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Posts from the ‘Federal Business Tax’ Category

Dec 14

Retirement Plans for Small Businesses

SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses like yours. The relative ease of administration and the complete discretion you, as the employer, are permitted in deciding whether or not to make  annual contributions, are features that are especially attractive. Here’s how these plans work.

If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting this model SEP, which doesn’t have to be filed with the IRS, you will have satisfied the SEP requirements. This means  that you, as the employer, will get a current income tax deduction for contributions you make on behalf of your employees. Your employees will be taxed not when the contributions are made, but at a later date when distributions are made, usually at retirement.  Depending on your specific needs, an individually-designed SEP—instead of the model SEP—may be appropriate for you.

When you set up a SEP for yourself and your employees, you will make these deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA,  and that he or she can exclude from income, is the lesser of: (i) 25 percent of compensation, and (ii) $49,000 (for 2011). The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own  contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

There are other requirements which you have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these  requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans. The detailed records that traditional plans must maintain to comply with the complex nondiscrimination  regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS—Forms 5500—which, for a pension plan, could require the services of an actuary. What record-keeping is required can be done by a trustee of the  SEP-IRAs—usually a bank or mutual fund.

Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (i.e., a “simple” plan). Under a simple plan, a “simple IRA” is established for each eligible employee, with the employer making  matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The simple plan is subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can  adopt a “simple” 401(k) plan, with similar features to a simple plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

If you have any questions about the above, or any other topics,please do not hesitate to contact us.

Sincerely,

Mike Jackson, CPA
Minar Northey LLP

(206) 282-2666

mike@minarnorthey.com

 

Dec 2

Year End Planning

It’s that time of year again when CPA’s are screaming “DEDUCT DEDUCT DEDUCT!!!”.

But we say, “WAIT WAIT WAIT!!!”

Although conventional wisdom encourages taxpayers to accelerate deductions and defer income, this is not always the path to reducing your tax bill.  Only after a carefull analysis of your current situation and your projected future are you able to determine what’s right for you.

Still a little lost?  We can help.

Sincerely,

Mike Jackson, CPA
Minar Northey

mike@minarnorthey.com

206.282.2666

 

Nov 30

Home Office Deductions

If you’re self-employed and work out of an office in your home, and if you satisfy the strict rules that govern those deductions (discussed below), you will be entitled to favorable “home office” deductions—that  is, above-the-line business expense deductions for the following:

  •         the “direct expenses” of the home office—e.g., the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
  •         the “indirect” expenses of maintaining the home office—e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of  mortgage interest, real  estate taxes, and casualty losses.

In addition, if your home office is your “principal place of business” under the rules discussed below, the costs of travelling between your  home office and other work locations in that business  are deductible transportation expenses, rather than nondeductible commuting costs. And you may also deduct the cost of computers and related equipment that you use  in the home office, without being subject to the “listed property” restrictions that would otherwise apply.

Tests for home office deductions. You may deduct your home office expenses if you meet any of the three tests described below:  the principal place of business test, the place for meeting  patients, clients or customers test, orthe  separate structure test. You may also deduct the expenses of certain storage space if you qualify under the rules described further below.

Principal place of business.You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. (What “exclusively  and on a regular basis” means is not entirely self-evident. We can help you figure out whether your home office satisfies this make-or-break requirement.) Your home office  is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities  test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is  the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.

Home office used for meeting patients, clients, or customers.You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with  patients, clients, or  customers. The patients, clients or customers must be physically present in the home office.

Separate structures.You’re entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that’s located in a separate unattached structure on the  same property as your home—for example, an unattached garage, artist’s studio, workshop, or office building.

Space for storing inventory or product samples.If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home  expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.

Amount limitations on home office deductions.The amount of your home office deductions is subject to limitations based on the income attributable to your use of the home office, your  residence-based deductions that aren’t dependent  on use of your home for business (e.g., mortgage interest and real estate taxes), and your business deductions that aren’t attributable to your use of the home office. But any home office expenses that  can’t be deducted because of these limitations may be carried over and deducted in later years. We can help you figure out how these limitations affect your home office deductions.

Sales of homes with home offices.If you sell—at a profit—a home that contains, or contained, a home office, the otherwise available $250,000/$500,000 exclusion  for gain on the sale of a principal residence won’t apply to the portion of your profit equal to the amount of depreciation you claimed on the home office. In addition, the exclusion won’t apply to the  portion of your profit allocable to a home office that’s separate from the dwelling unit. Otherwise, the home office won’t affect your eligibility for the exclusion.

We can help. Proper planning can be the key to nailing down the optimum tax treatment for your office at home expenses.  Please call us at (206) 282-2666 or email mike@minarnorthey.com if you would like to discuss these (or any other) matters.

Sincerely,

Michael Jackson, CPA
Minar Northey LLP

Apr 4

IRS Audit Statistics

The chance of receiving an audit generally changes based upon income level and filing type. Below are IRS statistics that are broken down by individual, income level, and business type. These are the overall numbers provided by the IRS, but realize that there are many factors that go into determining if the IRS is going to audit. IRS audits are rarely random and can be avoided by understanding how the IRS audit process works and what the common red flags are for an audit.

Total Amount of IRS Audits on Individual Tax Returns 

 
2007
2008
2009
Total Returns Filed
134,542,879
137,849,635
138,949,670
Total Audits Conducted
1,384,563
1,384,563
1,425,888
Percentage Audited
1.03%
1.01%
1.03%

 

IRS Audit Rates Based on Income

 
Percentage of Total Returns Filed
Percentage of Returns Audited
No adjusted gross income
2.13%
2.15%
$1 – $24,999
40.51%
0.90%
$25,000-$49,999
24.31%
0.72%
$50,000-$74,999
13.44%
0.69%
$75,000-$99,999
7.99%
0.69%
$100,000-$199,999
8.69%
0.98%
$200,000-$499,999
2.25%
1.92%
$500,000-$999,999
0.43%
2.98%
$1,000,000-$4,999,999
0.23%
4.02%
$5,000,000-$9,999,999
0.02%
6.47%
$10,000,000+
0.01%
9.77%

 

IRS Audit Rates Based on Return Type

 
Returns Filed
Returns Audited
Percentage Audited
Small Corporation
2,146,400
18,298
0.85%
Large Corporation
65,546
9,536
14.55%
Subchapter S
4,390,857
17,455
0.40%
Partnership
3,348,845
12,855
0.38%
Individual
137,849,635
1,384,563
1.01%

Feb 3

Schedule C Small Biz 2010 Prep and 2011 Planning

IRS recently released Publication 334, Tax Guide for Small Business, for use by individuals who file a Schedule C or C-EZ in preparing their 2010 returns and planning for the 2011 tax year. It highlights several administrative and tax law changes for 2010 and 2011, including several changes enacted as part of the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act).

Background. Publication 334 states that a taxpayer is self-employed if he carries on a trade or business as a sole proprietor (i.e., owner of unincorporated business) or independent contractor. A “trade or business” is defined as an activity carried on with the intent of making a profit, although the taxpayer need not actually make a profit in order to be in a trade or business. The publication further stated that a taxpayer’s part-time business, conducted in addition to a full-time job, can be considered self-employment.

Many service providers who offer their services to the general public, including doctors and lawyers, are considered independent contractors. The distinction between an employee and an independent contractor often turns on the amount of control exercised by the payor. In general, an individual is an independent contractor if the payor has the right to control or direct only the result of the work and not how it will be done. The earnings of an independent contractor are subject to self-employment tax.

Statutory employees (who have box 13 checked in their W-2s) and individual owners of single-member limited liability companies (LLCs) also use Schedule C or C-EZ.

What’s new for 2010. Publication 334 examines these new items for 2010:

… Self-employment tax wage base. For 2010, the maximum net self-employment earnings subject to the social security part of the self-employment tax remains at $106,800.
… Self-employed health insurance deduction. For 2010, self-employeds can deduct any self-employed health insurance deduction reported on Form 1040, line 29, from self-employment earnings.
… Increased Code Sec. 179 expense deduction dollar limits. For tax years beginning in 2010 (and 2011), the amount that may be expensed under Code Sec. 179 is $500,000.
… Standard mileage rate. For 2010, the standard mileage rate is 50¢ per mile.
… New general business credits. For 2010, there are 2 new general business credits: (1) the credit for small employer health insurance premiums, for eligible small employers’ nonelective contributions to purchase health insurance for its employees (Form 8941); and (2) the new hire retention credit, up to $1,000 for retaining qualifying employees hired after Feb. 3, 2010 and before Jan. 1, 2011 (Form 5884-B).

What’s new for 2011. Publication 334 highlights these new items for 2011:

… Self-employment tax wage base. For 2011, the maximum net self-employment earnings subject to the social security part of the self-employment tax remains at $106,800.
… Self-employment tax reduction. For 2011, self-employeds pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.
… Standard mileage rate. For 2011, the standard mileage rate is 51¢ per mile.
… Information reporting requirements. For 2011, subject to limited exceptions, a person receiving rental income from real estate is treated as engaged in the trade or business of renting property for information reporting purposes. In particular, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income must provide an information return to the service provider and IRS.

Extended due date for 2010 return. The due date for calendar year Form 1040 for 2010 is Apr. 18, 2011. For fiscal year taxpayers, the due date is the 15th day of the 4th month after the end of the fiscal year. Any taxes owed are due by Apr. 18, 2011, to avoid late-payment penalties and interest.

For help in determining how the above rules and regulations apply to you and your business, please contact us.

Sincerely,

Minar Northey LLP
mike@minarnorthey.com
206.282.2666

Jan 20

Rental Property Owners Beware (New Filing Requirements Take Effect in 2011)

Beginning with payments made after Dec. 31, 2010, with certain exceptions, taxpayers receiving income from rental real estate are considered to be in the trade or business of renting property, and subject to the same information reporting requirements as taxpayers in other trades or businesses. That is, if an owner of rental property makes a payment of at least $600 to a service provider (such as a plumber. electrician, property manager, accountant, etc.) during the tax year, the owner must file an information return with IRS and with the service provider. Typically, the payments will be reported on Form 1099-MISC.

Certain taxpayers are exempt from this information reporting. You will not have to report payments to service providers if you fit within one of the following categories:

  • an individual who receives rental income of no more than the “minimal amount.” This amount has not yet been defined and is to be determined under IRS regs;
  • an individual who receives substantially all rental income from renting his principal residence on a temporary basis. This category includes active members of the uniformed services and employees of the intelligence community
  • any other individual for whom the information reporting requirements would cause hardship.

Note that the exceptions refer to individual taxpayers. Presumably, therefore, if you own rental real estate as a corporation, partnership, trust, estate or other entity, that entity will be subject to the information reporting rules even if one of the above conditions is met. In addition, many of the terms used are not defined and will need to be clarified by IRS guidance.

Please keep in mind that this is only an overview of the new rental real estate information reporting rules. If you would like further information, we’d be happy to help.

email:  mike@minarnorthey.com
phone:  206.282.2666
web:  www.minarnorthey.com

Jan 20

Looking for A Summary of 2010 Tax Legislation? Look No Further.

Tax Planning Alert—The 2010 Tax Act

The newly passed and signed 2010 Tax Act, formally named the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, includes several provisions that will affect taxpayers. Here is the information you need to know now about this legislation, formally named the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Major Provisions
The new law
• postpones the sunset of the 2001 and 2003 tax cuts;
• reduces the estate tax;
• extends unemployment benefits;
• includes an alternative minimum tax (AMT) patch;
• continues through 2012 the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003; and
• extends for two years the repeal of the itemized deduction phase-out and the personal exemption phase-out.

Provisions That May Affect You
Estate Tax
The Act temporarily reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011).

Payroll Tax
For 2011, the Act reduces the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2%. The employer’s portion remains 6.2%.

Family
The Act extends several expired or expiring provisions affecting families, including the following:

• The increased standard deduction for married taxpayers filing jointly, which is scheduled to expire after 2010, continues for two years.
• The $1,000 child tax credit amount continues for two years instead of reverting to $500.
• The increased starting and ending points for the earned income credit continues for two years.
• The $3,000 amount for the child and dependent care credit, which was scheduled to revert to $2,400 after 2010, continues for two years.
• The American Opportunity Tax Credit continues for two years.

The Act also makes adjustments to the gift exclusion and generation-skipping transfer (GST) tax that will affect family giving:

• The federal gift tax exemption is increased to $5 million for 2011 and 2012, up from $1 million in 2010.
• The GST tax exemptions are set at $5 million for 2011 and 2012. The exemption limit is scheduled to drop to $1 million beginning in 2013.

Business
The Act extends the 100% bonus depreciation for business property acquired after September 8, 2010, before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). It also sets the expensing limitation under IRC §179 at $125,000 and the phase-out threshold amount at $500,000 for 2012. The Act then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.

The temporary 100% exclusion of gain from the sale of certain small business stock under IRC §1202, enacted by the Small Business Jobs Act of 2010, is extended through 2011.

AMT
The Act includes an AMT patch for 2010 and 2011.

• For 2010, the AMT exemption amounts will be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly.
• For 2011, the amounts will be $48,450 and $74,450, respectively.

Needless to say, the 2010 Tax Act is still very new. It is only just being analyzed by professional advisers. The law is potentially subject to modifications by technical correction acts. In addition, provisions of the law may be interpreted by the Treasury Department issuing regulations and by the IRS issuing forms and instructions.

If you’d like help determining how all these new rules apply to you, your business or your family, please don’t hesitate to contact us.

email:  mike@minarnorthey.com
phone:  206.282.2666
web:  www.minarnorthey.com

May 25

President Obama Urges Help for Small Businesses (Video)