We are getting near to tax filing deadline. For 2010 returns, the tax return deadline is April 18, 2011 since April 16th is Emancipation Day, and April 15th is declared a Legal Holiday in Washington DC. Here are some last minute reminders.
1. Remember to report all income. It is hard to defend the exclusion of income. Reconcile your 1099s and Form W-2 to your tax return.
2. If you have a business or rental property, carefully review all expenses that were ordinary and necessary for the production of income. Many people get sloppy and miss some of the smaller deductions. These missed deductions add up.
3. Look for deductions to charities and costs associated with charitable work. Charities are required to give you receipts for goods and services donated to them during the year. But some donations may not be the responsibility of the charity. For example, did you donate goods or services like driving the scouts to camp? You can deduct 14 cent a charitable mile. The tax court also said that hiring a babysitter while you performed charitable work is also deductible. The out of pocket costs for charitable costs and services add up to more deductions and that will keep more money in your pocket.
4. Can you make a contribution to an Individual Retirement Account (IRA)? If under 50 years of age at the end of 2010, you can contribute the smaller of $5,000 or taxable compensation for 2010. If over 50 years of age at the end of 2010, you may contribute up to the smaller of $6,000 or earned taxable compensation in 2010. The amount that you are allowed may be reduced depending on your Adjusted Gross Income (AGI) and you may be limited if you or your spouse is in a pension plan. The good news is that IRA contributions can be made up to April 18, 2011 and count as a 2010 deduction for income tax.
5. Do you have any tax credits that you can claim? Following is a list of credits to consider: earned income tax credit, Health coverage credits, child tax credit, child and dependent care credit, education credit, foreign tax credits. If you qualify for tax credits they may reduce your tax dollar for dollar.
6. If you inherited property and then sold at a gain, remember to step your cost basis up to the FMV at the date of death. This is often overlooked when preparing tax returns.
7. If you are a member of an LLC, did you incur any supplemental business expense that you did not submit for reimbursement? You may claim these expenses.
8. If you were out of work, remember to review all costs associated with job hunting and starting a new job. (resume writing, travel expense to interview for new position, and moving expense). For 2010, unemployment is also subject to tax.
9. Remember it is okay to take the deductions if you have substantial authority for the expense. Substantial authority includes visits to your rental property, paying kids in your business, and business convention expense in Hawaii or Bermuda. Know the tax rules and how to take advantage of lowering your income tax burden.
10. If you are in business don’t forget the new fast depreciation rules.
Sunday, April 10, 2011
Thursday, April 7, 2011
GOODBYE PESKY NEW 1099 REPORTING
As we have posted here several times, last year, a new law was put into place as part of Obama Care that in 2012 required reporting of all transactions over $600 to any vendor in a year. This included business payments to Walmart, your gas station and everybody else for services and materials. Good news! On March 5th the Senate passed a bill which President Obama is expected to sign quickly a repeal of this new law. This is great news for anybody in business. However, please note that the old form 1099 reporting requirement for services is still in effect
Wednesday, April 6, 2011
IN THE NEWS
I am always humbled when an editor contacts me for asisstance with an article. I was honored to have TWO articles published in last months Nails Magazine. Please check them out~
Ready, Set, File: http://www.nailsmag.com/article/91830/ready-set-file
Financing the Dream: http://www.nailsmag.com/article/91810/financing-the-dream
Ready, Set, File: http://www.nailsmag.com/article/91830/ready-set-file
Financing the Dream: http://www.nailsmag.com/article/91810/financing-the-dream
Tuesday, April 5, 2011
QUESTION ON FAST DEPRECIATION
Q. I sat in on your class at ISSE Midwest in Chicago. I just opened my own salon back in November and got lucky enough to be able to start with mostly used equipment. In your class you made mention to the fact that in 2011 you can write off all equipment purchases in full. I was wondering if you would mind giving me a little more info about it and if there is a certain way I have to go about it. I was also curious about what your firm charges for your tax preparation services. Right now it's just me in the salon and I'm currently using a CPA that does know a little about the business I would love to use someone like kopsa Otte that deals strictly with salons so that I can ensure I get the best service. Thanks in advance,
A. Good luck on your new business. Owning your own business can be very rewarding but also can be very frustrating at times. In response to your question, normally equipment is written off over 5 to 7 years based on some percentages laid out by the IRS. This is what is normally referred to as “depreciation’ or “MACRS.” MACRS is IRS terminology short for Modified Accelerated Cost Recovery System. As an alternative to deducting the cost over 5 to 7 years you can elect to chose what is called the “expensing election” or technically the Code Section 179 deduction (§179). The §179 of the law says you can expense up to $500,000 of “tangible personal property,” new or used (other than certain automobiles). You can choose the amount that you want to expenses. You do not have to expense the entire amount. The equipment can be new or used and still qualify. Warning, your first-year expensing deduction for an activity can’t exceed your taxable net income from the activity. This amount can be expanded by including certain W-2 or other earned income. This gets a little technical and I would need to look at your particular circumstances to determine if you could deduct more than the income from the salon. I also want to mention that if you elect §179 that if you can’t claim all this year you can carry over the unused portion to the next year. Taking fast depreciation depends on your circumstances. It is not an automatic that we advise fast deprecation. Again I would have to look at your situation to give proper advice to you. Amanda of my office will be in touch with you about our tax and other services.
A. Good luck on your new business. Owning your own business can be very rewarding but also can be very frustrating at times. In response to your question, normally equipment is written off over 5 to 7 years based on some percentages laid out by the IRS. This is what is normally referred to as “depreciation’ or “MACRS.” MACRS is IRS terminology short for Modified Accelerated Cost Recovery System. As an alternative to deducting the cost over 5 to 7 years you can elect to chose what is called the “expensing election” or technically the Code Section 179 deduction (§179). The §179 of the law says you can expense up to $500,000 of “tangible personal property,” new or used (other than certain automobiles). You can choose the amount that you want to expenses. You do not have to expense the entire amount. The equipment can be new or used and still qualify. Warning, your first-year expensing deduction for an activity can’t exceed your taxable net income from the activity. This amount can be expanded by including certain W-2 or other earned income. This gets a little technical and I would need to look at your particular circumstances to determine if you could deduct more than the income from the salon. I also want to mention that if you elect §179 that if you can’t claim all this year you can carry over the unused portion to the next year. Taking fast depreciation depends on your circumstances. It is not an automatic that we advise fast deprecation. Again I would have to look at your situation to give proper advice to you. Amanda of my office will be in touch with you about our tax and other services.
WALL STREET JOURNAL SAYS MORE GOVERNMENT WORKERS THAN OTHERS -- COMBINED
OPINION: 'More Americans in gov't than in manufacturing, farming, fishing, forestry, mining and utilities -- combined' (Wall Street Journal) -- In an op-ed posted at WSJ.com, Stephen Moore writes: "Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government." He adds that "more Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined." http://app.expressemailmarketing.com/get.link?linkid=2756351&subscriberid=143772548&campaignid=740151&linkurl=http%3a%2f%2fonline.wsj.com%2farticle%2fSB10001424052748704050204576219073867182108.html
Sunday, April 3, 2011
I'M FREAKING OUT - IT'S ALMOST APRIL 15TH AND I DON'T HAVE THE MONEY TO PAY MY TAX
With April 15th (actually the 18th this year) bearing down on us some people don't have the cash to pay their tax. Here is what we advise.
First and most importantly, don't let your inability to pay your tax liability in full keep you from filing your tax return properly and on time. It is also important to remember that an extension of time to file your tax return doesn't also extend the time to pay your tax bill.
Even if you can't make full payment of your liabilities, timely filing your return and making the largest partial payment you can will save you substantial amounts in interest and penalties. Additionally, there are procedures for requesting payment extensions and installment payment arrangements which will keep the IRS from instituting its collection process (liens, property seizures, etc.) against you.
Overview of the most common penalties.
The “failure to file” penalty accrues at the rate of 5% per month or part of a month (to a maximum of 25%, reached after five months) on the amount of tax your return should show you owe.
The “failure to pay” penalty is gentler, accruing at the rate of only 0.5% per month or part of a month (to a maximum of 25%, reached after fifty months) on the amount actually shown as due on the return.
If both apply, the failure to file penalty drops to 4.5% per month, so the total combined penalty remains at 5%—thus, the maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months, yielding an additional 22.5%. In total, these combined penalties can reach 47.5% of your unpaid liability in less than five years.
Both of these penalties are in addition to the interest that you will be charged for your late payment. If you also missed estimated tax payments, an additional penalty is tacked on for the period running from each payment's due date until the tax return due date, normally April 15th. This penalty is computed at 3% above the fluctuating federal short-term interest rate for the period.
Borrowing money to pay taxes.
Given the rate at which the above-mentioned penalties and interest accrues, it might be a good idea to borrow money to pay the taxes. In many situations, the rate of interest that you would pay to a family member, or even to a bank, is less overall than that which you would have to pay the IRS.
Note that the interest on a loan to pay taxes is nondeductible personal interest. In contrast, if you can take out a home equity loan (if anyone still has equity left in their home) and use the proceeds to pay off your tax debts, you will probably be paying at a lower rate than with other types of loans, and the interest payments will be deductible even if the loan proceeds aren't used in connection with the house.
Credit cards.
It is relatively quick and easy to use credit cards to pay the income tax bill, whether you file your income tax return by mailing a paper copy or by computer. In addition, three companies (Official Payments Corporation at 888-872-9829, Link2Gov Corporation at 888-729-1040, and RBS WorldPay, Inc. at 888-972-9829) are authorized service providers for purposes of accepting credit card charges from both electronic and paper filers. We do not normally advise the use of credit cards because not only is there likely to be at relatively high interest rates and the interest is not deductible the service providers typically charge an additional fee based on the amount you are paying.
Installment agreement request.
If you cannot or prefer not to take out a loan, you might be able to defer your tax payments by requesting that the IRS enter into an installment payment agreement with you. This request is made on Form 9465 or by applying for a payment agreement online. There are various options for making your monthly installment agreement payments, including the direct debit and payroll deduction methods, both of which are made automatically and thus reduce the risk of default.
If you file and request a payment agreement online, there are three available payment options: (1) payment in full within 10 days (which saves on interest and penalties); (2) short-term extension of up to 120 days (for which no fee is charged, but additional penalties and interest accrue); or (3) monthly payment plan (which carries a user fee in addition to the continued accrual of penalties and interest).
You can also request an installment agreement on Form 9465, which can be filed along with either an e-filed or paper return. If the liability is under $25,000, you will not be required to submit financial statements. Even if your request to pay in installments is granted, you will be charged interest on any tax not paid by its due date. However, the late payment penalty will be half the usual rate (0.25% instead of 0.5%) if you file your return by the due date (including extensions).
The IRS charges a fee for installment agreements, which will be deducted from your first payment after your request is approved. The fee for entering into an installment agreement is regularly $105, but it is reduced to $52 when the taxpayer pays by way of a direct debit from the taxpayer's bank account. Notwithstanding the method of payment, the fee is $43 if the taxpayer is an eligible low-income taxpayer. There is a $45 fee to restructure or reinstate an established installment agreement that applies regardless of income levels or method of payment.
Note that an installment agreement request can be made after the expiration of a hardship extension period (described below). Additionally, the IRS has the authority to enter into an installment agreement calling for less than full payment of the tax liability over the term of the agreement if it determines that such an agreement will facilitate partial collection of the liability.
The installment agreement may terminate, and all your taxes become due immediately, under certain circumstances (for example, if you stop making payments).
The IRS is required to enter into an installment agreement at your request (a “guaranteed installment agreement”) if the following apply:
• the tax liability is $10,000 or less (not counting interest and penalties);
• within the prior 5 years you have not (i) failed to file returns or pay taxes, or (ii) entered into a previous installment agreement;
• the IRS determines the tax liability cannot be paid in full;
• the installment agreement provides for full payment within 3 years; and
• you agree to comply with the tax laws during the agreement period.
As a matter of policy, the IRS often grants guaranteed installment agreements even if taxpayers are able to fully pay their accounts.
Undue hardship extensions.
You may also qualify for an extension of time to pay if you can show that payment would cause “undue hardship.” An undue hardship extension is applied for with Form 1127, to which you must attach a statement of assets and liabilities as well as an itemized list of receipts and disbursements for the 3 months preceding the tax due date.
If you qualify for an undue hardship extension, you will be given an extra six months to pay the tax shown as due on your tax return. You will avoid the failure to pay penalty, but you will still be charged interest. If the IRS determines a “deficiency” (i.e., that you owe taxes in excess of the amount shown on your return), the undue hardship extension can be as long as 18 months and, in exceptional cases, another 12 months can be tacked on. However, no extension will be granted if the deficiency was the result of negligence, intentional disregard of the tax rules, or fraud.
To establish undue hardship, it is not enough to show that it would just be inconvenient to pay your tax when due. For example, if you would have to sell property at a “sacrifice” price, you may qualify for an undue hardship extension. However, if a market exists, having to sell property at the current market price is not viewed as resulting in an undue hardship.
To qualify for an extension, you would have to: (i) show that you do not have enough cash and assets convertible into cash in excess of current working capital to meet your tax obligations; (ii) show you cannot borrow the amount needed except on terms that would inflict serious loss and hardship; and (iii) provide security for the tax debt. The determination of the kind of security—such as a bond, filing a notice of lien, mortgage, pledge, deed of trust, personal surety, or other form of security—will depend on the particular circumstances involved. However, no collateral is required if you have no assets.
Avoiding more serious consequences.
Many taxpayers ignore their tax liabilities when they run into financial difficulties—for example, by failing to file their tax returns. However, tax liabilities do not go away if left unaddressed, and failing to deal with the problem often exacerbates it. It is very important that you timely file a properly prepared return, even if full payment cannot be made. Include as large a partial payment as you can with the return, and start working with the IRS on one (or more) of the options discussed above as soon as possible. Otherwise, you may face escalating penalties, the risk of having liens assessed against your assets and income, or even seizure and sale of your property. In many cases, these tax nightmares can be avoided by taking advantage of the arrangements offered by the IRS.
Larry Kopsa CPA
First and most importantly, don't let your inability to pay your tax liability in full keep you from filing your tax return properly and on time. It is also important to remember that an extension of time to file your tax return doesn't also extend the time to pay your tax bill.
Even if you can't make full payment of your liabilities, timely filing your return and making the largest partial payment you can will save you substantial amounts in interest and penalties. Additionally, there are procedures for requesting payment extensions and installment payment arrangements which will keep the IRS from instituting its collection process (liens, property seizures, etc.) against you.
Overview of the most common penalties.
The “failure to file” penalty accrues at the rate of 5% per month or part of a month (to a maximum of 25%, reached after five months) on the amount of tax your return should show you owe.
The “failure to pay” penalty is gentler, accruing at the rate of only 0.5% per month or part of a month (to a maximum of 25%, reached after fifty months) on the amount actually shown as due on the return.
If both apply, the failure to file penalty drops to 4.5% per month, so the total combined penalty remains at 5%—thus, the maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months, yielding an additional 22.5%. In total, these combined penalties can reach 47.5% of your unpaid liability in less than five years.
Both of these penalties are in addition to the interest that you will be charged for your late payment. If you also missed estimated tax payments, an additional penalty is tacked on for the period running from each payment's due date until the tax return due date, normally April 15th. This penalty is computed at 3% above the fluctuating federal short-term interest rate for the period.
Borrowing money to pay taxes.
Given the rate at which the above-mentioned penalties and interest accrues, it might be a good idea to borrow money to pay the taxes. In many situations, the rate of interest that you would pay to a family member, or even to a bank, is less overall than that which you would have to pay the IRS.
Note that the interest on a loan to pay taxes is nondeductible personal interest. In contrast, if you can take out a home equity loan (if anyone still has equity left in their home) and use the proceeds to pay off your tax debts, you will probably be paying at a lower rate than with other types of loans, and the interest payments will be deductible even if the loan proceeds aren't used in connection with the house.
Credit cards.
It is relatively quick and easy to use credit cards to pay the income tax bill, whether you file your income tax return by mailing a paper copy or by computer. In addition, three companies (Official Payments Corporation at 888-872-9829, Link2Gov Corporation at 888-729-1040, and RBS WorldPay, Inc. at 888-972-9829) are authorized service providers for purposes of accepting credit card charges from both electronic and paper filers. We do not normally advise the use of credit cards because not only is there likely to be at relatively high interest rates and the interest is not deductible the service providers typically charge an additional fee based on the amount you are paying.
Installment agreement request.
If you cannot or prefer not to take out a loan, you might be able to defer your tax payments by requesting that the IRS enter into an installment payment agreement with you. This request is made on Form 9465 or by applying for a payment agreement online. There are various options for making your monthly installment agreement payments, including the direct debit and payroll deduction methods, both of which are made automatically and thus reduce the risk of default.
If you file and request a payment agreement online, there are three available payment options: (1) payment in full within 10 days (which saves on interest and penalties); (2) short-term extension of up to 120 days (for which no fee is charged, but additional penalties and interest accrue); or (3) monthly payment plan (which carries a user fee in addition to the continued accrual of penalties and interest).
You can also request an installment agreement on Form 9465, which can be filed along with either an e-filed or paper return. If the liability is under $25,000, you will not be required to submit financial statements. Even if your request to pay in installments is granted, you will be charged interest on any tax not paid by its due date. However, the late payment penalty will be half the usual rate (0.25% instead of 0.5%) if you file your return by the due date (including extensions).
The IRS charges a fee for installment agreements, which will be deducted from your first payment after your request is approved. The fee for entering into an installment agreement is regularly $105, but it is reduced to $52 when the taxpayer pays by way of a direct debit from the taxpayer's bank account. Notwithstanding the method of payment, the fee is $43 if the taxpayer is an eligible low-income taxpayer. There is a $45 fee to restructure or reinstate an established installment agreement that applies regardless of income levels or method of payment.
Note that an installment agreement request can be made after the expiration of a hardship extension period (described below). Additionally, the IRS has the authority to enter into an installment agreement calling for less than full payment of the tax liability over the term of the agreement if it determines that such an agreement will facilitate partial collection of the liability.
The installment agreement may terminate, and all your taxes become due immediately, under certain circumstances (for example, if you stop making payments).
The IRS is required to enter into an installment agreement at your request (a “guaranteed installment agreement”) if the following apply:
• the tax liability is $10,000 or less (not counting interest and penalties);
• within the prior 5 years you have not (i) failed to file returns or pay taxes, or (ii) entered into a previous installment agreement;
• the IRS determines the tax liability cannot be paid in full;
• the installment agreement provides for full payment within 3 years; and
• you agree to comply with the tax laws during the agreement period.
As a matter of policy, the IRS often grants guaranteed installment agreements even if taxpayers are able to fully pay their accounts.
Undue hardship extensions.
You may also qualify for an extension of time to pay if you can show that payment would cause “undue hardship.” An undue hardship extension is applied for with Form 1127, to which you must attach a statement of assets and liabilities as well as an itemized list of receipts and disbursements for the 3 months preceding the tax due date.
If you qualify for an undue hardship extension, you will be given an extra six months to pay the tax shown as due on your tax return. You will avoid the failure to pay penalty, but you will still be charged interest. If the IRS determines a “deficiency” (i.e., that you owe taxes in excess of the amount shown on your return), the undue hardship extension can be as long as 18 months and, in exceptional cases, another 12 months can be tacked on. However, no extension will be granted if the deficiency was the result of negligence, intentional disregard of the tax rules, or fraud.
To establish undue hardship, it is not enough to show that it would just be inconvenient to pay your tax when due. For example, if you would have to sell property at a “sacrifice” price, you may qualify for an undue hardship extension. However, if a market exists, having to sell property at the current market price is not viewed as resulting in an undue hardship.
To qualify for an extension, you would have to: (i) show that you do not have enough cash and assets convertible into cash in excess of current working capital to meet your tax obligations; (ii) show you cannot borrow the amount needed except on terms that would inflict serious loss and hardship; and (iii) provide security for the tax debt. The determination of the kind of security—such as a bond, filing a notice of lien, mortgage, pledge, deed of trust, personal surety, or other form of security—will depend on the particular circumstances involved. However, no collateral is required if you have no assets.
Avoiding more serious consequences.
Many taxpayers ignore their tax liabilities when they run into financial difficulties—for example, by failing to file their tax returns. However, tax liabilities do not go away if left unaddressed, and failing to deal with the problem often exacerbates it. It is very important that you timely file a properly prepared return, even if full payment cannot be made. Include as large a partial payment as you can with the return, and start working with the IRS on one (or more) of the options discussed above as soon as possible. Otherwise, you may face escalating penalties, the risk of having liens assessed against your assets and income, or even seizure and sale of your property. In many cases, these tax nightmares can be avoided by taking advantage of the arrangements offered by the IRS.
Larry Kopsa CPA
HERE IS A NOVEL WAY OF RAISING MONEY
Pastor Accused of Not Giving Communion without Tax Refunds
A Texas pastor has been accused by some of his parishioners of refusing to give them communion if they don’t donate their tax refunds to his church. The pastor, John Goodman of the Houston Unity Baptist Church, denied linking the communion to the donations. However, he told the local Fox News station in Houston that he had made an appeal for donations from tax refunds to help build a parking lot for the church, which would enable the church to keep the property. He said only four or five members of the church donate any money, and he called the rest of them “devils” and demons.”
“I asked if there were any other members, which I know it is, that got income tax money,” he said. “I ask if they would like to contribute it to the new parking lot.”
However, he denied that he had refused communion unless members donated their tax refunds.
A Texas pastor has been accused by some of his parishioners of refusing to give them communion if they don’t donate their tax refunds to his church. The pastor, John Goodman of the Houston Unity Baptist Church, denied linking the communion to the donations. However, he told the local Fox News station in Houston that he had made an appeal for donations from tax refunds to help build a parking lot for the church, which would enable the church to keep the property. He said only four or five members of the church donate any money, and he called the rest of them “devils” and demons.”
“I asked if there were any other members, which I know it is, that got income tax money,” he said. “I ask if they would like to contribute it to the new parking lot.”
However, he denied that he had refused communion unless members donated their tax refunds.
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