Yellis & Foley: Tax News Blog

New Tax Benefits for Employers Hiring the Unemployed

Thu, 18 Mar 2010 21:19:27 -0400

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.

Fine Print:

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.

Frivolous Income Tax Arguments

Mon, 08 Feb 2010 15:31:00 -0500

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.

The IRS Buys Shotguns

Thu, 04 Feb 2010 17:43:18 -0500

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.]

IRS Notices Getting Better?

Tue, 26 Jan 2010 15:40:01 -0500

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.

Related:

The original press release.

From the IRS YouTube Channel: Received a Letter from the IRS?

Note

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.

IRS: Scrutiny & Audit Rumors

Thu, 21 Jan 2010 13:55:20 -0500

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.

Tax Tips for New Businesses

Wed, 13 Jan 2010 10:48:20 -0500

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.

Pine Tree Zones: Economic Development Incentives

Tue, 15 Dec 2009 09:18:54 -0500

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.

Process

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).

Benefits

• 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

Advice

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.

More information on the state's website.

Year End: Donations

Fri, 11 Dec 2009 09:03:54 -0500

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.

Donating Stock

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

Self Employment & Estimated Taxes

Individual Tax Planning

Business Tax Planning

Year End: Business Tax Planning

Wed, 09 Dec 2009 08:54:35 -0500

Bonus Depreciation

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.

Expensing Assets

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.

Our Prognostication

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.

Note for Maine Businesses

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

Self Employment & Estimated Taxes

Individual Tax Planning

Year End: Self-Employment & Estimated Taxes

Tue, 08 Dec 2009 09:09:50 -0500

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.

Year End: Individual Tax Planning

Mon, 07 Dec 2009 10:09:35 -0500

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

New Car Sales Tax Deduction

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.

Selling Stock

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.

Retirement Savings

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.

College Deductions

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).

Golf Cart Tax Credit

Thu, 03 Dec 2009 15:26:53 -0500

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.

Wired Magazine had this entertaining piece on street-legal carts.

[On Fridays, we find something ironic or otherwise humorous in tax law.]

IRS Audit Logic

Wed, 02 Dec 2009 11:54:03 -0500

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.

Electronic Filing

Mon, 30 Nov 2009 15:13:10 -0500

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.

E-Filing Efficiencies

▪ 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 has more E-File information.

Mandatory E-Filing?

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.

IRA & Retirement News

Mon, 23 Nov 2009 13:30:20 -0500

IRA Contributions & Potential Tax Credit

A new provision in President Barack Obama's 2010 budget proposal would allow employees to make IRA contributions via payroll deductions through their employers. The item was discussed recently by a U.S. Treasury Department official during a roundtable discussion in New Hampshire with the Small Business Administration's Office of Advocacy. The discussion was cited in a recent Small Business Advocate newsletter (PDF link).

This proposal, according to the treasury official, is intended to expand retirement savings to those who currently do not have employer-sponsored retirement plans available. The proposal is also intended to be simple and inexpensive for employers to implement. Employers with 10 employees or fewer would be exempted from the automatic IRA proposal. The proposal would also make available a tax credit for employers that offer employees automatic IRAs.

IRS Retirement Planner

The IRS recently unveiled a retirement plan website, offering information and analysis tools. The site is designed for small businesses and the self-employed, people more likely to have control over their retirement plan options.

Reviewing this type of information as you compile your year-end tax documents is a good practice. Asking your accountant questions during the preparation of your return can ensure you achieve retirement goals by keeping your tax strategy in line with your plans.

Botox Tax

Fri, 20 Nov 2009 11:06:48 -0500

There is a new 5% tax on elective cosmetic surgery in the new Senate health care bill. Unlike most taxes, we think this will not dissuade those seeking the surgery. Also, by the numbers, the Senate thinks this is a $100 billion industry. That is equivalent to Australia's grocery store sales. Put another way, cosmetic surgery spending could fund 16 states of Maine for two years.

[On Fridays, we find the lighter side of tax news.]

Contractor vs. Employee

Wed, 18 Nov 2009 16:32:31 -0500

A frequent question we get relates to employee classification. Small business owners and their employees often need clarification on the legal definitions of an independent contractor vs. an employee. The issue has tax, insurance, and potentially legal ramifications.

Introduction

An independent contractor is someone contracted to perform specific service for another business. Contractors are essentially their own companies, responsible for taxes, expenses, insurance, and equipment. Businesses that use contractors instead of employees can save some payroll taxes and other costs associated with hiring employees.

The classification is more complicated than simply calling someone an 'independent contractor.' The IRS recognizes these general categories of control and independence when defining a contractor:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

When the hiring company controls what the worker does and how, is in charge of the business aspects of engagement, and if the relationship is like employment, the hire is really an employee--no matter what they call it. However, there are not a clearly defined set of standards that identify when it is contracting and when it is employment. The IRS makes this judgement on a case by case basis, thus the issue frequently comes up in audits.

Issues

The IRS, and other regulatory agencies, look for misclassified employees for several reasons, some of which can be very costly.

Taxes: A 'contractor' who should really be an employee pays 7.5% of their income in payroll tax. Although they see some benefit, it can be an onerous expense. Employers typically pay this half the employment tax, a cost above and beyond the wages paid.

Insurance: People inappropriately classified as contractors are not covered by the workers' compensation insurance carried by employers. Independent contractors should carry their own insurance for on the job injuries. Employers should be careful: workers comp audits often focus on inappropriately classified (and thus uncovered) workers.

Misclassification: If the IRS audits a business and discovers workers misclassified as contractors, employers may be forced to pay past employment taxes as well as penalties and interest.

Advice

It is important to understand the risks to you (the small business owner) of misclassified workers. This issue alone could jeopardize your entire business operation. The costs you could face for treating employees as independent contractors could force you into closing your business. You should fully understand the tax costs and insurance risks surrounding the issue, and take appropriate steps to mitigating those risks.

As always, we recommend planning ahead of time and keeping good records. Especially for independent contractors, because some business expenses can be deducted from business income. A sound tax strategy complemented by solid records makes preparing and filing the tax return easier (thus cheaper).

Written contract: Use a written contract to clarify your intent and working relationship with a contractor. While a contract alone is not enough to confirm 'independent contractor' status, it can be helpful in outlining how the relationship fits that status.

Insurance: If you are in an industry with heavy manual labor or risk of injury, or an industry that normally has workers compensation insurance, contact the appropriate state agency to determine who needs to be covered under such a policy. Sometimes independent contractors for tax purposes may be treated as employees for workers comp purposes.

Forms: Independent contractors that are paid more than $600 in a year must be provided with a form 1099-MISC at the end of the year. Independent contractors rely on the reported amount and their expense records to determine their income for tax purposes.

Resources

The IRS links to guidelines

SCORE, a non-profit that organizes small business education, has this helpful article

Legal Zoom advice (While not a law firm, Legal Zoom sells standard legal documents.)

Agencies Responsible for Labor Issues

Maine Department of Labor

Maine Workers' Comp Board

Maine Revenue Service

Federal Department of Labor

Internal Revenue Service

2009 Individual Federal Tax Changes

Mon, 16 Nov 2009 14:04:46 -0500

If you did not receive our fall newsletter, you missed this summary of the 2009 individual federal tax changes:

One of the important changes allows for individuals to increase their sales tax deduction on the purchase of a qualified new motor vehicle. The motor vehicle must be purchased between February 17, 2009 and December 31, 2009. A qualified motor vehicle includes a passenger automobile, light truck, or motorcycle, the original use of which begins with the purchaser. There is a weight limitation and a maximum deduction that is allowed. The new deduction can increase the amount of your standard deduction or can be used as an additional itemized deduction.

The new law also increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy efficient exterior windows, and energy-efficient heating and air conditioning systems. The Energy Star website has more information on qualifying items.

(Future tax updates and analysis will be posted here. You can subscribe via email or any RSS feed aggregator.)

Maine Tax Reform Delayed for People's Veto

Fri, 13 Nov 2009 09:21:23 -0500

Proposed Maine State income and sales tax changes have been placed on hold. On November 9th, Maine Secretary of State Matthew Dunlap announced that people's veto supporters collected enough signatures to place the measure on the June 8, 2010 ballot.

The ballot question will be: "Do you want to reject the new law that lowers Maine's income tax and replaces that revenue by making changes to the sales tax?"

If voters reject the changes, the status quo tax law will remain in place. If voters accept the changes (defeat the people's veto), the changes will take effect 30 days after election results are certified.

The proposed changes are in Chapter 382.

Previous coverage on Yellis & Foley's Tax News Blog.

Health Reform Ignores Tax Inequity

Thu, 12 Nov 2009 13:58:18 -0500

Introduction

While healthcare bills and the surrounding debate is far above our pay grades, we can discuss the tax changes in this "aircraft carrier behemoth" legislation. It is important to emphasize that nothing has been decided, thus our analysis is of the bill passed by the House of Representatives and the bills being formulated in the Senate. These bills have serious tax implications, yet fail to address a major tax inequity.

Prognostication

We would not be surprised to see the entire effort fail because of disagreements over the many issues involved. We would also be quite surprised to see the bill passed by the House become law. What seems to be happening is consensus for some type of health care reform. There is gathering momentum in Congress to regulate health insurance.

Tax Return Enforcement

A core element in these proposals is enforcement through the individual income tax return. After the level of mandatory heath coverage is determined, individuals not purchasing such coverage will be penalized as part of the annual income tax return filing. The penalty size is the subject of continuing debate. This would be very similar to the plan instituted in Massachusetts. It subjects non-conformers to additional taxes upon the filing of their state income tax returns.

Self-Employed Tax Inequity Not Addressed in Reform Proposals

Tax law treats employer and individually purchased health insurance differently. Employer-provided benefits are tax-favored for the employee, but post-tax for the self-employed. This blatant inequity forces the self-employed (and others not covered by employers plans) to pay additional taxes for equivalent coverage. Although this tax is somewhat hidden, it generally increases taxes by approximately 15% of the cost of insurance. This extra tax, coupled with the higher cost of individual health coverage in Maine, has created an untenable situation for many of our clients. This tax inequity has been talked about in Washington, but there has been no substantive action thus far.

Conclusion: Congress Should End the Inequity

It is refreshing to see that the House bill addressed the inequity in the tax treatment of employer provided health benefits for domestic partners. However, it has not addressed the inequity faced by millions of self-employed people across the country. We call on our legislators to act on behalf of the self-employed: ending this tax inequity is a step towards a reformed health insurance system.

If you have any questions regarding the health care issue, especially as it relates to your taxes, do not hesitate to contact us. We will be happy to share what we know with you.