

What Not to Do With Your Refund

The good news for small-business owners is that, with sound tax planning, they may be eligible for refunds on their personal taxes. The bad news is that many are squandering their refunds irresponsibly. These are among some of the worst mistakes that you can make:

• Purchasing a new car. Often paying for repairs on your own vehicle is far less expensive than the cost of purchasing a new one. In addition, be careful when using increased fuel mileage to justify purchasing a new car. You need to take into account how much driving you really need to do, multiplied by the savings in gasoline and divided by miles per gallon, compared with the incremental cost of buying the car over keeping the old car.
• Gambling. An activity tantamount to throwing your money away, gambling doesn’t necessarily mean a weeklong trip to Las Vegas. It also includes playing the lottery for the infinitesimally small chance of actually winning.
• Paying your credit card debt with refinanced debt. When you put your credit card debt on your mortgage, you put your house at risk. The first rule of managing debt is never to convert unsecured debt to secured debt. Furthermore, never convert short-term debt to long-term debt.

Avoid these all-to-common mistakes and instead look at your income tax refund as an exceptional windfall toward paying down some of the worst debt that you can carry, credit card debt. Once you free up the money that goes toward interest-accruing debt, you can apply it to a number of money-saving investments.

Al Giovetti
Giovetti and Giovetti, Certified Public Accountants
Catonsville, MD
http://www.thecomputershow.com

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Friday, June 30, 2006

Transportation Industry Deductions

People who work in the transportation industry — such as truck drivers, pilots and flight attendants — are recognized by the IRS as having unusual demands on their time and are therefore offered more liberal tax deductions. For instance, because they can't avoid eating at restaurants, transportation workers can deduct 70 percent of their per-diem amount, compared with people in other industries who can deduct only 50 percent of their meal costs. It's important that employees in this industry are cognizant of the laundry list of deductions available to them at tax time so they are compensated for their difficult lifestyle.

Dan Farmer, CPA
The Accounting and Tax Company
Coral Gables, Fla.
http://www.accountingandtaxcompany.com

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Monday, April 17, 2006

Coordinated Tax Strategies for Business Owners

Business owners need to make sure that the tax strategies they have in place for their businesses and their personal situations are in line with one another. Many business owners fail to capture many benefits available to them by not coordinating the two often-conflicting approaches. Simple changes in business structure and deferred income plans as well as capturing all available business deductions can reduce their exposure to tax by several thousand dollars. Make sure that your team of professional advisors, which include your CPA, attorney and business consultants, have open lines of communication to help you manage the two strategies.

Robert C. Jones, CPA
RC Jones and Associates Inc.
Office: (816) 792-9966
Fax: (816) 792-8622
Mobile: (816) 419-7864
info@rcjonesinc.com
http://www.rcjonesinc.com

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Tuesday, April 18, 2006

The Moral Behind the Tax Story: Part Two

A doctor was referred to us by his attorney. He was worried because an IRS agent had shown up at his office unannounced and presented an audit notice. The office manager had allowed the auditor to pull bank statements from the files to verify gross income. The auditor discovered additional bank accounts in the files and expanded the audit to the doctor’s other business activities. Documentation for these returns was then produced. Because the auditor could not recreate the income as reported on the returns, the IRS assessed unpaid tax of $440,000. After completing books, we filed amended returns on which the doctor had to pay about $100,000 in tax and penalties.

Moral: If an IRS agent shows up at your business, call your professional tax advisor and do not disclose anything. Refer them to your tax professional.

Michael Minyard, MBA, CPA
Michael Minyard & Co. PC, CPAs
http://mmcopc.com

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Wednesday, April 19, 2006

Expense Credit for Modification of Premises

Are you a small business that has spent money to make your premises accessible to your customers under the Americans with Disabilities act of 1990? If so, don't forget to take the credit on expenses made this year. The maximum eligible expenses are $10,250, and the maximum credit allowed is $5,000 for 2005. Consult your tax preparer for the expenses that qualify.

Linda Geary
The Geary Group PC
Shelby Township, Mich.
http://www.gearygrouppc.com

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Monday, April 10, 2006

Paying for Private School or College?

Tuition and other expenses for your children’s private school or college are not deductible. However, if you hire your sons or daughters to work in your business, their salary and fringe benefits are deductible and they will then have the money to pay some or all of their own tuition and expenses. Pay them fairly and require that they work, but remember, they do not have to be on your premises to be an employee. Today, with the huge volume of work being done over the Internet, your university student can work online for your company from college doing research, billing, marketing, editing or many other services.

Charles R. McCann, CPA
McCann CPA, PC and McCann Del Greco Associates LLC
mccann@mccanndelgreco.com
http://www.mccannbusinessgroup.com

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Tuesday, April 11, 2006

Property and Services as Income

If you receive property or services instead of money as rent or payment for services, you must include the fair market value of the property or services as your income for the year.

Remember that personal interest is not deductible. Examples include interest on a loan to purchase an automobile, credit card interest and installment interest incurred for personal expenses.

You cannot deduct contributions made to a political candidate, a campaign committee or a newsletter fund. Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible.

Jason Woytek
P.C. Rescue
Houston

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Wednesday, April 12, 2006

Deciding Between an LLC and an S-Corporation: Owner Compensation

Neither an LLC nor an S-Corporation pays taxes on its own because the company’s income and expenses pass through to the owners. However, there are significant differences between the two when it comes to compensating an owner active in the business. An S-Corporation owner is required to be on the payroll and receive a “reasonable salary” if the company is making money. An LLC owner can never be on the payroll, but rather can withdraw cash as a “guaranteed payment.” Or, the LLC owner can wait until the end of the year and pay self-employment taxes on all income. These are general descriptions of the tax situation related to paying owners of LLCs and S-Corporations. Nuances abound, so seek professional advice to match your desired tax result with your business and personal goals.

Andrew S. Goloboy, CPA
Managing Partner
andrew.goloboy@g-cpa.com
http://www.g-cpa.com

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Thursday, April 13, 2006

Tips on Choosing a Tax Return Preparer

Every year, taxpayers go through the process of completing their annual tax return. Some will complete the return with the forms provided by the Internal Revenue Service; some will use basic tax preparation software bought at the local office supply store; and others will have someone else prepare the returns for them. For those in the latter category, doing a little research can often prevent grief and frustration.

Below are some suggested steps to follow in choosing your tax preparer. Not only will these steps assure you that your preparer will meet your needs, but it will also provide some additional comfort during a stressful time of year.

• Research the tax preparer. Check to see if the preparer has any questionable history with the Better Business Bureau (http://search.bbb.org/search.html). In addition, if the tax preparer is a CPA or attorney, check with the state's board of accountancy) or the state's bar association to make sure he or she is in good standing with the appropriate state regulatory agency.
• Interview prospective preparers before handing over your financial information and definitely ask for references. Ask them what professional organizations they belong to. Are they required to have continuing education each year? If so, what classes did they take in past six months? If the preparers belong to professional organizations, ask if members are held to a code of ethics.
• Determine if the preparer has the necessary credentials to meet your needs. If your return is complex, it is advisable to seek the assistance of a certified public accountant, tax attorney or enrolled agent. These are the only three professions that can represent you in front of the IRS in all matters, including audits, collections and appeals. Those other than CPAs, tax attorneys and enrolled agents are allowed to represent the taxpayer during an audit only if he or she signed as the preparer of the return.
• Make sure that you will be able to contact the preparer after the return is filed. Many "tax shops" will shut down after April 15, could leave you calling an 800 number should any issues come up after your return has been filed.
• Ask about fees. While it is almost impossible to know the exact time it will require to complete a tax return, an estimate should not be out of the question. Avoid tax preparers who claim to be able to obtain larger refunds than others and also avoid those who base their fees on a percentage of your refund.
• Ask about the preparer’s policy if a mistake is made. Reputable firms and individuals will usually pay any penalties (but not the additional taxes) if they make a mistake which causes the taxpayer to pay additional taxes.

Finally, anyone suspecting tax fraud and/or abusive tax preparers should call the IRS at (800) 829-0433.

J.A. Lesemann Jr., CPA
Huntersville, N.C.

J. A. Lesemann Jr., CPA, is managing member of Lesemann & Associates, PLLC Certified Public Accountants, located at 107 S. Old Statesville Road in Huntersville. He can be reached at (704) 948-2735 or at Jay@LesemannCPA.com.

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Friday, April 14, 2006

The Moral Behind the Tax Story

When we completed a client’s preliminary tax returns, we were surprised at the large amount of tax due. Our client, a subcontractor, seemed to have missing expenses and duplicated income. Our experience indicated that his numbers were out of line. As we analyzed the books, we noted numerous checks written to the owner in addition to his payroll checks. Quizzing him about the checks, we found that he frequently used cash to purchase supplies or other items needed on the job and loaned money to employees until payday. Fortunately his wife collected receipts from his pockets and kept them. By adding them up and connecting the expenses to the jobs reduced the tax due by more than 50 percent.

Moral: Set up an accounting system to capture all expenses incurred in the normal course of business.

Michael Minyard, MBA, CPA
Michael Minyard & Co., PC, CPAs
http://mmcopc.com

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Monday, April 3, 2006

Earned Income Credit

There are a number of taxpayers who fail to claim the earned income credit benefit. Most taxpayers fail to apply because they do not realize they qualify. There are many benefits for those who qualify. Taxpayers can claim the credit or owe less federal tax. In addition, taxpayers who qualify could also owe no taxes or actually receive a refund check. My advice to taxpayers is to make sure that they are qualified to receive the earned income credit before filing their returns. Obtaining information from the IRS or a qualified tax professional is the best way to avoid tax liabilities and audits.

Mark Forrest
Accountant
Chicago, Ill.

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Tuesday, April 4, 2006

Start-up Expenditures (Section 195)

Effective Oct. 22, 2004, taxpayers can elect to immediately deduct up to $5,000 of start-up and organizational costs, reduced by the amount of total start-up and organizational costs exceeding $50,000. Expenditures that are not immediately deductible may be amortized over a 15-year period.

A valid election to deduct and/or amortize must be made by the due date of the return (including extensions) for the year in which the business begins. The election may not be made on a subsequent amended return, and therefore the deduction is lost if not made within the prescribed time frame.

Scott Reynolds
R. Scott Reynolds, CPA
Surprise, Ariz.

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Wednesday, April 5, 2006

Hope and Lifetime Learning Credit

If you cannot claim the Hope Credit or the Lifetime Learning Credit because your modified adjusted gross income (MAGI) exceeds $53,000 ($107,000 on a joint return), you may be eligible to deduct up to $2,000 or $4,000 of qualifying higher education tuition and fees paid during 2005 on your 2005 return.

The deduction is claimed directly from gross income on Line 34 of Form 1040 (whether or not you itemized), or on Line 19 of Form 1040A. If your MAGI for 2005 does not exceed $65,000 or $130,000, if filing jointly, your maximum deduction for tuition and fees is $4,000. If MAGI is more than $65,000 or $130,000, but not more than $80,000 or $160,000 if filing jointly, your maximum deduction is $2,000. No deduction is allowed if your MAGI exceeds $80,000 or $160,000 if filing jointly.

The deduction cannot be taken in addition to the Hope Credit or the Lifetime Learning Credit. Although credits are more beneficial than deductions, the deduction benefits those whose MAGI falls between $53,000 ($107,000 on a joint return) and $80,000 ($160,000 on a joint return).

Legislation to extend the deduction past 2005 has not yet been enacted, but is expected to be passed.

Both the Hope and Lifetime Learning Credits for 2006 will be phased out over an AGI range of $45,000–$55,000 ($90,000–$110,000 if filing jointly).

Terri R. Ferran, CPA
Riverton, Utah

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Thursday, April 6, 2006

Relief for Volunteers of Katrina

Volunteers who provided donated services for Katrina relief efforts can claim 70 percent of the business mileage rate between Aug. 25, 2005, and Dec. 31, 2005. This is great news because normally the mileage rate for charitable deductions for the 2005 tax year is 15 cents per mile plus tolls and parking, and those costs are only deductible if they are not reimbursed by the charity. The business rate was 40.5 cents until Aug. 31 and 48.5 cents for Aug. 31, 2005, to Dec. 31, 2005.

Princess Clark-Wendel
Princess Clark Consulting Inc.
Chicago, Ill.

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Friday, April 7, 2006

Stay Away From the Grey

Be honest in your business dealings, in your reporting to the IRS and in life in general. Don’t cut corners to save a few dollars today, because it will likely cost you big down the road. Keep good records and stay away from the grey.

Mark Strong
Strong & Strong LC
Springville, Utah

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Monday, March 27, 2006

Katrina Emergency Tax Relief Act of 2005

The Katrina Emergency Tax Relief Act of 2005 contains tax breaks not only for victims of the disaster but for individuals and businesses helping in the recovery. While not too many people currently in the New England area were victims of this disaster, many may qualify under new rules for those helping in the recovery. Following are some of these benefits for which you, or someone you know, may qualify.

Individuals who use their principal residence to provide housing free of charge to evacuees for at least 60 consecutive days may claim a $500 deduction from taxable income for each evacuee residing in the taxpayer's home.

Generally, for individuals, contributions to charitable organizations are limited to 50 percent of the taxpayer's adjusted gross income for the year. The new law removes the 50 percent limitation for the period beginning on Aug. 28, 2005, and ending on Dec. 31, 2005.

Taxpayers using a personal vehicle for any charity work may claim a tax deduction of 14 cents per mile in lieu of a deduction based on actual expenses. The new law raises the rate for charity work related to Hurricane Katrina to 70 percent of the standard mileage rate for business use for the period beginning Aug. 25, 2005, and ending Dec. 31, 2006. The current standard business mileage rate is 48.5 cents per mile, making the mileage rate for Hurricane Katrina charitable work 34 cents per mile.

For corporations, the charitable contribution deduction is generally limited to 10 percent of taxable income for the year in which the contribution was made. The new law waives the 10 percent limitation for Hurricane Katrina cash donations made to a charitable organization if the corporation elects this treatment.

More new rules apply for corporations that donate food or books from inventory to charitable organizations and schools in the disaster area. The rules allow for more beneficial valuation of these items, and therefore, greater deductions. In addition, employment credits are available to employers who hire individuals that were victims of Hurricane Katrina and forced to relocate.

The Katrina Emergency Tax Relief Act of 2005 provides many new tax relief provisions. The items mentioned above comprise a brief overview of a few. Please contact your tax advisor for additional information.

Author:
Jonathan C. Hitter, CPA, MST
Walter & Shuffain, P.C.
Norwood, Mass.

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Tuesday, March 28, 2006

Section 179 and New Technology Purchases

As we prepare tax returns for 2005, we can spot potential tax savings for 2006 for ourselves and our clients. When considering the cost benefits of purchasing new computers and off-the-shelf software, review Section 179 of the Tax Code.

Author:
James Willis Davis, CPA
JWD Management Consulting
Chicago, Ill.

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Wednesday, March 29, 2006

Domestic Producers Deduction (DPD)

For tax years beginning in 2005 and 2006, a deduction is allowed for 3 percent of the lesser of qualified domestic productions activities income or taxable income. It is commonly known as the “production deduction." While this deduction is primarily available to manufacturers, other industries such as farming and construction can benefit. This deduction is a calculated amount and is taken in addition to the regular deductions on a corporation or individual's income tax return. In effect, if you qualify, it's a freebie. The deduction increases to 6 percent for 2007, 2008 and 2009 and to 9 percent thereafter.

Author:
David N. Wurst
Walker & Wurst, CPA, PA
Charlotte, N.C.
dwurst@walkerwurst.com

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Thursday, March 30, 2006

Consider a Roth 401(k).

Starting in 2006, employer-sponsored 401(k) plan may be converted to a Roth 401(k). The benefits of owning a Roth 401(k) are similar to those of having a Roth IRA, where contributions to the plan are pretaxed but distributions are tax-free. You can elect a Roth 401(k) only if your employer offers it as an option.

What sets it apart from traditional 401(k) plans is the way participants are taxed. You make your contributions with after-tax dollars, but when you withdraw money from a Roth 401(k), it comes out tax free. Here's a look at the issues surrounding the Roth 401(k) and what you should consider before you open one.

How is the Roth 401(k) different?
Unlike traditional 401(k)s, which offer tax-deferred growth, participants in a Roth 401(k) pay their taxes up front. If you put $15,000 in a traditional 401(k), you slice $15,000 off your taxable income for the year. Now assume your investment grows to $45,000 over time, and your tax bracket is 33.33 percent. Because all your contributions are tax-deferred, you pay no income taxes until you take a distribution, which can start when you reach age 59.5. When you tap the account, you'd end up with $30,000 after taxes.

Let's use those same assumptions with a Roth 401(k): You'd need $22,500 worth of income to get that $15,000 investment, since you'd pay taxes up front ($7,500). The flip side is that you get to keep the entire $45,000 that accumulates in the account.

Who is eligible for a Roth 401(k)?
Unlike a Roth IRA, which has strict income limits, there's no velvet rope as an obstacle to getting into a Roth 401(k). Like traditional 401(k)s, Roths have a catch-up provision. Those 50 or older by the end of 2006 can contribute up to $20,000.

Can I still get a company match?
Employer matches will still be made with pretax dollars. But the match money will accumulate in a separate account and be taxed as ordinary income at withdrawal.

What are the withdrawal rules?
Roth 401(k)s are similar to Roth IRAs in this regard: Investors must hold their account for five years before they get a tax-free withdrawal. The rules are still fuzzy, but it appears that a Roth 401(k) will be similar to a traditional 401(k): You can take an early withdrawal, but you'll pay a 10 percent penalty if you do so. Money can also be paid out when you terminate employment or when you reach the age of 59.5.

Check out http://www.conlonconsulting.com/newsletter.html for our tax newsletter.

Author:
William Patrick Conlon, CPA
Conlan Accountancy Group
Sacramento, Calif.

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Friday, March 31, 2006

Track Your Mileage

Don't underestimate the value of tracking your mileage. At 44.5 cents per mile for business miles in 2006, it really adds up. The record-keeping takes a little time, but it is well worth it. Choose a simple way to track the mileage: a small memo pad in your car, jotting the mileage on your calendar, an Excel® spreadsheet — just keep it simple. In case of an audit, you will need to have the following information in your log: date, whom you went to see, miles driven, and, most important, the business purpose of your meeting. Remember to include trips to the bank, the office supply store, and, of course, meetings with your CPA.

Author:
Donna L. Bordeaux,
Certified Public Accountant &
Personal Financial Specialist
Charlotte N.C. 28277
www.dlbcpa.com

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Monday, March 20, 2006

Alternatives to “rolling over” company retirement funds

Commonly you will hear your stock broker advise you to "roll over" any funds you have in a company retirement plan into an IRA to defer the taxation on it until you withdraw those funds from the IRA in the future. However, if your retirement is invested in "employer securities," you may be able to take advantage of additional tax benefits that will not be available if you roll them over. For example, you can get capital gain treatment (taxed up to 15 percent) on any appreciation of the employer's securities that occurred while inside the company's retirement account. If you roll these investments into an IRA, you lose the ability to recognize the capital gains. Instead you will recognize ordinary income (taxed up to 35 percent) on distributions from your IRA.

A common form of legal entity these days is the LLC. Many lawyers are recommending LLCs these days because of their simplicity. If your business is an LLC, the default taxation is as a Sole Proprietorship (for single-owner LLCs) or a Partnership (for multiple-owner LLCs). However, you can save self-employment taxes if you elect for your LLC to be treated as an S Corporation. That is because the profits of an S Corporation aren't presently subject to self-employment taxes, whereas sole proprietorships and partnerships are.

Many small businesses elect to be treated as S Corporations because their attorney or accountant advised them to do so. The reason this is common is because profits (or losses) from an S-Corp flow through to the shareholders of the S Corporation, and the corporation isn't taxed itself, as opposed to a C Corporation. In a C-Corp, the company is taxed and then the shareholder is taxed again when dividends are paid out to the shareholders. Thus, a C-Corp is subject to "double taxation," whereas an S-Corp is not.

Sometimes the double taxation of a C Corporation can be less than the single taxation of an S Corporation. The profits of an S-Corp flow through to the shareholder and are taxed at the shareholders rates (which can be as high as 35 percent). If the C-Corporation made less than $50,000 in taxable income in a year, it is only taxed at 15 percent. Any dividend distributions will be subject to tax as high as 15 percent as well. However, these combined corporate and dividend rates equal 30 percent, which is 5 percent less than the 35 percent an S Corporation is taxed.

Author:
Stanley Dean, CPA
Stanley Dean and Associates P.C.
Atlanta

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Tuesday, March 21, 2006

The tax benefits of entities

So, the question is, how do you reduce your tax burden and improve your bottom line? Better paper trail? More aggressive interpretation of the tax code and an accountant that will let you take the deductions? Embezzle the money and move to the Cayman Islands? All of these are alternatives, and some even should be pursued. However, the tool most often overlooked in the in the frenzy to reduce taxes is the creative use of company structures, or entities.

What is an entity? In the sense we mean here, it is a legal structure registered with the state in which you are doing business. Examples are limited liability companies, corporations and limited partnerships. There are many reasons for forming an entity, but one of the strongest is for the tax benefits.

Tax benefits are the result of both the entity structure itself and the psychology we experience when we set up and run an incorporated business. Depending on the structure, we can take more or fewer business deductions against earned income. We can also pay more or fewer taxes on the money we pull out of the business to live on. We can also use multiple entities to split services and move money into a more tax-advantaged situation, or use different year-ends to spread out the timing of our taxes. The psychology of running an incorporated business is also important. When the business is an entity, we tend to pay more attention to the paper trail, making it easier for our CPAs to make suggestions on increasing our deductions and using creative ideas to lower taxes.

If you’re already in business, then you need to spend some time understanding how entities can play together to reduce your taxes and increase your wealth. If you’re not in business yet, then setting a home based business is an important first step to achieving the wealth that you desire. In either case, putting us on your team puts you on the right path to an abundant future.

Author:
Gary Bauer
Your Entity Solution
http://www.yourentitysolution.com
Las Vegas

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Wednesday, March 22, 2006

Five small business tax tips

Capture all of your expenses.
Credit card charges incurred near the end of the year will be billed on a statement that arrives in January. All charges incurred prior to the end of the year are counted as expenses in the year in which the charge is made, not in the year paid. Include these expenses to reduce your tax bite.

Most frequent bookkeeping mistakes.
One of the most common bookkeeping errors is entering the purchase of equipment or machinery as an expense. The appropriate treatment is to capitalize assets, and elect accelerated depreciation on your tax return to maximize expenses and reduce tax.

Get it right from the start!
When opening a new business, consult professionals to advise on a business structure. Select a form — corporation, S Corporation, LLC or proprietorship — appropriate to the business activities you envision. Set up books immediately and record all business transactions from the start. Often new businesses overlook the initial expenses of opening the business, which understates expenses and increases taxes.

Account for non-cash expenses.
Your bank does not do your accounting. There are dozens of transactions that increase expenses and do not go through a bank account. Your contribution of tools or equipment to the business is a good example, as is the use of a storage facility that you own. These may be expenses that will reduce taxes.

Hiring employees?
Set up payroll accounting and payroll accounts with the IRS and state. Pay withheld taxes, FICA and other payroll taxes as they become due. Delays or improper execution will result in a blizzard of notices and paperwork that will sap your ability to conduct business. As a responsible person in the business, you may be subject to 100 percent penalties for underpayment or failure to pay over all withheld payroll taxes.

Michael Minyard
Michael Minyard & Co. P.C.
Phoenix

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Thursday, March 23, 2006

Illegal tax avoidance schemes

Most have heard the phrase, “If it sounds too good too be true, then it probably is.” So why do honest, hard-working, tax-paying citizens fall for tax-avoidance schemes year in and year out? The answer is that most Americans are always looking to pay as little income tax as possible. When questionable companies hold seminars telling participants that there are tax deductions that “the government does not want you to know about,” many citizens usually think this is true and will buy the book that gives them all the untold secrets.

There are also tax “professionals” — both individuals and companies — that will guarantee you a bigger refund than you could ever get on your own or by using the tax preparer down the street. The tax law is the tax law. If you compare two tax professionals that have had the training and education necessary to prepare your tax return, there is usually little difference between the two.

Below are our top 10 illegal tax avoidance schemes that are currently being used:

1. “Never Pay Taxes Again!”
2. “I Don’t Pay Taxes – Why Should You?”
3. “Deduct the Cost of your Personal Residence!”
4. “Deduct the Cost of Your Child’s Education!”
5. “I Can Get You a Big Tax Refund for a Fee!”
6. “Share or Borrow Earned Income Tax Credit (EITC) Dependents!”
7. “Put Your Money in a Trust and Never Pay Taxes Again!”
8. “Taxes are Unconstitutional — Pay for Our Seminar and We Will Show You!”
9. “The IRS Doesn’t Want You to Know About This!”
10. “So New, Your Tax Professional Doesn’t Even Know About It!”

Remember, ask your tax preparer what tax-related classes he or she has taken this year. Every year the tax law changes. If your preparer doesn’t keep up to date on these changes, there might be problems down the road.

If you have any questions about this or any other tax matter, Lesemann & Associates PLLC CPAs are available to help you. Please contact us to set up an appointment.

J. A. (Jay) Lesemann Jr. CPA
Lesemann & Associates PLLC
Huntersville, NC
http://www.LesemannCPA.com

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Friday, March 24, 2006

State and local sales tax deduction

A deduction for state and local sales taxes is once again allowed as part of the taxpayer’s itemized deductions — but only for 2004 and 2005 returns. The taxpayer is permitted to choose to deduct either state and local sales taxes or state and local income taxes, whichever amount is larger. For residents of the seven states that impose no state or local income taxes, the choice is simple. For other residents, it will be necessary to “run the numbers” to make the best choice. And, although the IRS has issued standard sales tax tables for regular purchases, the taxpayer is also permitted to add sales tax paid for the purchase of a motor vehicle, aircraft, boat, home and home-building materials to the sales tax table amount.

Thomas Reed
Reed/Daum Associates Inc.
Pittsburgh, PA
treed@reeddaum.com

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Monday, March 13, 2006

Deducting State and Local Sales Tax

If you itemize your taxes, you can deduct state and local sales taxes instead of state and local income taxes.

The State and Local General Sales Tax Deduction Worksheet in the 2005 Form 1040 instruction booklet will help you determine your sales tax deduction amount in lieu of saving sales receipts throughout the year. You also may be able to add the state and local general sales tax paid on certain items, such as the following:

• A motor vehicle, but only up to the amount of tax paid at the general sales tax rate
• An aircraft, boat, home-building materials, or a home (including mobile or prefabricated) if the tax rate is the same as the general sales tax rate

Claim the deduction on line 5 of Schedule A, checking box B to indicate the amount that represents sales tax.

Although this deduction will mainly benefit taxpayers with a state or local sales tax but no income tax — those living in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — it may give a larger deduction to any taxpayer who paid more sales taxes than income taxes. For example, you may have bought a new car, boosting your sales tax total, or claimed tax credits, lowering your state income tax.

Author:
Michael Chessmore, CPA
Dripping Springs, Texas

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Tuesday, March 14, 2006

Selection of a Business Entity May Not Be as Simple as It Seems

When you select the type of business entity to use for your small business, there are a number of decisions that must be made which will have an effect on your potential liability related to the business and how the business will be taxed. In most states, several options are now available that were not available before. The alphabet soup includes LLCs, LLPs, LPs and PLLCs, as well as good-old corporations, partnerships and sole proprietors. Most of these entities have ways to be taxed directly at the business level or have the taxable income passed through to the partners, shareholders or members. Although the easy answer is to automatically assume that the best route is to have the income tax passed through, it is not always the best choice. Most businesses must accumulate some working capital and assets, especially in their formative years. Therefore, it is important to keep in mind that the first $50,000 of income is taxed at 15% and the next $25,000 is taxed at 25%. These rates are often lower than the rates that would be paid by the owners on their personal returns. This can be especially important in the start-up phase when the owner may be drawing a relatively small salary. Under many such situations, the money that needs to be left in the business would be subject not only to income tax at higher rates on the owner’s personal return, but also to self-employment and Medicare taxes. During the start-up stage of a business (and often for a continuing period), cash flow is an important factor in the survival of the business. Minimizing the amount that goes to Uncle Sam is always a wise way to improve cash flow.

Author:
John Braden
John Braden & Co. P.C.
Houston, Texas

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Wednesday, March 15, 2006

Transfers of Partnership Interests

One of the big advantages of utilizing the partnership form of doing business occurs when one of the owners sells his or her interest at a gain. In such a case, the partnership can “step up” its tax basis in the partnership’s assets. This can result in greater depreciation and other deductions for the buyer. These benefits are also available to the heirs of a deceased partner. To get these benefits, the partnership must make a timely election under section 754. Most LLCs are taxed as partnerships and would be eligible for the election. It is not available to corporations. If you or one of your partners acquired a partnership interest during 2004 or 2005, be sure your tax preparer considers whether to make a section 754 election.

Author:
R. Michael Swaim
Swaim Financial Services Ltd.
Houston, Texas

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Thursday, March 16, 2006

New furniture or equipment purchased in 2006

If you purchase new furniture or equipment in 2006, you will need to decide whether to take an immediate tax write-off or spread the purchase price over several years. This is called depreciation. Consult with your bookkeeper or accountant to examine your circumstances and company structure to maximize your deductions.

Author:
Tonya D. Lindsay
A Plus Bookkeeping, a division of Malkasian Accountancy
Sacramento, Calif.

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Friday, March 17, 2006

Fixed asset purchases

Consider timing your fixed asset purchases to optimize the increased expensing allowance ($108,000 in 2006, to be indexed for inflation in future years). An SUV weighing more than 6,000 pounds will qualify up to a maximum deduction of $25,000.

Author:
Rosemary Takacs
The LBA Group
Jacksonville, Fla.

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Monday, March 6, 2006

Keep your eye on Congress.

2005 ended without Congress extending some very important tax breaks. For individuals, these include alternative minimum tax (AMT) relief, the state sales tax itemized deduction, the teachers' deduction for classroom supplies, and the higher education expense deduction. For businesses, the enhanced section 179 expensing deduction ends in 2007 if it isn't extended. Many lawmakers also want to extend the lower tax rates on dividends and capital gains but these are very controversial with the federal budget deficit at an all-time high. Some of these tax breaks are expected to pass in February and be retroactive to January 1, 2006. Be ready to act once Congress makes up its mind.

Check out http://www.conlonconsulting.com/newsletter.html for our tax newsletter.

Author:
William Patrick Conlon, CPA
Conlon Accountancy Group
Sacramento, CA

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Tuesday, March 7, 2006

Tax benefits resulting from natural disaster

If you were affected by Hurricanes Katrina, Rita or Wilma, some recent tax law changes may be beneficial to you. For example, if you incurred a personal casualty or theft loss in the hurricane disaster areas, you are not subject to the $100 and the 10% of adjusted gross income floors. You also can elect to deduct losses from these hurricanes on your 2004 tax return instead of on your 2005 tax return if doing so is more advantageous to you. If you took distributions from your IRA, pension or annuity, up to $100,000 of qualified hurricane distributions may be exempt from the 10 percent early withdrawal penalty tax, and are not subject to the usual 20% mandatory income tax withholding requirement. You can claim an additional exemption of $500 for housing each Hurricane-Katrina-displaced individual for a period of at least 60 consecutive days ending in the tax year in which the exemption is claimed. The maximum additional exemption amount you can claim for all displaced individuals is $2,000 ($1,000 if married filing separately). To claim the additional exemption, the taxpayer must provide the displaced individual's tax identification number. The discharge of personal debt after Aug. 24, 2005, and before Jan. 1, 2007, as a result of Hurricane Katrina, is excluded from income. There are special rules for handling net operating losses incurred in the Gulf Opportunity (GO) Zone as a result of the hurricanes, and there are increased limits on depreciation and section 179 deductions applicable to certain property acquired. Also, an eligible employer who conducted an active trade or business in the GO Zone can claim an employee retention credit equal to 40 percent of the qualified wages for each eligible employee (up to a maximum of $6,000 in qualified wages per employee).

Author: Doug Flewellan
UHY Mann Frankfort Stein & Lipp Advisors
Houston, Texas

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Wednesday, March 8, 2006

Auto Expense Rates for 2005

There are two auto expense rates for 2005. For the first eight months the mileage rate is 40.5 cents and a special one-time adjustment for the last four months of 2005 to 48.5 cents. Beginning Jan 1, 2006 the standard mileage rate for business travel will be 44.5 cents per mile.

Author:
Michael Mills
E Commerce Consultants International, Inc.
Tampa, FL

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Thursday, March 9, 2006

Special Tax Rules for Cooperative Housing Owners/Stockholders

If you are an owner/stockholder of a cooperative housing corporation, you own shares of stock in a corporation that leases or owns housing facilities. Typically you can deduct your share of the corporation's deductible real estate taxes and mortgage interest just like a standard home owner. To qualify as a cooperative housing corporation, the business must meet the following conditions:

	There is only one class of outstanding stock for the business
	Each stockholder, solely because of ownership of stock can live in the dwelling owned by the corporation
	No stockholder can receive any distribution out of capital, except when the corporation is partially or completely liquidated
	Tenant-stockholders pay at least 80% of the corporation's gross income for the tax year (income received during the entire year even if the corporation was not a cooperative housing corporation for the whole year)

To figure your share of real estate taxes and interest (1) divide the number of shares of stock by the total outstanding (including shares owned by the corporation). (2) Then multiply the corporation's deductible real estate taxes by the number you figured in one.

If the corporation received a refund of real estate taxes paid in a prior year, it must reduce the amount of real estate taxes paid this year when it allocates the taxes to each stockholder. Your deduction for real estate taxes paid this year will be reduced by your share of the refund the corporation received. For more information see IRS Publication 530.

Author:
Brian N. Stovall, Consultant - Accounting/Business Advisory
The Brico Group, Inc.
Atlanta, GA
www.thebricogroup.com
www.bricodaily.blogspot.com

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Friday, March 10, 2006

Expenses under IRS Code 179

Taxpayers may elect under Internal Revenue Code Section 179 to expense up to $105,000 of the cost of certain assets purchased and placed in service during 2005. The expense is limited to the amount of income and is subject to certain phase-out. Generally speaking, computer software may be expensed under this provision.

Author:
Brad E. Mayer
Boeckermann, Grafstrom, and Mayer
Bloomington, MN
www.boeckermann.com

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