CPA Reminder: 2011 Self-employed Healthcare Credit

Posted on March 17, 2012 by The LA CPA

Yes, I know.  Health insurance is very high and a drag on the small business.  So, lessen the pain by taking the healthcare credit if you qualify.  Here are the facts:

Starting in tax year 2011, you take the credit on Form 1040, line 29.

However, you must be one of the following to qualify:

  • A self-employed individual with a net profit reported
    on Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ
    (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit
    or Loss From Farming.
  • A partner with net earnings from self-employment
    reported on Schedule K-1 (Form 1065), Partner’s Share of Income,
    Deductions, Credits, etc., box 14, code A.
  • A shareholder owning more than 2 percent of the
    outstanding stock of an S corporation with wages from the corporation
    reported on Form W-2, Wage and Tax Statement.  This last situation catches clients off guard because they have to do an odd adjustment to their W-2.  Our bookkeepers work with clients to properly report their payroll.  If you did not properly include the health insurance in your W-2, then you should amend it.

The insurance plan must be established under your business.

  • For self-employed individuals filing a Schedule C,
    C-EZ, or F, the policy can be either in the name of the business or in the
    name of the individual.
  • For partners, the policy can be either in the name of
    the partnership or in the name of the partner. You can either pay the
    premiums yourself or your partnership can pay them and report the premium
    amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included
    in your gross income. However, if the policy is in your name and you pay
    the premiums yourself, the partnership must reimburse you and report the
    premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be
    included in your gross income. Otherwise, the insurance plan will not be
    considered to be established under your business.
  • For more-than-2-percent shareholders, the policy can be
    either in the name of the S corporation or in the name of the shareholder.
    You can either pay the premiums yourself or your S corporation can pay
    them and report the premium amounts on Form W-2 as wages to be included in
    your gross income. However, if the policy is in your name and you pay the
    premiums yourself, the S corporation must reimburse you and report the
    premium amounts on Form W-2 as wages to be included in your gross income.
    Otherwise, the insurance plan will not be considered to be established
    under your business.

If this in confusing, speak to your CPA.  The deduction is too good to pass up.

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Don’t Shoot the CPA! Something New This April If You Can’t Pay Your Taxes

Posted on March 15, 2012 by The LA CPA

You’ve worked hard, but got laid off.  Then on April 15th the following year, your CPA tells you that you owe taxes, but you don’t have the money.  What are you going to do?  Check out what our “compassionate” IRS has to say:

The Internal Revenue Service today announced a major expansion
of its “Fresh Start” initiative to help struggling taxpayers by taking steps to
provide new penalty relief to the unemployed and making Installment Agreements
available to more people.

Under the new Fresh Start provisions, part of a broader effort started at the
IRS in 2008, certain taxpayers who have been unemployed for 30 days or longer
will be able to avoid failure-to-pay penalties. In addition, the IRS is doubling
the dollar threshold for taxpayers eligible for Installment Agreements to help
more people qualify for the program.

“We have an obligation to work with taxpayers who are struggling to make ends
meet,” said IRS Commissioner Doug Shulman. ”This new approach makes sense for
taxpayers and for the nation’s tax system, and it’s part of a wider effort we
have underway to help struggling taxpayers.”

Penalty Relief

The IRS announced plans for new penalty relief for the unemployed on
failure-to-pay penalties, which are one of the biggest factors a financially
distressed taxpayer faces on a tax bill.

To assist those most in need, a six-month grace period on failure-to-pay
penalties will be made available to certain wage earners and self-employed
individuals. The request for an extension of time to pay will result in relief
from the failure to pay penalty for tax year 2011 only if the tax, interest and
any other penalties are fully paid by Oct. 15, 2012.

The penalty relief will be available to two categories of taxpayers:

  • Wage earners who have been unemployed at least
    30 consecutive days during 2011 or in 2012 up to the April 17 deadline for
    filing a federal tax return this year.
  • Self-employed individuals who experienced a 25
    percent or greater reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not
exceed $200,000 if he or she files as married filing jointly or not exceed
$100,000 if he or she files as single or head of household. This penalty relief
is also restricted to taxpayers whose calendar year 2011 balance due does not
exceed $50,000.

Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A to
seek the 2011 penalty relief. The new form is available on IRS.gov.

The failure-to-pay penalty is generally half of 1 percent per month with an
upper limit of 25 percent. Under this new relief, taxpayers can avoid that
penalty until Oct. 15, 2012, which is six months beyond this year’s filing
deadline. However, the IRS is still legally required to charge interest on
unpaid back taxes and does not have the authority to waive this charge, which is
currently 3 percent on an annual basis.

Even with the new penalty relief becoming available, the IRS strongly
encourages taxpayers to file their returns on time by April 17 or file for an
extension. Failure-to-file penalties applied to unpaid taxes remain in effect
and are generally 5 percent per month, also with a 25 percent cap.

Installment Agreements

The Fresh Start provisions also mean that more taxpayers will have the
ability to use streamlined installment agreements to catch up on back taxes.

The IRS announced today that, effective immediately, the threshold for using
an installment agreement without having to supply the IRS with a financial
statement has been raised from $25,000 to $50,000. This is a significant
reduction in taxpayer burden.

Taxpayers who owe up to $50,000 in back taxes will now be able to enter into
a streamlined agreement with the IRS that stretches the payment out over a
series of months or years. The maximum term for streamlined installment
agreements has also been raised to 72 months from the current 60-month
maximum.

Taxpayers seeking installment agreements exceeding $50,000 will still need to
supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F).
Taxpayers may also pay down their balance due to $50,000 or less to take
advantage of this payment option.

An installment agreement is an option for those who cannot pay their entire
tax bills by the due date. Penalties are reduced, although interest continues to
accrue on the outstanding balance. In order to qualify for the new expanded
streamlined installment agreement, a taxpayer must agree to monthly direct debit
payments.

Taxpayers can set up an installment agreement with the IRS by going to the
On-line Payment Agreement (OPA) page on IRS.gov and following the
instructions.
These changes supplement a number of efforts to help struggling
taxpayers, including the “Fresh Start” program announced last year. The
initiative includes a variety of changes to help individuals and businesses pay
back taxes more easily and with less burden, including the issuance of fewer tax
liens.

Generally, an offer will not be accepted if the IRS believes that the
liability can be paid in full as a lump sum or through a payment agreement. The
IRS looks at the taxpayer’s income and assets to make a determination regarding
the taxpayer’s ability to pay.

So don’t shoot your CPA who informs you of bad news.  We’re here to help.

Source: IRS Site

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Are You a Bomar Enough to Move to the IPad in Your Small Business?

Posted on March 6, 2012 by The LA CPA

Back in the 1970′s, I was amazed at a new small business gadget, the Bomar Brain.  This little $40 calculator could add, subtract, divide, and do other mathematical functions.  You could even carry it with one hand.  Good by to the clunky adding machines whose tapes rolled under the desk across the power cord. Every small business soon had a handheld calculator, though the Bomar Brain faded into the techie sunset.

In the last few years, business has now come to another technological crossroad.  Is the iPad necessary to run a business?  According to Lauri Kulikowski in Why Every Business Needs an iPad?, it is necessary. According to the article, businesses can be flexible with product demos, videos, images in a mobile setting.  This article did not surprise me since I have watched people in the entertainment industry use the iPads to show demos, head shots, and movie clips.

What has kept me from buying an iPad was Microsoft Office.  I was told that iPad did not support Microsoft Office but had its own word processor, spreadsheet, etc.

However, this may have changed.  Check out online.com.  Apparently, Online.com provides an App (either free or $4.99 a month) that can bring the Microsoft Office to life.  I have to try this out, but this could be the missing link for me and the iPad.  Most of my work entails analysis, accounting, etc.  The imaery doesn’t help very much.

However, if you are a small business Android lover, the Onlive Desktop bridges that, too.

Either way, what you must remember in a small business is that technology can open up opportunities and change how your clients see you.  Small businesses must be vigilant with technology.

 

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Taxes and a Load off Your Debt, Or is It?

Posted on March 2, 2012 by The LA CPA

Losing your home is bad enough, but paying taxes because the experience rubs salt in the wounds.  Prior to 2007, there was very little relief for a debtor that had a residence debt forgiven.  However, that changed in 2007.  Canceled debt is normally taxable to you, but there are exceptions. One of
those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

Here are some points I found on the IRS web site regarding the tax implications and considerations:

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions. However, I have found that some clients that have lost  rental property with a high basis may have a chance of offsetting the gain with the rental’s basis.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home
in Box 7.

If the bank forgave your debt, do not wait until April the next year to tell your tax advisor.  Sometimes, proper tax planning can help reduce the pain.

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Don’t Mess with Taxes

Posted on February 29, 2012 by The LA CPA

(From Marx Brother’s Duck Soup)

The new Secretary of War Chicolini( Marx brother Chico) is discussing the  funding of the war:

Minister of Finance: Something must be done! War would
mean a prohibitive increase in our taxes.

Chicolini: Hey, I got an uncle lives in Taxes.”

Minister of Finance: No, I’m talking about taxes – money,
dollars.

Chicolini: Dollas! There’s-a where my uncle
lives. Dollas, Taxes!

People usually stress about taxes in the first quarter of every year.  What a person doesn’t need is a negligent or dishonest tax preparer.  Brian O’Connell wrote an article, 5 Signs You’ve Got a Lousy Tax Preparer which offered some good advice.  However, the points he raised really seemed to point to a dishonest tax preparer, as opposed to a lousy one.  Here are the points:

  1. Your preparer promises a big tax refund:  This is comical.  Why would a tax preparer proclaim a big refund especially before seeing the documents unless they are going to “create” numbers?
  2. Your preparer doesn’t have proper credentials:  The IRS has really buckled down on the education and registration of tax preparers.  This of course doesn’t apply to CPAs where we have our own standards to adhere to.
  3. The tax preparer requires that your refund be deposited into their bank:  This is a clear red flag to run.  We never take our client’s refunds in any circumstance.
  4. The preparer’s fee is based on a percentage of your refund:  This is another ethical violation for CPAs.  Never take the bait.

Taxes are not something to gamble with.  Make sure you understand your tax return.  Expecially understand where the numbers come from.  Make sure your preparer is not dreaming up numbers.

 

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Business Cents: Before You Add That New Employee or Invest in that Venture…

Posted on February 25, 2012 by The LA CPA

Several years ago, a small business prospect asked me about their idea of employing a new sales person.  At that time, the company’s industry was high sales with low margins.  This prospect were being crowded out by the big home technology manufacturers who can work at a much higher sales volume.  This company’s gross profit margin was 6%.  However, to increase their market share, they wanted to hire a sales person for $60,000.  I explained quickly that the sales person would have to bring in $1,000,000 of sales just to break even on the new employee’s salary.  This does not count the additional costs like worker’s compensation insurance, payroll taxes, vacation pay, etc.

Now, when you add up all of the relative costs, including sick pay, you have the true cost of the employee.  If you divide that by the hours it takes an employee to perform a function, you arrive at your “burden rate.”

Small businesses must do this type of analysis before strategizing to hire new bodies.  Other considerations are discussed in How to figure out the actual cost of your employees by Ken Kaufman.

Kaufman’s article eludes to the burden rate per employee, but this analysis sometimes is harder to produce in manufacturer settings.  For example, if you have an employee that designs multiple products, you would have to quantify the hours the employee spends on each design.  That may sound easy unless that employee moves between products in one day.

This kind of analysis will be valuable to a small business in setting prices, budgeting and forecasting, and expanding.  However, where small businesses handicap their information is in business plans.  A venture capitalist or entrepreneur should start at the granular data of an employee’s burden rate.  Once you know that, you can project the production efficiency and work your way to pricing the item based on a gross profit ratio.  Lastly, you can project your units and arrive at forecasted sales.

What a small business entrepreneur will find out from this strategy is whether their pricing will be competitive in their respective market space.  If not, they should know that before funding a small business.

 

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CPA Tax Tip:Are You Tarnishing Your Golden Years By Using Your Retirement as a Piggy Bank?

Posted on February 23, 2012 by The LA CPA

Years ago, a client referred me to a songwriter.  The first thing I noticed about the songwriter is that he and his wife had liquidated his IRAs to buy a bigger house.  Now this was prior to the first home exception of $10,000. I cringed.  The upshot was that the large distribution sling-shotted the couple into a much higher tax bracket, triggered additional income tax, and a 10% premature penalty.

There are some exceptions, now, but before you make the plunge into that pot of gold reserved for the golden years, you should know  the rules:

1. Payments you receive from your Individual Retirement Arrangement before
you reach age 59 ½ are generally considered early or premature distributions.  This was the situation of my clients.

2. Early distributions are usually subject to an additional 10 percent tax.  As previously discussed, there was no way I could get them out of this penalty.

3. Distributions are reported to the IRS and identified such as rollovers or due to death.

4. Distributions you roll over to another IRA or qualified retirement plan
are not subject to the additional 10 percent tax. You must complete the
rollover within 60 days after the day you received the distribution.  These are also not subjet to income taxes also.

5. The amount you roll over is generally taxed when the new plan makes a
distribution to you or your beneficiary.

6. If you made nondeductible contributions to an IRA and later take early
distributions from your IRA, the portion of the distribution attributable to
those nondeductible contributions is not taxed.  If you do not need a tax deduction (yes I have had client’s like this), then this may be a good strategy to shelter some investment income.

7. If you received an early distribution from a Roth IRA, the distribution
attributable to your prior contributions is not taxed.

8. If you received a distribution from any other qualified retirement plan,
generally the entire distribution is taxable unless you made after-tax employee
contributions to the plan.

9. There are several exceptions to the additional 10 percent early
distribution tax, such as when the distributions are used for the purchase of a
first home (up to $10,000), for certain medical or educational expenses, or if
you are totally and permanently disabled.

The place to start is to not NEED the extra money.  Try to live within your means so as to not be tempted to withdraw your retirement nest egg.  If you need help in creating a budget, or analyzing your expenses, contact your CPA.

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What! I Have to Pay Taxes on My Unemployment Benefits?!

Posted on February 17, 2012 by The LA CPA

Do you remember the Marx Brother’s “contract scene” in  Night at the Opera? It started with Groucho reading, “The party of the first part, will be known in this contract as the party of the first part…”  Chico said it was “no good.”  He couldn’t say why, so he wanted to hear it again.

You may feel like you are experiencing this non sequitur when you find out that the government, who just paid unemployment benefits to feed you, asks some of it back in April of the next year.  So, before sending them one of your frozen hams, you should know how these benefits are taxed:

Unemployment compensation generally includes, among other forms, state
unemployment compensation benefits, but the tax implications depend on the type
of program paying the benefits. You must report unemployment compensation on
line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.

Here are four tips from the IRS about unemployment benefits.

1. You must include all unemployment compensation you receive in your total
income for the year. You should receive a Form 1099-G, with the total
unemployment compensation paid to you shown in box 1.

2. Other types of unemployment benefits include:

  • Benefits paid by a state or the District of Columbia
    from the Federal Unemployment Trust Fund
  • Railroad unemployment compensation benefits
  • Disability payments from a government program paid as a
    substitute for unemployment compensation
  • Trade readjustment allowances under the Trade Act of
    1974
  • Unemployment assistance under the Disaster Relief and
    Emergency Assistance Act

For complete information on each of the benefits listed, see chapter 12 in
IRS Publication 17, Your Federal Income Tax, or Publication 525, Taxable and
Nontaxable Income.

3. You must report benefits paid to you as an unemployed member of a union
from regular union dues. However, if you contribute to a special union fund and
your payments to the fund are not deductible, you only need to include in your
income the unemployment benefits that exceed the amount of your contributions.

4. You can choose to have federal income tax withheld from your unemployment
compensation. To make this choice, complete Form W-4V, Voluntary Withholding
Request, and give it to the paying office. Tax will be withheld at 10 percent
of your payment. If you choose not to have tax withheld, you may have to make
estimated tax payments throughout the year.

However, there may be a silver lining if you did not make enough money to pay taxes.  Another possibility is that you over-withheld on compensation you earned before or after you received your benefits which ends up paying the taxes for the unemployment benefits.

As a planning tool, if you were unemployed early in the year, you should look into claiming no more than zero on your W-4 to withhold taxes.  If that is not enough, you may want to withhold even more taxes in the year.  To avoid planning may bring an unwelcome surprise with penalties in April.

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Charlie’s Angels and the 21st Century Small Business Service Environment

Posted on February 14, 2012 by The LA CPA

Remeber the original 1970′s Charlie’s Angels TV program with Ferrah Fawcett?  John Forsythe was the boss you heard, but never saw.  He would speak through a telephone speaker box to his three female crime fighters.  Now that is the ultimate in remote business operations.  I don’t think I could ever text any of my bookkeepers or accountants to drop-kick some thug.

Elizabeth Sile talks about running a business remotely in her article, How to Run a Business Remotely. We  rare pretty good at running remotely because I chose over ten years ago when very few companies were operating in such a way.

Our style not only accomondates the employees who mostly work remotely (their home or client’s office), but also our clients because of our ability to work paperless.  This is not to say that nobody can go into the office.  There are some things that must be operated from the office.

However, taking Ms. Sile’s suggestions.  These are her points:

Make the right hires: This is the most important of all the points.  As Jim Collins says, “You must have the right persons on the bus.” Small business must hire the right people to the right job.  If you are bogged down by family hires, you have to make tough decisions.

Use technology to your advantage: This point has been our biggest advantage because we developed systems of virtual filing cabinets and attached scanned documents that speed up our services.  Small business must weigh each investment about its logical benefit and payback.

Communication is key: This is obvious, but should not be the small business’s first concern.  There are so many ways people communicate remotely.  Implementing a system will not be a big task.  What is more important is the frequency and style of communication.  Text messages could be misinterpreted so choose wisely.

My addition: Think scalable: I am always thinking about our systems and how they will work when we land those next couple of clients. As a small business that has a high profile on the internet, we get prospects every week.  Many times these prospects require a short timeframe.  I always hire people before my bookkeepers and accountants are over worked.  Small business must always have a eye on the horizon to grow.

All of this entails a strategy.  Set out the strategy of where you are going and use the tactics laid out above to be a striving small business in the 21st Century.

 

 

 

 

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Small Business and the Social Media Complaint Game

Posted on February 9, 2012 by The LA CPA

Last week, I joined a conference call with an individual that can help my client’s entertainment business.  What we found out after the call was that this individual and his company had two scathing unanswered criticisms reported online.  Immediately, red flags went up.

Then yesterday, a client set up a meeting with another individual in the entertainment industry.  When I looked up his name, guess what?  In bold print was a scathing feedback on Yelp, it too was unanswered.

Courtney Rubin’s article, Why Every Minute Counts When It Comes to Social Media Complaints reminded me of the social media dangers in any industry.  She wrote, “A whopping 88 percent of customers said that if confronted with unanswered complaints on a company’s social media site, they’d be either somewhat less likely or far less likely to do business with the company in the future.”

Any a small business, especially in the entertainment industry, must be vigilant about what is posted on line.  If you grow to a size where the Twitter and Face Book comments become too numerous, you may have to hire a company to do this for you.

So, let’s say you are a small company and don’t have the resources to hire a company to find these comments.  What I suggest is you do it yourself.  Type your name, or your company’s name with the term, “scam,”  “Ripoff,” or “review” and see what comes up.  Make sure you go through a few pages and not just page one.

If you find one, address it professionally.  Take the high road, and reply to the concern.  Use the platform to state your company’s values like how customer satisfaction comes first.  Don’t beat up on the complainer no matter how abusive they are.  Give examples on how you remedied issues.

Another thing you can do is have some of your good customers write a response to the posting, along with yours.  The positive comments should outweigh the negative one.

Any small business, and especially one in the entertainment industry, should be aware of what is said about them  in social media.  Don’t be a ostrich and ignore it.

 

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