Tax News Blog
Maine Tax Reform
Last Tuesday, Maine voters rejected the tax reform law that would have expanded the sales tax to services and lowered the income tax. Despite some confusion around the wording of the ballot question and conflicting advertisements, voters clearly rejected the previously enacted law.
Both the media and various politicians claim a continued need to reform or change Maine's tax laws. What remains unclear is how those laws could be changed and what the voters actually support.
The IRS has established a task force to study the issue of licensing tax preparers that aren't CPAs, enrolled agents, or attorneys. The proposal could include initial tests, certification, and ongoing education requirements. The plan may be modeled on Oregon's existing law.
The proposals will impact the tax preparer community, as many tax firms use minimally trained employees to prepare returns. The potential increased scrutiny may push these firms to raise their practices and, subsequently, prices. CPAs are already subject to certification and ongoing professional education rules. Existing clients of CPA firms won't be affected by the proposed changes.
In 2011, the ten year Bush tax cuts will phase out. Currently there are Congressional efforts to keep the cuts, but there are also efforts to raise additional tax revenue. In the end, the cuts will probably expire. Thus in 2011, the following will probably occur:
■ Income Rates: the 36% and 39.6% tax brackets will be reinstated for married filers making more than $250k and singles making more than $200k;
■ Capital Gains: for taxpayers above the 28% income bracket, the capital gains rate will increase from 15% to 20%;
■ High Income: other credits and deductions may be phased out across higher income levels.
As pressures mount to balance the federal budget, Congress could look to reinstate higher progressive income tax schedules. Rates could hit 50% for those with the highest adjusted gross incomes.
If you haven't received your income tax refund yet, now is the time to check. In our Links & Tools section, we've got handy links to the IRS and Maine Revenue Service's refund status applications. On each of those sites, using your tax return, you can track where your refund is at in the process.
IRS Refund Status
Some returns are being held up with Schedule M issues. Everyone earning income should have filed the Schedule M to receive the "Making Work Pay Credit." Filers that failed to claim the Making Work Pay Credit (6.2% of earned income, capped at $400 per person) are having it added to their returns. Unfortunately, this means extra processing time and delayed refund penalties. Here at Yellis & Foley, we sorted through potential Schedule M issues early in the season and prepared all our clients' returns accordingly. It can pay to have a CPA.
We've blogged very irregularly for the past few months. Now that April 15th has come and gone, we'll have more time to post tax news and relevant analysis.
One of the most common issues we discussed with clients during tax season was the new health care law. Although it has now become law, we're still not sure which provisions will survive intact and which will be changed before they become effective.
CCH, part of a tax software company, produced a brief on the new law and it's tax implications. We are reposting it here for your information (PDF download).
We've got a few updates from tax land for you. Things are very busy here at the office, but the end is in sight. Don't wait until the 14th to call your tax man!
IRS Cracks Down on Businesses Using Independent Contractor Status Improperly. This from CNN:
If your business uses independent contractors, get ready for new scrutiny. Hoping to boost tax revenue, the IRS and many state governments are cracking down on how companies classify their workers.
When employers report wages for independent contractors on IRS form 1099, rather than a W-2, they aren't required to pay unemployment insurance, worker's compensation insurance or payroll taxes for them. But the rules governing which workers are genuinely "independent" are strict -- and often flouted.
The Internal Revenue Service launched a program last month that will randomly examine 6,000 companies over the next three years for employee misclassifications. The federal government estimates it will raise $7 billion over the next 10 through tighter enforcement.
Most Americans want higher taxes for the rich, but no reduction in entitlements. This from a Quinnipiac University poll, reported by Reuters:
The Quinnipiac University poll found that 60 percent of Americans among both major political parties think raising income taxes on households making more than $250,000 should be a main tenet of the government's efforts to tame the deficit. More than 70 percent, including a majority of Republicans, say those making more than $1 million should pay more.
But 80 percent say raising taxes on those making less than that should not be part of the government's approach. Moreover, most oppose touching Medicare and Social Security - two long-term drivers of the budget deficit over the coming decades.
Got the homebuyers credit? Don't sell your house too soon. The IRS will be policing the public datbases of real estate sales, seeking to recapture the home buyers credit. If a person buys a home between 1/1/09 and 4/30/10 and sells within three years, the tax credit is recaptured.
Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law recently.
Employers' Share of Social Security Withholding: Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after the date of enactment. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.
$1,000 Business Tax Credit: In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.
Family members and other relatives do not qualify.
Employer must get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.
Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.
On the one hand, we've got the IRS trying to play nice by making taxpayer notices easier to follow. On the other hand, they buy shotguns. No surprise, today we've got more of the latter.
The IRS recently released an 80 page PDF outlining frivolous tax arguments [link is a PDF]. The document outlines dozens of the top frivolous arguments, rebuffs them with the law, and concludes with a description of the penalties for using these kinds of argument in your tax evasion scheme.
Apparently some people have never met an accountant. Some taxpayers have actually argued income taxes are voluntary. Others claim that they don't meet the IRS's definition of 'person.' Had they consulted an accountant, they would have been reminded of the certainty and universality of taxes. Frankly, we'd rather hear that from an accountant than from the IRS.
For those of you thinking about not filing your taxes this year, the IRS is sending out a subtle message: "watch out."
According to the Federal Business Opportunities website, the IRS is seeking to buy 60 shotguns for its Criminal Investigation Division.
[On Fridays, we find the lighter side of tax news.]
On January 11th, the IRS announced a program to redesign its communications with the public. Like a good government agency, it established a new office (with the simple moniker "Office of Taxpayer Correspondence") to oversee the redesign. The goal is to make its notices simple and effective.
The IRS has already released the first few notices it redesigned. The new notices have a lot more whitespace, more bold headings, and seem more sequential. However the few we looked at were several additional pages long! "We want to make sure that taxpayers understand what they read in the simplest language possible," said the head of the new IRS office. We'll see how this goes.
For perspective: the IRS uses 1,000 different notices to correspond with taxpayers, and sends out 200 million annually. Yikes.
The original press release.
From the IRS YouTube Channel: Received a Letter from the IRS?
Tax return season has started, and thus our postings to this blog will lessen. Be sure to get your stuff together and visit your tax preparer soon--we're all ready and waiting for you.
We follow a few reputable IRS prognosticators and in-the-loop people. Here's the latest in scrutiny and audit alerts:
Appraisers: in a memo to field agents, the IRS mentioned the penalties for misstatements in appraisals that result in taxes saved. These penalties apply to the payer of the tax and may apply to the appraiser. Agents will be paying attention to both sides in any reviews or audits.
R&D Tax Credit: The IRS has found many R&D tax credit claims without proper documentation or based on bogus assumptions. Examiners have been told to slap a 20% fine on spurious claims.
S Corporations: Recent audits have found areas of noncompliance, so agents will be on the lookout for: excessive travel, meals, and entertainment expenses; expensing of tools and supplies; taking profits as dividends instead of salary to avoid payroll taxes. S Corporations can be a solid tax structure, but owners should be aware of increased scrutiny and follow the guidelines.
Payroll Tax Audits: notices of 6,000 exams over three years were going out in November, but were delayed until February of 2010. The IRS wanted to fine-tune the selection criteria to select fewer profiles that would result in a no-change audit. Payroll audits look for employee classification issues, executive pay levels, and treatment of fringe benefits. Examiners will be closely looking at S Corps, ensuring owners aren't paid little/no salary. (The illegal strategy is to pay out profits as dividends, avoiding payroll taxes.)
As always, there's reason to fear the IRS if you've followed their regulations and kept good records. While audits can be nerve-wracking and tiresome, there are a few simple steps to prepare. If you've avoided taxes, then fearing the IRS is probably warranted.
According to the New Hampshire Business Review, new business filings were up significantly in December. The most important thing for entrepreneurs is building a profitable business. However, many people get this right, but get fouled up in accounting and taxes.
To be successful, new entrepreneurs need to start out with the right framework and tax strategy. It's not enough to hire a decent accountant, entrepreneurs need to set themselves up for success.
Here are the top six things you should know when starting a new business:
1. First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are: sole proprietorship, partnership, corporation, and S corporation. The choice is based on what you do and how many people will work with and for you.
2. The type of business you operate determines what taxes you must pay and how you pay them. There are four general types of business taxes: income tax, self-employment tax, employment tax, and excise tax. Your liability for these taxes will depend on your entity’s structure and your business activities.
3. An employer identification number is used to identify a business entity. Generally, businesses need an EIN. These can be obtained from the Internal Revenue Service.
4. Good record keeping will help you ensure successful operation of your new business. You may choose any record keeping system suited to your business that clearly shows your income and expenses. The law does not generally require that you keep any special kinds of records. However, the business you are in affects the type of records you need to keep for Federal tax purposes.
5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year is the most common tax year used, but another 12 month period may work better for some businesses (i.e. ski resorts).
6. The business must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and the accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under the accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
Please contact us in order to insure that you start out with the proper framework. We stand ready to assist you with all of your business tax and accounting needs. Share this list with new business people you know.
2009 News: Maine's Pine Tree Zones Expanded
PTZ benefits are now available to businesses anywhere in Maine (previously they were confined to designated areas). Potential savings include incremental increases in employer taxes and sales taxes on new equipment purchases. Businesses need to get their plans certified by the Department of Economic and Community Development and add one net new quality job within two years to qualify for benefits.
Businesses that have expansion plans should contact the Department of Economic and Community Development to begin the application process. The process includes writing a letter, receiving an official response, preparing a plan, and having that plan certified. Upon certification, businesses qualify for available benefits, subject to annual filing requirements. Businesses must create one net new "quality" job within two years of certification ("quality" means meeting a gross income test and making certain benefits available).
• Corporate Income Tax Credit: the tax credit benefit derives from net new PTDZ payroll and property as a percentage of all Maine payroll and property;
• Insurance Premiums Tax Credit: the tax credit benefit derives from net new PTDZ payroll and property as a percentage of all Maine payroll and property; (only applies to Financial Services sector)
• Income Tax Reimbursement: the tax reimbursement benefit derives from income taxes withheld for net new jobs created;
• Sales and Use Tax: paying no tax on all new tangible property purchases that are used in its qualified business activity;
• Access to reduced electricity rates
PTDZ benefits may be a good fit with businesses already planning an expansion, however the incremental tax savings may be minimal if the expansion does not add many employees or purchase much equipment. Applying for certification may be a lengthy, time-intensive process. At Yellis & Foley, we think this certification should be part of your overall tax strategy. Thus, in order to access benefits that exceed your costs, consultation with your CPA is essential.
Donations in General
Giving to charity is tax deductible if you itemize deductions. Check your last tax return to see if you itemize: an attached Schedule A tells you that you did. Cash contributions lower your taxable income dollar for dollar, resulting in a tax savings of: $ contributed * marginal tax rate.
Gifts of stock can make sense for a charity and donor, but from a tax perspective, there's a clear do/do not rule. If you have owned a stock for more than a year and it has appreciated in value, donating it allows you to deduct the full value without paying taxes on the appreciation. If you sold the stock and donated the cash, you'd have to pay the capital gains rate on the sale. Thus the 'do' rule: donate appreciated stock. If your stock has lost value, sell it and donate the cash. If you donated the stock itself, you would not be able to deduct the capital loss. Thus the 'do not' rule: do not donate stock that has lost value.
Past Year-End Planning Entries
Congress adjusted depreciation rules for 2009 to give businesses the incentives to invest in equipment and other capital purchases. Thus buying assets and putting them into use this year can result in huge write-offs. The 2009 bonus depreciation rules allow businesses to claim 50% of the asset's cost in 2009, with the rest being depreciated the regular way. This applies to assets with 20 year (or less) usable lives, and does not apply to most buildings or real estate.
Firms can also expense up to $250k of the cost of an asset instead of depreciating them at all. This provision is is phased out after a firm expenses over $800k in asset purchases, resulting in no expensing available after $1.05 million claimed.
These breaks could be extended in 2010, but they have not been officially acted on. If not extended, bonus depreciation ends and the expensing cap falls to $134k in 2010. Businesses should consider making investments over the next few weeks if they have taxable income to reduce and the purchases fit into normal operations.
The Maine State Government has not followed these federal asset rules. So Maine-based companies should be aware that they will not be able to claim the bonus depreciation or asset expensing against income for Maine taxation purposes.
Special Case: Large SUV Write-off
Buying a new heavy SUV for business-only use may provide the best writeoff of all: expense up to $25k, claim half the remaining cost as bonus depreciation, and take 20% of the remaining cost as regular depreciation. This applies to new SUVs with a loaded weight over 6k pounds used exclusively for business. On an SUV costing $50k, a business could take expense $25k, claim $12.5k as bonus depreciation, and $2.5k as first year depreciation, for a total writeoff of $40k--80% of the purchase price!
Past Year-End Planning Entries
People whose taxes are not withheld in regular wage checks must make estimated tax payments. This applies to business owners and the self-employed. The IRS assesses penalties for underpayment of taxes throughout the year. You should be safe if you're paying 90% of your expected tax bill or 100% of last year's tax bill (110% if your adjusted gross income is above $150k). Your tax professional should provide you with quarterly payment slips when you file each year's return. If you can, increase withholding in December if you are facing a potential underpayment penalty.
Small business owners have a break on 2009 estimated tax rules. If your 2008 adjusted gross income was under $500k and more than half of it was from a firm with under 500 workers, your payin requirement is the lower of 90% of your 2008 or 2009 tax liability. This could free up some cash this year-end (actual taxes are still due on April 15th).
Estimated taxes and underpayment penalties can be tricky, if you're in doubt, its worth a call to your tax professional. If you don't have a tax professional, dealing with these issues may be a good reason to get one.
This week, we're posting advice for year end tax planning. If you think one of the topics could help your tax situation, do additional research or contact your tax professional. We're standing by to answer any questions you've got. --Y&F
Individual taxpayers can deduct sales tax they paid on a new vehicle purchased in 2009. The deduction is available to those who itemize and those that do not (as an addition to the standard deduction). Taxpayers can claim the deduction for multiple vehicles, but the vehicle price is capped at $49,500. Income limits apply: marrieds making over $250k and singles making over $125k do not qualify.
Year end be the time to sell some securities. Stocks that have lost value and stocks that have gained value can be sold for favorable tax treatment, depending on your situation. Capital losses from last year can be used to offset this year's capital gains. If you have losses from this year, they can offset up to $3,000 of other income (the remainder of the loss is carried over to 2010). Talk to your investment advisors and tax professional before selling stock.
Your taxable income can be lowered by contributing money to your individual retirement account (IRA). IRA contributions are tax-deferred, meaning that you don't pay taxes now, but do pay taxes when you withdraw from your IRA. You can contribute up to $5,000 per year; if you are over age 50, the limit rises to $6,000 per year. IRA contributions lower your taxable income dollar for dollar, meaning your tax savings is the contribution * your marginal tax rate. Depending on your income level, you may also qualify for the savers credit, which directly lowers your tax bill.
For taxpayers in college themselves or with dependents in college, paying tuition or buying required supplies can result in tax benefits. Paying tuition now for bills due in January will make the expense claimable for 2009 tax purposes. Buying a computer for a student, if the college requires it (most do), can result in a 20% tax credit (using the Lifetime Learning or Hope credit).
The IRS has approved some golf carts for an alternative energy income tax credit. Buyers of an approved vehicle get a base credit of $2500 plus an additional amount depending on the vehicle. To be eligible, carts have to meet the safety standards required for operation on 35 mph roads. The plugin credit is limited to half of the vehicle's cost.
Street-legal golf carts, now subsidized by the federal government.
[On Fridays, we find something ironic or otherwise humorous in tax law.]
The GAO, a federal inspection agency, recently found that IRS audits of sole proprietors yields less revenue per hour than IRS audits of other entities. This is because sole proprietors generally have lower gross receipts than other entities, such as corporations. So despite significant noncompliance, these types of audits turn up less additional taxes and penalties.
But despite finding more money elsewhere, the IRS will not let Schedule C filers off the hook because of the high levels of noncompliance. The IRS will not send any signal that its ok to fudge on your taxes.
Here at Yellis & Foley, we use E-File for most of our clients' tax returns. We've found the service to be more efficient and less of a hassle, both for us and our clients. We still provide each client with a paper copy of their return--but they don't have to sign and mail anything to the IRS.
▪ Tax returns prepared and filed electronically have less than a 1% error rate, compared to a 20% + error rate for mailed paper returns.
▪ Tax refunds can be received in as little as 10 days when E-Filing and direct deposit are used.
▪ When using E-File, taxpayers can still defer payment until April 15th, even if their return is processed well before the deadline.
The IRS is pushing for a new regulation on professional tax preparers. They want Congress to require all professional firms that file more than 100 returns to use electronic filing.