Regardless of how life changes, one of the biggest hurdles you'll face in running your own business is to stay on top of your numerous obligations to federal, state, and local tax agencies. A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records.
You can safely assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an "I didn't know I was required to do that" claim. The old legal saying that "ignorance of the law is no excuse" is perhaps most often applied in tax settings. On the other hand, it is surprising how many small businesses actually overpay their taxes. They often neglect to take deductions they're legally entitled to, or just don't know about certain breaks that can help them lower their tax bill.
Adding to the mayhem, we have tax codes that seem to be in a constant state of flux. Creating exceptions for special groups has resulted in a steady stream of new and revised tax laws, which have lengthened the Internal Revenue Code to over 4,500 pages and rendered it barely understandable to even the most experienced tax professionals. Often one section can run up to several hundred pages. A special tax service used by tax professionals explains the meaning and application of each part of the code. It is contained in another 12 volumes! The harder Congress tries to simplify the code, the more complex it becomes.
Preparing your taxes and strategizing how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, MONEY, and (God forbid) an auditor knocking on your door, is to have a professional accountant handle your taxes. Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code and gain the advantage over the IRS.
Nevertheless, many accountants don't understand the mammoth tax code and end up being too conservative with your tax deductions. The more conservative they are, the more taxes you end up paying.
Unfortunately, the cryptic and mystifying nature of the tax code generates a lot of folklore and misinformation that also leads to costly mistakes. Here is a list of some common small business tax misperceptions:
1. All Start-Up Costs Are Immediately Deductible
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.
You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation. You can elect to deduct up to $10,000 of business start-up costs and $10,000 of organizational costs paid or incurred in the year that you start a business. The $10,000 deduction is reduced by the amount your total start-up or organizational costs exceed $60,000. Any remaining cost must be amortized.
The only catch is that in order to take advantage of the immediate deduction you must spread out the remainder of your start-up costs over 15 years (180 months).
2. Overpaying The IRS Makes You "Audit Proof"
The IRS doesn't care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can't substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to "Audit Proof" yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.
3. Being incorporated enables you to take more deductions.
Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are pretty much equivalent to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend $1,000 in legal and accounting fees to set up a corporation, only to determine shortly after that they want to change their name or company direction. Plenty of small business owners who incorporate don't make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.
4. The home office deduction is a red flag for an audit.
This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.
5. If you don't take the home office deduction, business expenses are not deductible.
You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.
6. Taking an extension on your taxes is an extension to pay taxes.
Extensions enable you to extend your filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date.
7. Part-time business owners cannot set up self-employed pensions.
If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.
Besides avoiding these pitfalls, possessing basic knowledge of how the tax system works is also beneficial. After all, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If your accountant messes up, you pay the penalty, not him.
Tuesday, August 30, 2011
Friday, August 26, 2011
FAQ Friday: Higher Education
As we approach the start of a new school year, it is important to keep taxes in mind, whether if it's for yourself, or for your children.
Today's FAQ is:
What types of tax relief are available for costs of my children's higher education?
A wide variety of relief is available. In some cases you'll have to choose which to claim, based on what each is worth in your tax situation. There are tax exclusions, tax deferrals, tax credits, tax deductions, and relief from tax penalties.
You can't take two different kinds of relief for the same item. You can sometimes take one type of relief for one education item and another type for another item.
Some benefits have income ceilings that bar or limit the relief as taxpayer's income rises.
Today's FAQ is:
What types of tax relief are available for costs of my children's higher education?
A wide variety of relief is available. In some cases you'll have to choose which to claim, based on what each is worth in your tax situation. There are tax exclusions, tax deferrals, tax credits, tax deductions, and relief from tax penalties.
You can't take two different kinds of relief for the same item. You can sometimes take one type of relief for one education item and another type for another item.
Some benefits have income ceilings that bar or limit the relief as taxpayer's income rises.
Tuesday, August 23, 2011
Tax Tuesday: International Tax Planning
As our society continues to move towards global economic dependence, our tax regulations will continue to become more complex. As this international economic trade continues to affect small businesses and individuals, it will be vital for taxpayers to understand the regulations when dealing with international treaty requirements and international commerce. By utilizing foreign corporations, foreign tax credits and foreign income exclusion provisions, taxpayers are able to fairly report their income and utilize qualified deductions. Establishing record keeping strategies and remaining compliant with government reporting standards will not only keep you safe but give you peace of mind knowing your financial scenario.
Friday, August 19, 2011
FAQ Friday: What type of records do I need to keep?
Keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.
Here's a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:
While you're storing your current year's income and expense records, be sure to keep your bank account and loan records too, even though you don't report them on your tax return. If the IRS believes you've underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.
Here's a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:
- Income (wages, interest/dividends, etc.)
- Exemptions (cost of support)
- Medical expenses
- Taxes
- Interest
- Charitable contributions
- Child care
- Business expenses
- Professional and union dues
- Uniforms and job supplies
- Education, if it is deductible for income taxes
- Automobile, if you use your automobile for deductible activities, such as business or charity
- Travel, if you travel for business and are able to deduct the costs on your tax return
While you're storing your current year's income and expense records, be sure to keep your bank account and loan records too, even though you don't report them on your tax return. If the IRS believes you've underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.
Tuesday, August 16, 2011
Tax Tuesday: Can ObamaCare Survive an Unconstitutional Mandate?
Forbes magazine had a great article on the much-talked about ObamaCare.
Can ObamaCare Survive an Unconstitutional Mandate?
The answer is yes … and no.
A three-judge panel of the 11th Circuit Court of Appeals has now weighed in and two of the judges, one Republican and one Democratic appointee, ruled unconstitutional the health care legislation’s mandate requiring people to have health insurance. That’s the good news.
But the court stopped short of following federal Judge Roger Vinson of Florida, who struck down the whole law. The Appeals Court decided to leave the rest of the legislation in tact. That ruling immediately raised the question: If the U.S. Supreme Court came to the same conclusion, could the rest of ObamaCare survive?
Although as a presidential candidate, Barack Obama criticized the mandate; now the Obama Justice Department says the mandate is absolutely necessary to make the law work. It’s just one of many Obama flip-flops in his long and sordid drive to control virtually every part of the U.S. health care system.
Another of the important flip-flops playing a role in the 11th Circuit’s decision is whether the mandate is a tax. In the fall of 2009, the president told ABC’s George Stephanopoulos in a televised interview that the mandate absolutely was not a tax. Now, of course, the Justice Department claims it absolutely is.
But in its very carefully reasoned and well-written majority opinion, the 11th Circuit ruled that the mandate is a penalty and not a tax and that some parts of the law were severable from the mandate. Let’s take the last claim first.
ObamaCare is 2,700 pages long and sticks the federal government’s nose in virtually every segment of the health care system. Many of those regulations, restrictions and intrusions have little or nothing to do with the mandate. For example:
* The much-hyped “free” benefits added to Medicare and private health insurance last year;
* The recent, and also much-hyped, requirements that health insurance cover all FDA-approved contraceptives, along with other services, without patient copays;
* The Independent Payment Advisory Board (IPAB) that will soon morph into Medicare’s rationer-in-chief;
* The Department of Health and Human Services Secretary Kathleen Sebelius’s heavy-handed approach to private health insurance, including efforts to monitor premium increases and punishing health insurers that don’t toe the administration line.
However, there are also good provisions, such as:
* Establishing a regulatory pathway for “biosimilar” drugs;
* And some important steps to reduce the fraud and abuse in Medicare.
The mandate to buy health insurance would have little to no effect on any of these, and many other, provisions. Even many of the new taxes are not necessarily dependent on the coverage mandate. They are intended to pay for Medicaid expansion and subsidized coverage for the poor, health care pork given to the states, high risk pools to cover uninsurable people (at least until 2014), health care clinics for the poor and many of the new “free” coverages mentioned earlier.
However, as big and intrusive as these steps are, they pale in comparison to the mandate to buy coverage or be penalized. That provision allows Washington to micromanage every health insurance policy in the country. If people are required to have coverage, then Washington must determine what kind of coverage is “qualified.” And they will be very expensive, comprehensive policies—the only kind most liberals and Democrats think are worth having.
If the Supreme Court were to strike down only the coverage mandate as an overreach of the federal government’s constitutionally limited powers, the state-based health insurance exchanges might still function. And the federal subsidies to help families with incomes up to 400 percent of the federal poverty level pay for coverage might still flow. That’s because the government can provide families with a subsidy if they choose to buy health coverage in the exchange without demanding that they do so.
By contrast, without the mandate lots of people and employers would likely continue buying non-qualified coverage outside of the exchange, limiting the government’s ability to interfere.
But just because a health care system might find ways to function under a wounded, rather than a dead, ObamaCare doesn’t mean that’s any way to run a health care system.
Even if the Supreme Court follows the lead of the 11th Circuit, or if it upholds the law, congressional candidates running next year should still make “repeal and replace” the second most important plank in their campaign platforms—after jobs and the economy. ObamaCare may be able to survive an unconstitutional mandate, but the country can’t.
Can ObamaCare Survive an Unconstitutional Mandate?
The answer is yes … and no.
A three-judge panel of the 11th Circuit Court of Appeals has now weighed in and two of the judges, one Republican and one Democratic appointee, ruled unconstitutional the health care legislation’s mandate requiring people to have health insurance. That’s the good news.
But the court stopped short of following federal Judge Roger Vinson of Florida, who struck down the whole law. The Appeals Court decided to leave the rest of the legislation in tact. That ruling immediately raised the question: If the U.S. Supreme Court came to the same conclusion, could the rest of ObamaCare survive?
Although as a presidential candidate, Barack Obama criticized the mandate; now the Obama Justice Department says the mandate is absolutely necessary to make the law work. It’s just one of many Obama flip-flops in his long and sordid drive to control virtually every part of the U.S. health care system.
Another of the important flip-flops playing a role in the 11th Circuit’s decision is whether the mandate is a tax. In the fall of 2009, the president told ABC’s George Stephanopoulos in a televised interview that the mandate absolutely was not a tax. Now, of course, the Justice Department claims it absolutely is.
But in its very carefully reasoned and well-written majority opinion, the 11th Circuit ruled that the mandate is a penalty and not a tax and that some parts of the law were severable from the mandate. Let’s take the last claim first.
ObamaCare is 2,700 pages long and sticks the federal government’s nose in virtually every segment of the health care system. Many of those regulations, restrictions and intrusions have little or nothing to do with the mandate. For example:
* The much-hyped “free” benefits added to Medicare and private health insurance last year;
* The recent, and also much-hyped, requirements that health insurance cover all FDA-approved contraceptives, along with other services, without patient copays;
* The Independent Payment Advisory Board (IPAB) that will soon morph into Medicare’s rationer-in-chief;
* The Department of Health and Human Services Secretary Kathleen Sebelius’s heavy-handed approach to private health insurance, including efforts to monitor premium increases and punishing health insurers that don’t toe the administration line.
However, there are also good provisions, such as:
* Establishing a regulatory pathway for “biosimilar” drugs;
* And some important steps to reduce the fraud and abuse in Medicare.
The mandate to buy health insurance would have little to no effect on any of these, and many other, provisions. Even many of the new taxes are not necessarily dependent on the coverage mandate. They are intended to pay for Medicaid expansion and subsidized coverage for the poor, health care pork given to the states, high risk pools to cover uninsurable people (at least until 2014), health care clinics for the poor and many of the new “free” coverages mentioned earlier.
However, as big and intrusive as these steps are, they pale in comparison to the mandate to buy coverage or be penalized. That provision allows Washington to micromanage every health insurance policy in the country. If people are required to have coverage, then Washington must determine what kind of coverage is “qualified.” And they will be very expensive, comprehensive policies—the only kind most liberals and Democrats think are worth having.
If the Supreme Court were to strike down only the coverage mandate as an overreach of the federal government’s constitutionally limited powers, the state-based health insurance exchanges might still function. And the federal subsidies to help families with incomes up to 400 percent of the federal poverty level pay for coverage might still flow. That’s because the government can provide families with a subsidy if they choose to buy health coverage in the exchange without demanding that they do so.
By contrast, without the mandate lots of people and employers would likely continue buying non-qualified coverage outside of the exchange, limiting the government’s ability to interfere.
But just because a health care system might find ways to function under a wounded, rather than a dead, ObamaCare doesn’t mean that’s any way to run a health care system.
Even if the Supreme Court follows the lead of the 11th Circuit, or if it upholds the law, congressional candidates running next year should still make “repeal and replace” the second most important plank in their campaign platforms—after jobs and the economy. ObamaCare may be able to survive an unconstitutional mandate, but the country can’t.
Friday, August 12, 2011
FAQ Friday: Should I keep my old tax returns? If so, for how long?
Yes, keep your old tax returns.
One of the benefits of keeping your tax returns from year to year is that you can look at last year's return while preparing this year's. It's a handy reference, and reminds you of deductions you may have forgotten.
Another reason to keep your old tax returns is that there may be information in an old return that you need later.
One example of information you may need years later is the tax basis of your home. If you sold your home some years ago and replaced it with the one you live in now, you filed a Form 2119 with your old return. On Form 2119, you figured the tax basis of your current home. When you sell your current home, the starting point to find out what your gain (or loss) is comes from the Form 2119 for the old house.
Audits and your old tax returns
Here's a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You'd think the IRS would have them handy, but that's not the way it works. Your old returns are more than likely in a computer, in a storage area, or on microfilm somewhere. Usually what your IRS auditor has is just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor's request.
How long should I keep my old tax returns?
You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.
If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.
One of the benefits of keeping your tax returns from year to year is that you can look at last year's return while preparing this year's. It's a handy reference, and reminds you of deductions you may have forgotten.
Another reason to keep your old tax returns is that there may be information in an old return that you need later.
One example of information you may need years later is the tax basis of your home. If you sold your home some years ago and replaced it with the one you live in now, you filed a Form 2119 with your old return. On Form 2119, you figured the tax basis of your current home. When you sell your current home, the starting point to find out what your gain (or loss) is comes from the Form 2119 for the old house.
Audits and your old tax returns
Here's a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You'd think the IRS would have them handy, but that's not the way it works. Your old returns are more than likely in a computer, in a storage area, or on microfilm somewhere. Usually what your IRS auditor has is just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor's request.
How long should I keep my old tax returns?
You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.
If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.
Tuesday, August 9, 2011
Tax Tuesday: Can I deduct student loan interest?
Now that kids are heading back to school, we’ll be featuring some tax-saving tips and interesting articles on ways you may be able to save money while your children get the education they deserve.
Can I deduct student loan interest?
Since personal interest is generally non-deductible, deductions must meet several tests:
Can I deduct student loan interest?
Since personal interest is generally non-deductible, deductions must meet several tests:
- You must be the person liable on the debt and the loan must be for education only (not an open line of credit).
- Your income can't exceed $150,000 in 2011 on a joint return or $75,000 in 2011 (Same limits applied in 2010) on a single return; married couples filing separately cannot deduct.
- You can't deduct if you're claimed as a dependent.
- Deduction ceiling is $2,500.
Friday, August 5, 2011
FAQ Friday: Self-Employed
What special deductions can I get if I'm self employed?
You may be able to take an immediate expense deduction of up to $500,000 for 2011, for equipment purchased for use in your business, instead of writing it off over many years. Additionally, self-employed individuals can deduct 100% of their health insurance premiums. You may also be able to establish a Keogh, SEP or SIMPLE plan and deduct your contributions (investments).
What tax-deferred investments are possible if I'm self-employed?
Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for sideline or moonlighting businesses. Several types of plan are available: the Keogh plan, the SEP, and the SIMPLE.
You may be able to take an immediate expense deduction of up to $500,000 for 2011, for equipment purchased for use in your business, instead of writing it off over many years. Additionally, self-employed individuals can deduct 100% of their health insurance premiums. You may also be able to establish a Keogh, SEP or SIMPLE plan and deduct your contributions (investments).
What tax-deferred investments are possible if I'm self-employed?
Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for sideline or moonlighting businesses. Several types of plan are available: the Keogh plan, the SEP, and the SIMPLE.
Tuesday, August 2, 2011
Tax Tuesday: Can I ever save tax by filing a separate return instead of jointly with my spouse?
You sometimes may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:
- One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
- The spouses' incomes are about equal.
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