Tag Archives: small business

Time to Issue 1099-MISC

The form 1099-Misc is filed by businesses and self-employed people, primarily for services provided by businesses or people who are not a corporation (except law firms). You’ll need to file a 1099-Misc for everyone last year that you:

Paid $600 or more for
• Services (including parts and materials)
• Rent
• Prizes and awards
• Other income payments

Paid any amount for
• Services paid to any law firm or attorney

If you paid by credit card or a third party service (i.e., paypal) then you do not include them.

To collect the legal name, address, and taxpayer identification (SSN or EIN), you will need to have the vendor or individual fill out a W-9. This stays with you and doesn’t get filed with the IRS.

If you need assistance with issuing the 1099-MISC to your vendors we can help you in preparing and sending to those individuals.

Steve Eubanks, EA
Strategic Tax Group

www.strategictaxgroup.com

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Tax Developments During the First Quarter of 2014

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

IRA rollovers to be limited. A law limits the number of IRA rollovers that can be made in any 1-year period to one. Recently, the Tax Court held that the limit applies not to each separate IRA an individual may own, but to all of his or her IRAs. It reached this result even though the IRS had indicated in proposed regulations and tax publications that the limit applies to each IRA. Thus, an individual with three IRAs could make three rollovers in a 1-year period under the IRS guidance but only one under the Tax Court decision. After considering the matter, the IRS has announced that it will adopt the more restrictive view of the Tax Court. However, the new rule won’t apply to any rollover that involves a distribution occurring before 2015. The IRS emphasized that an IRA owner will continue to be able to transfer funds from one IRA trustee directly to another as frequently as desired. Such transfers are not rollovers and thus are not subject to the limit.

Popular expired tax breaks may be revived. A number of popular tax breaks expired at the end of 2013. For individuals, these expired items include, among others, the deduction for state and local sales taxes, the deduction for qualified tuition and related expenses, tax-free distributions from IRAs for charitable purposes, the deduction for mortgage insurance premiums, the exclusion for discharged principal residence debt, and the provision allowing a higher exclusion for employer-provided transit benefits. Work has begun in Congress to revive these provisions and extend them through 2015. Some key business breaks might also be brought back, including the research credit, higher expensing, bonus depreciation, employer wage credit for activated military reservists, work opportunity tax credit, and 15-year straight line cost recovery for qualified leasehold, restaurant, and retail improvements, among other items.

Severance payments are subject to social security taxes. In a unanimous decision (with one justice not participating), the Supreme Court, reversing the Sixth Circuit Court of Appeals, has held that severance payments that were made to involuntarily terminated employees, and that weren’t tied to the receipt of State unemployment insurance, are subject to tax under the Federal Insurance Contributions Act (social security taxes). The Court concluded that the severance payments at issue fell within the law’s broad definition of “wages” for social security tax purposes.

Luxury auto depreciation limits for 2014. Under special “luxury automobile” rules, a taxpayer’s otherwise available depreciation deduction for business autos, light trucks, and minivans is subject to additional limits, which operate to extend depreciation beyond its regular period. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2014. The depreciation deduction limits for 2014 are the same as in 2013 for a passenger auto, while the limits are $100 higher for a light truck or van for the first three years and the same for years after the third year. The first-year depreciation limit is $3,160 for autos and $3,460 for light trucks or vans first placed in service in 2014. The bonus depreciation rules for additional first-year depreciation for autos, light trucks and vans, under which the regular first-year dollar limit for eligible vehicles was increased by $8,000, only applied to vehicles placed in service before Jan. 1, 2014. But there is a chance that Congress may retroactively revive bonus depreciation to the beginning of 2014 and extend it through 2015.

Maximum auto/truck values for cents-per-mile valuation. The IRS has released the 2014 maximum fair market values for employer-provided autos, trucks and vans, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate. An employer must treat an employee’s personal use of an employer-provided auto as fringe benefit income and value it using one of several methods. One of the permitted methods allows an employer to value personal use at the mileage allowance rate (56¢ per mile for 2014). However, this method may be used only if the auto’s fair market value does not exceed $12,800, as adjusted for inflation. The inflation-adjusted figures for vehicles first made available to employees for personal use in 2014 are $16,000 for autos (same as for 2013) and $17,300 for trucks and vans (up from $17,000 for 2013).

Relief from individual mandate for certain limited health coverage. The health care law contains an “individual mandate”—a requirement that most U.S. citizens and legal residents maintain minimum essential health insurance coverage (i.e., government-sponsored programs such as Medicare, Medicaid, Children’s Health Insurance Program; eligible employer-sponsored plans; plans in the individual market; certain grandfathered group health plans; and other coverage as recognized by Health and Human Services) or be subject to a tax penalty for 2014 and later years. The IRS has provided relief from the penalty for months in 2014 in which individuals have, under Medicaid and chapter 55 of Title 10, U.S.C. (medical and dental care for members and certain former members of the uniformed services, and for their dependents), limited-benefit health coverage that is not minimum essential coverage.

Proposed regulations on the individual mandate. The IRS has issued proposed regulations on the individual mandate to carry health insurance. The regulations include additions to the list of government-provided health plans that don’t provide minimum essential coverage and a liberalization of the hardship exemption rules under which an individual who fails to carry coverage can escape the penalty.

Guidance on the employer mandate to provide health insurance. The IRS has issued final regulations and guidance in the form of frequently asked questions (FAQs) on the health care law’s so-called employer mandate imposed on a large employer (one that employed on average at least 50 full-time employees on business days during the preceding calendar year). The mandate or employer shared responsibility provisions, as they are called, essentially impose a penalty on such employers if one or more of their full-time employees obtains a premium tax credit through the insurance exchange. The mandate was supposed to begin in 2014 but it has been delayed until 2015. The final regulations further delay the applicability of the employer mandate to mid-sized employers (i.e., those with between 50 and 99 full-time employees) until 2016, provided that the employer meets certain requirements. In addition, they provide a phased-in coverage requirement for large employers. The FAQs cover a variety of topics including how to determine whether an employer is subject to the mandate, how to properly identify full-time employees, and how to calculate the shared responsibility payment.

Small estates get more time to transfer unused exclusion to surviving spouse. The estate of a decedent who is survived by a spouse may make a portability election. It allows the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life and at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount. In general, the election must be made within nine months of the decedent’s death on the estate tax return, even if the estate is below the exclusion amount so that a return normally would not be required. Because many estates below the threshold did not file, the IRS provided a simplified method to obtain an extension of time to elect portability. This method only applies for an estate of decedent who died after Dec. 31, 2010 and on or before Dec. 31, 2013. The decedent must have been a U.S. citizen or resident on the date of death. In addition, an estate tax return must not have been required because the size of the estate was below the filing threshold. If these and other requirements are met, the IRS will grant an automatic extension to make the election on an estate tax return filed on or before Dec. 31, 2014. Taxpayers failing to qualify for this relief may request an extension of time to make the election by requesting a letter ruling.

New IRS guidance on virtual currency. The IRS has provided guidance in the form of frequently asked questions (FAQs) on the tax treatment of virtual currency, such as Bitcoin. This guidance treats virtual currency as property for U.S. federal tax purposes. Thus, the general tax principles that apply to property transactions apply to transactions using virtual currency.

Steve Eubanks, EA
Strategic Tax Group
www.strategictaxgroup.com

Important Tax Developments In The Third Quarter Of 2013

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Developments concerning the Affordable Care Act (ACA).  In the lead-up to the roll out of the health insurance exchanges on Oct. 1, 2013, the IRS issued the following guidance on the ACA:

… The IRS released Questions and Answers (Q&As) on the health insurance premium tax credit on its website. This credit is designed to make health insurance affordable to individuals with modest incomes (i.e., between 100% and 400% of the federal poverty level, or FPL) who are not eligible for other qualifying coverage, such as Medicare, or “affordable” employer-sponsored health insurance plans that provide “minimum value.” To qualify for the credit, individuals must purchase insurance on a health exchange. The Q&As note that individuals can choose to have the credit paid in advance to their insurance company to lower what they pay for their monthly premiums, and then reconcile the amount paid in advance with the actual credit computed when they file their tax return. Alternately, individuals can claim all of the credit when they file their tax return for the year. The Q&As explain exactly who is eligible for the credit and address other important aspects of it.

 

… The IRS issued proposed regulations on the tax credit available to certain small employers that offer health insurance coverage to their employees. This credit is available to an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. The proposed regulations would become effective when they are formally adopted as final regulations. However, employers may rely on the proposed regulations for tax years beginning after Dec. 31, 2013, and before Dec. 31, 2014.

 

… The IRS issued final regulations on the “shared responsibility” payment under the ACA, which is the enforcement mechanism for the ACA’s mandate that most individuals maintain health insurance coverage. Starting in 2014, the individual shared responsibility provision calls for each individual to have basic health insurance cover age (known as minimum essential coverage), qualify for an exemption, or make a shared responsibility payment when filing a federal income tax return. Individuals will not have to make a payment if coverage is unaffordable, if they spend less than three consecutive months without coverage, or if they qualify for an exemption under one of several other reasons, including hardship and religious beliefs. The final regulations address these and other aspects of the shared responsibility payment.

 

Tax treatment of same-sex spouses.  The IRS and other Federal agencies issued guidance on the treatment of same-sex spouses and couples for tax and other purposes in light of the Supreme Court’s landmark Windsor  decision striking down section 3 of the Defense of Marriage Act (DOMA), which had required same-sex spouses to be treated as unmarried for purposes of federal law. The key developments are as follows:

… Effective as of Sept. 16, 2013, the IRS adopted a “state of celebration” rule in recognizing same-sex marriages. This means that same-sex couples who were legally married in jurisdictions that recognize their marriages (i.e., “state of celebration”) will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage. Spouse may retroactively apply this rule to open years.

 

… Same-sex spouses who were legally married in a state that recognizes same-sex marriages must file their 2013 federal income tax return using either “married filing jointly” or “married filing separately” status, even if they now reside in a state that does not recognize same-sex marriage. Same-sex spouses who file an original 2012 tax return on or after Sept. 16, 2013 also generally must file using a married filing separately or joint filing status. Same-sex spouses may file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations on refunds.

 

… The IRS provided optional special administrative procedures for employers to use to correct overpayments of employment taxes for 2013 and prior years for certain benefits provided and remuneration paid to same-sex spouses.

 

… The Department of Labor’s (DOL)’s Employee Benefits Security Administration (EBSA) announced that it is following the IRS in recognizing “spouses” and “marriages” based on the validity of the marriage in the state of celebration, rather than based on the married couple’s state of domicile, for purposes of interpreting the meaning of “spouse” and “marriage” as these terms appear in the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and in Internal Revenue Code provisions that EBSA interprets.

 

… In Frequently Asked Questions (FAQs) posted on the IRS’s website, the IRS made clear that same-sex and opposite-sex individuals who are in registered domestic partnerships, civil unions, or other similar formal relationships that aren’t marriages under state law aren’t considered as married or spouses for federal tax purposes.

 

New rules for deducting or capitalizing tangible property costs.  The IRS issued new regulations for determining whether amounts paid to acquire, produce, or improve tangible property may be currently deducted as business expenses or must be capitalized. Among other things, they provide detailed definitions of “materials and supplies” and “rotable and temporary spare parts” and prescribe rules and elective de minimis and optional methods for handling their cost. They also have rules for differentiating between deductible repairs and capitalizable improvements, among many other items. The regulations generally are effective for tax years beginning on or after Jan. 1, 2014, but taxpayers can elect to apply them to certain pre-2014 years.

New rules for dispositions of certain depreciable property.  The IRS issued proposed regulations that change several of the rules for dispositions of Modified Accelerated Cost Recovery System (MACRS) property. While the regulations are not final but merely proposed, taxpayers may rely on them. Included among the changes are rules that no longer treat structural components of a building as separate from the building and rules providing that partial dispositions generally are treated as dispositions.

New simplified relief for late elections pertaining to S corporations.  The IRS provided simplified methods for taxpayers to request relief for late elections pertaining to S corporations. The relief covers the S corporation election itself, the electing small business trust (ESBT) election, the qualified Subchapter S trust (QSST) election, the qualified Subchapter S subsidiary (QSub) election, and late corporate classification elections which the taxpayer intended to take effect on the same date that the taxpayer intended that an S corporation election for the entity should take effect.

Simplified per-diem increase for post-Sept. 30, 2013 travel.  An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn’t exceed IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn’t subject to income- or payroll-tax withholding and isn’t reported on the employee’s Form W-2. In general, the IRS-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. Instead of using actual per-diems, employers may use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. The IRS released the “high-low” simplified per-diem rates for post-Sept. 30, 2013 travel. The high-cost area per-diem increases $9 to $251, and the low-cost area per-diem increases $7 to $170.

Supreme Court to decide FICA tax treatment of severance pay.  The Supreme Court agreed to review a decision of the Court of Appeals for the Sixth Circuit which held that severance payments aren’t wages for purposes of Federal Insurance Contributions Act (FICA) tax. Thus, the Supreme Court will resolve a circuit split that currently exists between the Sixth and Federal Circuit Courts on the issue.

 

Steve Eubanks, EA, MBA

Strategic Tax Group

www.strategictaxgroup.com

 

 

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Tax Strategies for Small Business – Part 2

Charitable Contributions of Property and Services

Many well intended small business owners have asked me about making charitable donations of unproductive business property, goods or services. These contributions are welcomed by the charity, but a charitable donation of property or services is a less effective tax strategy than a cash donation for a small business that is established as a sole proprietorship, partnership or S corporation.

If you have unproductive assets to dispose of, consider selling those assets to a charitable organization or another business at a liquidation value and take any loss as an ordinary business deduction. If the property has no real value (it would be thrown away if not donated), then write the asset off your books and then donate it to the charity.

The IRS does not allow a deduction for time or the value of services. However, a C Corporation may contribute certain goods and take a deduction for value greater than the cost of the item being given away. This exception occurs when the C Corporation donates product inventory to a charitable organization that requires that product in its charitable mission. For example, a pharmaceutical company may donate medicine to a non-profit clinic.

Tax Strategies for Small Businesses – Part 1

Small Business Tax Deductions

Business owners are great at spending money. Sometimes they spend wisely, sometimes not so much. Almost all spending in the pursuit of their business is at least partially deductible. Too many business owners, the rules for deducting expenses are confusing, and as a result, they fail to take full advantage of the deductions that are legally available. Passing on a dollar of legal tax deductions is like paying an extra $0.30 to $0.50 in income and payroll taxes.

Not only should business owners take every legal deduction they can, but also they should arrange their business and personal affairs in a way that entitles them to maximize those deductions.

Section 162(a) of the Internal Revenue Code specifies allowable business deductions. The IRS allows for the deduction of all ordinary and necessary expenses related to a trade or business, including salaries, reasonable travel expenditures, rent, management expenses, office expenses including utilities and telephone, sales commissions, supplies, repairs and maintenance, advertising, and property insurance.

Many of my clients wonder what “ordinary and necessary” means. There are many court cases that provide tax professionals and tax-attorneys appropriate guidance for almost every deduction you can think of. If you are ever in doubt, call your tax professional and ask. If he or she doesn’t know immediately, they will research your question and respond quickly.

One simple test on deductibility is to consider whether you would reimburse an employee for a similar expenditure. Unfortunately, that kind of thinking may also lead you to severely under-deduct. Another quick test is to consider whether the expenditure can be traced to generating income or avoiding expenditure. The last test is probably the most important one: your confidence that you can justify the deduction to an IRS examiner.

Special Rules

 Some expenditures are never deductible: the expense of running a criminal enterprise, bribes and kickbacks, lobbying and political expenditures, damage awards arising out of an antitrust conviction, excessive payments made to shareholder- employee, and a number of other ‘bad boy’ clauses. The general concept here is that the US Government isn’t going to reward illegal or improper behavior.

Some expenditures are only partially deductible, including business meals and entertainment expenses and certain car expenses.

Some expenses are deductible over time. For example, if you buy a building, you can’t take a full deduction the year you purchase it. Rather, you would amortize / depreciate the deduction over time (up to 40 years). Another example of an expenditure that gets deducted over time is the amount paid for local franchisee rights. Intangible assets like a franchise agreement get deducted over fifteen years.

For most profitable small businesses, long-lived assets other than capital items, property, real estate and intangible assets can be immediately deducted – even if the item will be used for many years, including furniture, computers and machinery.

Tax Credit For Small Firms That Offer Health Insurance

A tax credit for small firms that offer health insurance comes at a price. The deduction for medical premiums is reduced by the credit. Currently with 10 or fewer full-time workers and average wages under $25,000 can claim a tax credit for 35% of the lesser of what they pay for employee coverage or the average group premium for smalls in the state. The percentage falls rapidly for companies with more employees and higher pay, and no credit is allowed firms that employ 25 or more workers or have average annual pay of $50,000 or more.

Steve Eubanks, EA, MBA
http://www.strategictaxgroup.com

Small Business Jobs Act of 2010 (P.L. 111-240)

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for businesses. Here’s a brief overview of the tax changes in the Small Business Jobs Act.

Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service in during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under the Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000. The Small Business Jobs Act also makes certain real property eligible for expensing. Thus, for property placed in service in any tax year beginning in 2010 or 2011, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.

Extension of 50% bonus first-year depreciation. Before the Small Business Jobs Act, Congress already allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Small Business Jobs Act extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (as well as 2011 for certain aircraft and long production period property).

Boosted deduction for start-up expenditures. The Small Business Jobs Act allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

100% exclusion of gain from the sale of small business stock Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). This percentage exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Small Business Jobs Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the Small Business Jobs Act eliminates the alternative minimum tax (AMT) preference item attributable to such sales.

General business credits of eligible small businesses for 2010 get five-year carryback. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The Small Business Jobs Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.

Deductibility of health insurance for the purpose of calculating self-employment tax. The Small Business Jobs Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gain tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

New tax break for long-term contract accounting. The Small Business Jobs Act provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation in 2010 is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Limitation on penalty for failure to disclose certain reportable transactions. The Small Business Jobs Act generally limits the penalty to 75% of the decrease in tax resulting from the transaction, retroactively to penalties assessed after Dec. 31, 2006. Minimum and maximum penalties apply.

Revenue raisers. These tax breaks come at a cost. To mention a few of these unfavorable provisions, information reporting will generally be required for rental property expense payments made after Dec. 31, 2010, and increased information return penalties will be imposed.

Please keep in mind that I’ve described only the highlights of the most important changes in the Small Business Jobs Act. If you would like more details about any aspect of the new legislation, please do not hesitate to contact me.

Steve Eubanks, EA

steve.eubanks@strategictaxgroup.com

www.strategictaxgroup.com