Tax Cut for Uncle Sam

Each business or investment falls in either one of these tax categories, namely the capital gain and the ordinary tax. Businessmen who do not know which category do their business falls under opt to have both. This is a disadvantage because they might be paying more than what they should actually pay for.

Determining Difference Between Ordinary and  Capital Gain Taxes

If you sell an asset or an investment like a house, dividend or business to gain profit, capital gain is applied. But if your business earned money through gaining interest, then ordinary tax is applied.

Capital gain only applies when you sold the business or asset to a price which is higher than the asset’s adjusted tax basis. However, if the said asset is given to you as a gift or inheritance and you sold it, a different set of rules is applicable to it.

Capital Gain Tax Computation

The amount that you’re going to pay depends on your marginal bracket, the type of asset that was sold and how long you own the asset or investment. If you own the asset for less than one year, then it is considered as short term gain thus ordinary tax is applied. But if you own the asset for more than one year, then it is considered as long term capital gain, thus capital gain is applied.

The amount of capital gain is also dependent on your bracket. If you belong to a bracket that is higher than 15%, the rate is 15%. But if you belong to the 10% and 15% bracket, the rate is 5%. This rate applies to all sales and transactions done from May 6, 2003 to December 31, 2008.

Businessmen prefer to pay capital gain because it has a lesser rate. Capital gain rates range from 5% to 28% while the ordinary rate is 35%.

There are instances when selling the asset that you owned for more than a year could place you in a higher bracket. If this happens, you could still pay for a portion of the asset using capital gain at the 5% bracket, but the remaining portion of the taxable asset should be paid using the 15% rate.

Using the “netting rules” in computing for the capital gain taxes

Short-term capital gains and losses are netted with each other while long-term gains and losses are also netted against each other using another set of rules. When the net short-term gains or losses as well as the net long-term gains or losses are computed, these nets are netted against each other using a standard formula. All these rules and formulas are collectively known as the “netting rules”.

When the capital losses are netted against the gains, the excess of which could be as high as $3,000 and it could be deducted to the ordinary income of each year. The unused capital losses are carried forward to the following year.

If you intend to make lots of money, you should know when to sell your assets and the proper tax that applies to it.

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Historical image of 1870 Tax Day Reminder

Normally, all previous years’ taxes are to be postmarked no later than midnight on April 15th of the following year of any given year. Meaning, that your taxes due for 2010 must be paid and filed by April 15th 2011, correct? Well, normally, yes; but not this year. The only time that this normally fluctuates is if and when April 15th falls on a weekend. April 15, 2011 will be on a Friday – so what gives? For the millions of American, like me, who wait until the last possible minute (my mantra – procrastinate later) this is welcome, but puzzling news. While we procrastinators and last minute filers rarely reason long enough to ask why, it is important to know the correct date, and to realize how it may or may not have an effect on other dates relevant to Tax Day 2011 such as automatic extension dates.

Extension to Pay NOT an Option

It is imperative to state and remind that although the IRS grants “automatic” extensions allowing taxpayers to file their final forms sixty days later, the extension and any estimated owed taxes are still due on tax day, which for 2011 means that your forms and payment (normally done on a Form 1040 V) must be postmarked at or before midnight, Monday April 18, 2011.

Tax Day 2011 Extended Due to Emancipation Day Recognition

What holiday? So by now, most of us Americans are racking our brains and scratching our heads trying to figure out what holiday in April is nationally celebrated. Tax Day 2011 has been extended due to remembrance, recognition and celebration of Emancipation Day, a Washington D.C. holiday, not a nationally recognized holiday.

Emancipation Day had been recognized previously by (Washington D.C.) mayoral proclamation and now by being officially designated as an officially recognized public holiday of the District of Columbia. The holiday commemorates the “first freed” by the U.S. federal government when President Lincoln signed the Compensated Emancipated Act nine months prior to his issuance of the infamous Emancipation Proclamation.

As a result of the public holiday in Washington D.C. the Department of Treasury, the governing body overseeing the Internal Revenue Service, has extended Tax Day 2011 until Monday, April 18, 2011.

Careful Calendar Markings Required

Emancipation Day does not equate to Tax Amnesty Day. Just because Tax Day 2011 is not April 15th versus the 18th does not automatically adjust other dates by 3 days. Keep these dates in mind:

Overseas Exception Due Date: June 15, 2011, the 15th falls on a regularly scheduled business day and hence the deadline will not be extended without approval.

Automatic Approval Extensions Due Date: June 15,  2011 (remember – estimated payments must still be sent in via IRS Form 1040V with the request for extension; it is better to over estimate as you may still be held liable for penalties for underpayment.)

Approved Filing 1040 Extensions Due Date: October 15, 2011

The extension of Tax Day 2011 will give some the necessary additional weekend and time to prepare and file the required forms and payments, but hopefully it will allow all to reflect on the reason – Emancipation Day, commemorating the freeing of those held in servitude in the federal capitol.

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Small Business Filing Options

Different Small Business Tax Return Filing Options

Every wage earning citizen of the United States of America is required to pay their income taxes; for that matter, also Medicare and Social Security taxes too. Further, almost every citizen pays taxes in some fashion or other regardless of wag earnings in the forms of sales tax, property taxes or even vehicle registration. However, when it comes to corporations however, there are distinct differences in preparing taxes for big corporations and small businesses. Small business tax returns are often complicated and complex. The following tips may prove to be useful in filing a small business’ tax return.

Though many small business owners prefer to personally file their tax returns, it is possibly to the best interest of an organization to have professional tax preparers to be in charge of the tax organization. There are instances where a small business’ taxes are very complex because of the numerous billable services, and inexperienced business owners with no accounting background are confused to no end. A professional tax preparer will be able to adequately prepare each small business tax return with accuracy. Yet several small business owners prefer to deal with the expertise of Certified Public Accountants (CPAs). A CPA can keep a business’ financial ventures in order, clearly underlining the problem areas and discrepancies. What’s more, CPAs with expertise in small business taxes are in perfect position to suggest tax credits and deductions which can lessen a business’ annual tax. By hiring professionals, a small business’ tax return can be prepared in a short period of time, giving allowances to make adjustments if there are inconsistencies with the record.

Yet there are business owners who are uncomfortable to having other people conduct their monetary business for them, and prefer to prepare the taxes on their own. At such, it is a wise move for business owners to enlist themselves to basic tax courses. These lessons are available at local colleges and tax preparation businesses. Once business owners are equipped with the technical knowhow of the most common tax regulations and laws, and how to properly file their reports, then they can take advantage of the tax preparation course for a lifetime.

Another option for business owners would be to obtain tax software programs, which enable them to prepare their taxes with ease and speed. Tax software’s are user friendly and offer step-by-step procedures for easy and hassle-free tax preparation. The softwares are usually free and offer pertinent forms, but small business owners may have to purchase the software since the small business forms are only available in paid versions. Software programs also enable small business taxes to be transmitted through the internet to be sent to its proper taxing agency.

Overall, small business owners can prepare their own tax returns or ask for the help of CPAs and other professional tax preparers. They can also enroll in tax preparing courses and invest in tax software programs. Whatever the case, business owners should never forget that they are eligible for several tax deductions and credits. If properly credited, a business can have thousands of dollars in savings. These deductions come in the form of allowances, health care benefits, loans, charity donations, and the likes. The IRS offers these deductions to give small businesses the opportunity to keep more of their income for more financial ventures and growth in the future.

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Tax Software Spelled Out

Choosing Tax Software Program

Each year brings millions of Americans rely on professional tax preparers to organize their taxes. These professional tax preparers may be in the form of a Certified Public Accountant (CPA) and tax agencies. Though these professionals reduce the risk of mistakes and any discrepancies in the report, their charges are often somewhat expensive. Due to this, many Americans opt to file their federal and state tax returns on their own. Though the traditional way to prepare taxes is through paper tax forms, some citizens now rely on tax software programs in preparing their taxes and submitting it electronically to the state and federal taxing agencies.

Similar to all software programs, each software has its advantages and disadvantages. In a nutshell, software programs enable taxpayers to prepare their taxes in an efficient and orderly manner. The most popular types of tax software include Turbo Tax, TaxAct, and TaxCut, among many others. Each program offers several versions such as standard, deluxe, and premium version. Each software offers different features and services; however, all of them contain federal income tax return forms. Depending on the software version, it can contain both the state and federal income tax return forms. There are also versions which can assist in tax deductions and credits for bigger tax savings.

The Advantages of Using Tax Software Programs

Tax softwares are designed to be user friendly in order to cater to all Americans. These programs usually offer step-by-step processes which give taxpayers the opportunity to finish preparing their taxes in half the time than it takes on traditional written method. The software also enables taxpayers to transfer the data from a state tax return to a federal return. This saves time in filing, as well as assures the consistency of the information, since both forms contain the same data.

Most users comment on how they are able to save more money in using tax software programs than by enlisting the services of professionals. Tax preparers often charge more than $100 for preparing a citizen’s tax returns; tax software programs range are often free, and if the user wants better versions, then these programs are available for $60 or more.

Lastly, tax software programs enable users to file their taxes electronically, which mean that the taxes are filed faster, and are processed quicker for faster refunds. If for some reason a user is uncomfortable with e-filing, then they are given the option to print their forms.

Disadvantages of Using Tax Software Programs

When it comes to disadvantages, some tax software programs require additional payment for e-filing. There are also those which has hidden fees.

When it comes to tax software programs, it is important that the user first check the reviews for a particular product before buying it. Due to its numerous advantages, one of the most famous disadvantages of tax software falls on hidden charges. With the right program for the right price, Americans can finally file their taxes with ease and confidence.

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Tax Preparations 101

Many small businesses have complex tax records. There are health care options to consider, as well as other billable services which can impact one’s tax books. With these scenarios, it is no wonder that most entrepreneurs are at a loss when it comes to preparing their annual tax returns.

Self Prepared vs. Tax Professional

In order to consolidate efficiently, a lot of small business owners prefer preparing their own tax reports. Contrary to popular belief, this practice is not effective in getting the best deal out of the system. By refusing to hire a Certified Public Accountant (CPA) or enlisting an accounting
franchise to prepare a small business’ taxes, the business actually loses more money in the long run.

Hiring professionals in this important task saves a company more money when compared to executives trying to prepare their own taxes. The logic behind this is that a business has to pay a lump sum once, sit back and relax as a CPA or franchise takes care of the tax report. CPAs
are well-versed with the laws and are experts in finding legal ways to minimize one’s tax return. As a result, companies can have more revenue to see and spend on more important things.

Hiring a Professional CPA

For long-term money saving solutions, it is best to hire licensed CPAs to join a company’s roster. Having a CPA onboard ensures that the executives are making the best financial ventures. It enables them to make wise financial decisions without compromising the business’
growing accounts. Though hiring a CPA at the start may be a financial burden, overtime one can see the results as a business’ tax return grows more and more amiable. For cheaper ventures, there are private CPAs who work freelance that enable companies to ask for financial
advices without hiring them as regular company employees.

Another benefit of working with experts is that a CPA or franchises display impressive accuracy. Much as a business owner or executive loves the company, there are complexities in tax returns only professionals can understand and resolve. CPAs have special areas of
expertise, such as those who are dealing with small business taxes. If an individual’s business is involved in more than one complex situation, then it is a wise idea to initiate a contract with franchises. Franchises can oversee one’s taxes and provide all the services which correspond
to a particular business’ needs.

In addition to this, professionals can prepare an annual tax return with speed, enabling a business to beat the deadline and iron out any kinks in the report. This benefit is often neglected and shunned when the tax return is being prepared by inexperienced business personnel.

Overall, it is most effective to hire professionals such as franchises and CPAs when it comes to preparing taxes for small businesses. These experts are superior in their field and can provide a small business with the customized care it needs. Through the help of these professionals,
small businesses can prepare their taxes with speed, accuracy, and precision.

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Be Aware of Email Scams

We are not even sure that Google and their massive data centers could come up with all of the possible scams possible on the Internet. Tacky and unbelievable as they may seem, especially preying on consumers, emails scams on the Internet are a real threat to anyone connected today. The latest Internet and electronic mail (email) scams involves the Electronic Federal Tax Payment System, or the EFTPS.

EFTPS Email Scam

One would think that Americans are so use to email scams that it would go without saying that every email received from an unknown source should be handled with suspicious fingertips around the keyboard, but sadly, email scam and fraudsters are getting scarily better at appearing authentic.  Emails are currently being sent en mass to U.S. email accounts claiming to be from the Electronic Federal Tax Payment System (EFTPS).

All consumer, especially American taxpayers, should be aware of this EFPTS email scam claims to come from the Electronic Federal Tax Payment System. The scam EFPTS e-mail states that tax payments made by the e-mail recipient through EFTPS have been rejected. The e-mail then directs recipients to a bogus website containing malicious software (malware) infecting the victim’s computer. To avoid the bogus website and malware, do not click on any links, open any attachments or reply to the sender for any e-mail you may receive that claims to come from EFTPS.

The IRS and the Financial Management Service (the Treasury bureau that owns EFTPS) does not communicate payment information through e-mail.

The IRS requests that anyone receiving a suspected scam EFTPS email do the following:

• Do not reply!
• Do not click or access any links contained in the suspect email; do not submit ANY information.
• REPORT the suspected scam IRS email.

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Maximize your home office deduction.

The Taxpayer Relief Act of 1997 included a modification of the IRS’s definition of “principal place of business” that will permit a larger number of taxpayers to qualify for the home-office deduction. For tax years beginning after 1998, the deduction will be available for home offices that are used for administrative or management activities related to the taxpayer’s business (for example, billing, maintaining records, ordering supplies, scheduling appointments, creating reports).
Business/Personal Boundaries Home-based businesses, by their very nature, often have less structure. While many consider this to be an advantage, working at home can be a double-edged sword. The lack of structure tends to result in home-based workers putting in more hours than when they did not work at home. Having set office hours and “closing up” at the end of the day will help you balance business and personal matters.

Under the amended rules, a taxpayer is allowed to deduct expenses of a home office that is used for business purposes only if the space is used “exclusively” on a “regular basis” as:

The principal place of business carried on by the taxpayer,

1. A place for meeting with clients or customers in the ordinary course of business, or
2. A place for the taxpayer to perform administrative or management activities associated with the business, provided there is no other fixed location from which the taxpayer conducts a substantial amount of such administrative or management activities.

The Taxpayer Relief Act of 1997 added this third provision to the definition of principal place of business.

The exclusive-use test will be satisfied if a specific portion of the taxpayer’s home is used solely for business purposes or inventory storage. The regular-basis test is satisfied if the space is used on a continuing basis for business purposes (that is, incidental business use will not qualify.)

In determining the principal place of business (first provision under the definition of principal place of business, above), the IRS considers two factors: Does the taxpayer spend more business-related time in the home office than anywhere else? Are the most significant revenue-generating activities performed in the home office? Both of these factors must be considered when determining the principal place of business.

Employees
To qualify for the home-office deduction, an employee must satisfy two additional criteria. First, the use of the home office must be for the convenience of the employer (for example, the employer does not provide a space for the employee to do his/her job). Second, the taxpayer does not rent all or part of the home to the employer. Employees who telecommute may be able to satisfy the requirements for the home-office deduction.

Expenses
Home office expenses are classified into three categories:

Direct Business Expenses relate only to the taxpayer’s business activity (for example, supplies, salaries). Expenditures for additional phone lines, long-distance calls, and optional phone services for the business may be deductible as direct business expenses. However, basic local telephone service charges (that is, monthly access charges) for the first phone line in the residence generally do not qualify for the deduction.

Permissible Expenses are expenditures that could be included as itemized deductions in the individual’s tax return (for example, mortgage interest, real estate taxes, and casualty losses).

Previously Non-deductible Expenses would not be deductible if not for the home office deduction (for example, insurance, utilities, and depreciation).

Limitation
Home office deductions are limited to the gross income from the business activity. Previously non-deductible expenses cannot create or increase a net loss from a business activity. However, a carryover to future years is available for unused, allowable home-office expenses.

Sale of Residence
Tax rules generally permit a $500,000 (married filing jointly) or $250,000 (single or married filing separately) exclusion on the gain from the sale of a primary residence. If part of the home is used for business purposes, the gain is divided into two parts — personal-use portion (the exclusion applies) and business-use portion (exclusion does not apply). For example, a taxpayer who qualifies for the exclusion, but has used 25 percent of the home for business purposes during the during past five years, will only be able to apply the exclusion against 75 percent of any gain recognized on the sale of the home.

As with many tax laws there are exceptions to this rule. If you’d like a clearer picture of the size of the exclusion you qualify for, please call us.

Taxes
The “office-in-home” tax deduction is valuable because it converts a portion of otherwise nondeductible expenses (for example, utilities and homeowners insurance) into a deduction. The treatment of home offices for income tax purposes is one of the more controversial provisions in the tax law.

An individual is not entitled to deduct any expenses of using his/her home for business purposes unless the space is used exclusively on a regular basis as the “principal place of business.” The IRS applies a 2-part test to determine if the home office is the principal place of business.

Do you spend more business-related time in your home office than anywhere else?

Are the most significant revenue-generating activities performed in your home office?

If the answer to either of these questions is no, the home office will not be considered the principal place of business, and the deduction will not be available.

Business use of the home by an employee must also be for the convenience of the employer. These rules make it very difficult for an employee to qualify for the deduction.

If these three tests are met, the deduction is limited to the gross income from the business activity. Furthermore, a deduction for home-office expenses cannot create or increase a net loss from the business. Any disallowed deduction may be carried over to future years.

Taxpayers taking a deduction for business use of their home must complete Form 8829. Some tax experts believe that taking a deduction for home-office expenses, whether clearly allowable or not, increases the likelihood of an IRS audit.

These are some thoughts to consider.

If you have a home office or are considering one, please call us. We’ll be happy help you take advantage of these deductions.

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Business tax returns and records.

Regardless of how life changes, one of the biggest hurdles you’ll face in running your own business is to stay on top of your numerous obligations to federal, state, and local tax agencies. A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records.

You can safely assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” claim. The old legal saying that “ignorance of the law is no excuse” is perhaps most often applied in tax settings. On the other hand, it is surprising how many small businesses actually overpay their taxes. They often neglect to take deductions they’re legally entitled to, or just don’t know about certain breaks that can help them lower their tax bill.

Adding to the mayhem, we have tax codes that seem to be in a constant state of flux. Creating exceptions for special groups has resulted in a steady stream of new and revised tax laws, which have lengthened the Internal Revenue Code to over 4,500 pages and rendered it barely understandable to even the most experienced tax professionals. Often one section can run up to several hundred pages. A special tax service used by tax professionals explains the meaning and application of each part of the code. It is contained in another 12 volumes! The harder Congress tries to simplify the code, the more complex it becomes.

Preparing your taxes and strategizing how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, MONEY, and (God forbid) an auditor knocking on your door, is to have a professional accountant handle your taxes. Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code and gain the advantage over the IRS.

Nevertheless, many accountants don’t understand the mammoth tax code and end up being too conservative with your tax deductions. The more conservative they are, the more taxes you end up paying.

Unfortunately, the cryptic and mystifying nature of the tax code generates a lot of folklore and misinformation that also leads to costly mistakes. Here is a list of some common small business tax misconceptions:

1. All Start-Up Costs Are Immediately Deductible

Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.

You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation. You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.

The only catch is that in order to take advantage of the immediate deduction you must spread out the remainder of your start-up costs over 15 years (180 months).

So the immediate deduction is a good option for businesses with less than $14,000 of start-up expenses. If you’re startup expenses are greater than $14,000, then you’ll do better by not taking an immediate deduction but spreading your start-up costs over 5 years (60 months).

2. Overpaying The IRS Makes You “Audit Proof”

The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. Being incorporated enables you to take more deductions.

Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are pretty much equivalent to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend $1,000 in legal and accounting fees to set up a corporation, only to determine shortly after that they want to change their name or company direction. Plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

4. The home office deduction is a red flag for an audit.

This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.

5. If you don’t take the home office deduction, business expenses are not deductible.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

6. Taking an extension on your taxes is an extension to pay taxes.

Extensions enable you to extend your filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date.

7. Part-time business owners cannot set up self-employed pensions.

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

Besides avoiding these pitfalls, possessing basic knowledge of how the tax system works is also beneficial. After all, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If your accountant messes up, you pay the penalty, not him.

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