Tax Planning Archives | Page 6 of 9

To Be, Or Not To Be an S-Corporation, THAT is the Question:

Whether ’tis Nobler in the mind to suffer the stings and angles of outrageous tax planning, or to take hold against a sea of tax pitfalls, and by addressing them : to not cry, to sleep more soundly.

As CPAs, we come across some pretty poor tax planning and accounting with new clients. Sometimes we had to amend tax returns prepared by another CPA.

Jose Zabrano, CPA addressed the need for better planning concerning the C-corp/S-corp question in How Changes in Corporate Tax Rates Can Affect Choice of C vs S Corp

Any time you make decisions of this type, you should always work with a CPA, but you should know the basic differences in the two types of tax designations:

Who pays the Taxes? Normally the main difference between the two is that C Corporations pay their own taxes at their own rates. (This of course is the main deciding factor in Jose’s article.) An S-corporation income or loss passes through to the shareholders’ individual returns where the taxes are paid at their rate.
Medical Deductions:We usually deal with closely-held or sing shareholder companies so medical deductions are an issue. C Corporations usually allow the owner shareholder to deduct their medical insurance and out of pocket medical costs. S Corporations do not with one exception: If 2% + (ownership) shareholders want to deduct their medical insurance deductions, they can if you do a tricky W-2 maneuver allowing them to take the deduction on their personal returns. As CPA s, we still struggle with payroll companies to get this right. This must be done by December of each year.
Tax Basis:Shareholders who want to deduct losses that pass through from their S-Corporations must be careful. In order to deduct these losses, you must have a “tax basis.” In other words, you must have “skin in the game.” In its most simplest form, what this means is that in most cases, you cannot deduct losses if your capital account is negative. As a CPA, we compute basis and at-risk calculations to determine if a loss is partially or totally deductible, or does it get carried forward.
Reasonable Compensation: What’s reasonable? “Reasonable” is what the IRS says is reasonable, so a CPA must consult you as to your salary and draws in an S Corporation. This is a hot button for the IRS because shareholders skirt paying payroll taxes on draws. C- corporations do not pay draws, but dividends which are taxed currently at capital gain rate if they qualify.

As CPA s we see a lot of the same mistakes in S Corporations and C Corporations. We stress that clients plan during the year so as to not have any surprises.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

S-Corporations: Watch out for those Glacier Crevasses

Have you ever watched a mountain climbing movie or documentary where they have to cross a glacier that is covered with snow. The climbers move at a snail’s pace checking the ground in front of them for a hidden crevasse. One bad step and they can drop a hundred feet into a icy grave. Certainly not the environment for a mild mannered CPA.

Maybe this is too dramatic for operating an S-corporation, but the wrong moves can send you plummeting into tax despair. Here are a few CPA tips if you are a closely held company:

Make a timely and valid election. The IRS has eased up on the deadlines for S-corporation elections, but don’t take them for granted. Always make your elections timely, and if not, try to fit into one of the exceptions that gives you a grace period.
Pay yourself a reasonable salary. As CPA’s we see many owners trying to take a disproportionate amount of draws as opposed to salary. The IRS doesn’t like this because the owner/officer is skipping out on paying FICA and medicare withholding. Make sure your salary is reasonble for the service you are providing.
Report medical insurance deductions properly. A 2% + owner cannot deduct the medical insurance in its S-corporation. There is a tricky manuever that you have to add the insurace to your W-2; deduct it as part of your salary; lastly take the insurance as a self-employment health insurance deduction on your personal return. It usually takes a CPA to discuss this with your payroll service.
Don’t Be Second Class. S-corporations cannot have more than one class of stock. Do not inadvertantly create a second class stock by having different voting rights, or disproportional draws.
Watch out for your Tax Basis when Deducting a Loss. Just because you have a loss does not mean you can take it. You must have a tax basis to do so. In other words, you cannot take out more losses than what you have invested plus profits. The basis calculation should be updated every year.
Have your CPA plan your tax strategy each year. We find many new clients whose CPA’s ignore the S-corporation in tax planning. You must dive into it during the year, not March of the following year.

These might seem tough, but your CPA should automatically monitor the things above. To not do so could present shocking surprises in April. Check with your CPA before implementing any of these points.

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CPA Tip: Should Your Business Buy Your Car, or You?

Most small businesses owners, and even entertainment industry personalities (and companies) ask, “Should I Run My Car Through My Business?” The facts are as follows:

They want to buy a new car.
They use a large percentage of this car for business, say 70%.
The other 30% is used for commuting and personal travel.

Most clients want to purchase a vehicle in the company. Here are the facts:

If you use the vehicle for any personal use (including driving to work and back), then the value of that use will be added to your W-2 wages.
If you were to fully depreciate the automobile, the company will show a “gain” upon its sale for any amount because it will have no tax basis.
If you were to try to transfer the car’s title to yourself from the company, then you may have to recognize income for its value.
Commuting costs to and from work are usually not deductible.

If the client wants to purchase the vehicle personally, they have two options:

The company can pay a fixed allowance which is recorded on the employee’s W-2.
The company may reimburse the auto gas and other costs for the business portion resulting in no taxable income to the employee.
The company can pay the employee a standard rate established by the IRS, (like 55.5 cents per mile). There is no taxable income reported by the employee.
Any amount not reimbursed is reported as a miscellaneous itemized deduction subject to a 2% AGI floor, and many times ultimately not deductible.

As a CPA, I see many auto situations, but basically they come down to these same two options. Plan ahead and keep records of any employee business use regardless of which method you use. Always consult a tax professional before implementing any tax strategies.

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A CPA’s P.O.P. and the Independent Contractor House of Mirrors

Have you ever heard of Pacific Ocean Park? (P.O.P. as we kids used to call it). I grew up in Los Angeles during the 1960s and would go down to that amusement park in Santa Monica. It was a real old fashioned park consisting of a fun house, house of mirrors, fortune tellers, etc. One of my favorites was the house of mirrors. My cousin, Bill and I would always try to figure out a system on navigating through it. We had no directions, or secret knowledge, so we had to wing it.

Such is the case with employers and their independent contractors. It seems that every new client I obtained had the same dilemma, what was an employee? Technically, each state defines what an employee is and the IRS is required to use their definitions in their determination. However, the IRS has published guidelines that you may want to use:

IRS 20 Factors and 3 Categories of Control

Revenue Ruling 87-41: The Twenty Factors

To help determine whether a worker is an employee under the common law rules, the IRS identified 20 factors that may indicate whether the employer can exercise enough control to establish an employer-employee relationship. These factors, set forth in Revenue Ruling 87-41, were based on the circumstances that the courts identified and relied upon to decide whether an employment relationship existed. Not all the factors must be present to find an employee/employment relationship, but the factors are guides to use to assess the likelihood as to whether an individual is an employee or an independent contractor.

(1) Instructions. An employee must comply with instructions about when, where and how to work. The control factor is present if the employer has the right to require compliance with the instructions.

(2) Training. An employee receives on-going training from, or at the direction of, the employer.

Independent contractors use their own methods and receive no training from the purchasers of their services.

(3) Integration. An employee’s services are integrated into the business operations because the services are important to the business. This shows that the worker is subject to direction and control of the employer.

(4) Services rendered personally. If the services must be rendered personally, presumably the employer is interested in the methods used to accomplish the work as well as the end results. An employee often does not have the ability to assign their work to other employees, an independent contractor may assign the work to others.

(5) Hiring, supervising and paying assistants. If an employer hires, supervises and pays assistants, the worker is generally categorized as an employee. An independent contractor hires, supervises and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.

(6) Continuing relationship. A continuing relationship between the worker and the employer indicates that an employer-employee relationship exists. The IRS has found that a continuing relationship may exist where work is performed at frequently recurring intervals, even if the intervals are irregular.

(7) Set hours of work. A worker who has set hours of work established by an employer is generally an employee. An independent contractor sets his/her own schedule.

(8) Full time required. An employee normally works full time for an employer. An independent contractor is free to work when and for whom he or she chooses.

(9) Work done on premises. Work performed on the premises of the employer for whom the services are performed suggests employer control, and therefore, the worker may be an employee. Independent Contractor may perform the work wherever they desire as long as the contract requirements are performed.

(10) Order or sequence set. A worker who must perform services in the order or sequence set by an employer is generally an employee. Independent Contractor performs the work in whatever order or sequence they may desire.

(11) Oral or written reports. A requirement that the worker submit regular or written reports to the employer indicates a degree of control by the employer.

(12) Payments by hour, week or month. Payments by the hour, week or month generally point to an employer-employee relationship.

(13) Payment of expenses. If the employer ordinarily pays the worker’s business and/or travel expenses, the worker is ordinarily an employee.

(14) Furnishing of tools and materials. If the employer furnishes significant tools, materials and other equipment by an employer, the worker is generally an employee.

(15) Significant investment. If a worker has a significant investment in the facilities where the worker performs services, the worker may be an independent contractor.

(16) Profit or loss. If the worker can make a profit or suffer a loss, the worker may be an independent contractor. Employees are typically paid for their time and labor and have no liability for business expenses.

(17) Working for more than one firm at a time. If a worker performs services for a multiple of unrelated firms at the same time, the worker may be an independent contractor.

(18) Making services available to the general public. If a worker makes his or her services available to the general public on a regular and consistent basis, the worker may be an independent contractor.

(19) Right to discharge. The employer’s right to discharge a worker is a factor indicating that the worker is an employee.

(20) Right to terminate. If the worker can quit work at any time without incurring liability, the worker is generally an employee.

Three Categories of Control Factors

Over the years, the Internal Revenue Service recognized changes in business practices and therefore created three categories of factors to assess the degree of control and independence. These factors are to be used in conjunction with the 20 Factors.

(1) Behavioral Control – Includes the type of instructions the business gives to the worker, such as when and where to do the work, and the training the business provides to the worker. The key consideration is whether the business has retained the right to control the details of the worker’s performance or has relinquished that right

(2) Financial Control – Address the business’s right to control the business aspects of the worker’s job.

(3) Relationship Of Parties – The nature of the relationship may be evidenced by:

_ a written contract;

_ the benefits the business provides to an employee, such as paid vacation and health coverage;

_ the permanency of the position; and

_ the extent to which the services performed are a key aspect of the regular business of the company

Copy these down and implement them in your tax planning. It could save you a bundle of tax penalties. However, all tax situations are different, so consult a tax advisor before acting.

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Informed Giving: Even in Tough Times, Non-Profit Organizations Need You

For over three decades I have experienced charitable giving on several levels: 1) Like most people, I support those organizations that are dear to me, 2) I have sat or sit on non-profit boards, usually as Treasurer, but occasionally President., 3) As a CPA, I have obviously counselled people on their contributions, the most of exciting of those was a donation of a Picasso.

But, in order to donate correctly, you should follow the rules set out by the tax code and the IRS:
1. Tax-exempt status. Contributions must be made to
qualified charitable organizations to be deductible. Ask the charity about its
tax-exempt status, or look for it on IRS.gov in the Exempt Organizations Select
Check, an online search tool that allows users to select an exempt organization
and check certain information about its federal tax status as well as
information about tax forms an organization may file that are available for public
review. This search tool can also be used to find which charities have had
their exempt status automatically revoked. Don’t hand out cash to street vendors unless you are sure they represent a legitimate company.

2. Itemizing. Charitable contributions are deductible
only if you itemize deductions using Form 1040, Schedule A. A real bummer for those who are not wealthy enough to own a home, or have other deductions that qualify them.

3. Fair market value. Cash contributions and the fair
market value of most property you donate to a qualified organization are
usually deductible. Special rules apply to several types of donated property,
including cars, boats, clothing and household items. If you receive something
in return for your donation, such as merchandise, goods, services, admission to
a charity banquet or sporting event only the amount exceeding the fair market
value of the benefit received can be deducted.

4. Records to keep. You should keep good records of
any donation you make, regardless of the amount. All cash contributions must be
documented to be deductible – even donations of small amounts. A cancelled
check, bank or credit card statement, payroll deduction record or a written
statement from the charity that includes the charity’s name, contribution date
and amount usually fulfill this record-keeping requirement. When donating things like clothes, take pictures, itemize, and always get a receipt.

5. Large donations. All contributions valued at $250
and above require additional documentation to be deductible. For these, you
should receive a written statement from the charity acknowledging your
donation. The statement should specify the amount of cash donated and/or
provide a description and fair market value of the property donated. It should
also say whether the charity provided any goods or services in exchange for
your donation. If you donate non-cash items valued at $500 or more, you must
also complete a Form 8283, Noncash Charitable Contributions, and attach the
form to your return. If you claim a contribution of noncash property worth more
than $5,000, you typically must obtain a property appraisal and attach it to
your return along with Form 8283. Obviously, I had to obtain a written appraisal of the Picasso, and fill out the form.

Don’t wait until December 31 to figure this out. Collect your donation receipts in a big envelope throughout the year. Then, match them to your checks and credit cards.

6. Timing. If you pledge to donate to a qualified
charity, keep in mind that for most taxpayers contributions are only deductible
in the tax year they are actually made. For example, if you pledged $500 in
September but paid the charity just $200 by Dec. 31 of that same year, only
$200 of the pledged amount may qualify as tax-deductible for that tax year.
End-of-year donations by check or credit card usually qualify as tax-deductible
for that tax year, even though you may not pay the credit card bill or have
your bank account debited until after Dec. 31.

For more information, see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property.

Source: IRS

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You May Be Able to Deduct the Cost of Working for a New Violent Psychopath

When I was a teen, I landed a job installing car stereos. It was the coolest job on earth because I was trained, paid well, and eventually had the best possible stereo system in my car at a wholesale cost. Never mind the fact that I was working for a “violent psychopath.”

If you are looking for a job, here are some tips:

1. To qualify for a deduction, your expenses must be spent on a job
search in your current occupation. You may not deduct expenses you incur while
looking for a job in a new occupation. So, if you are an engineer looking for a job as a nurse, forget the deduction. But, if you are an ER nurse looking for a job as a surgical nurse, you may have a deduction.

2. You can deduct employment and outplacement agency fees you pay while
looking for a job in your present occupation. If your employer pays you back in
a later year for employment agency fees, you must include the amount you
received in your gross income, up to the amount of your tax benefit in the
earlier year.

3. You can deduct amounts you spend for preparing and mailing copies of
your resume to prospective employers as long as you are looking for a new job
in your present occupation. This expense isn’t as costly as in previous generations since so many use E-mail to send resumes.

4. If you travel to look for a new job in your present occupation, you
may be able to deduct travel expenses to and from the area to which you
travelled. You can only deduct the travel expenses if the trip is primarily to
look for a new job. The amount of time you spend on personal activity unrelated
to your job search compared to the amount of time you spend looking for work is
important in determining whether the trip is primarily personal or is primarily
to look for a new job.

5. You cannot deduct your job search expenses if there was a
substantial break between the end of your last job and the time you begin
looking for a new one. This is a tough call. Consult your tax advisor.

6. You cannot deduct job search expenses if you are looking for a job
for the first time. If you are just starting out, ignore this article.

7. The amount of job search expenses that you can claim is limited. To
determine your deduction, use Schedule A, Itemized Deductions. Job search
expenses are claimed as a miscellaneous itemized deduction and the total of all
miscellaneous deductions must be more than two percent of your adjusted gross income.

8. When you do land a new job, don’t forget about the possible deduction for costs in relocating and moving.

As, always, each tax situation can be different. So, consult your tax advisor before making any decisions.

For more information about job search expenses,
see IRS Publication 529, Miscellaneous Deductions.

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Do You Have Trouble Paying Back Taxes? The IRS Cares! No, Really. But to a Point.

As CPAs, every year we acquire clients who need help negotiating with the IRS regarding their back taxes. This apparently seemed to be such a problem, that the IRS has actually made it a little easier to satisfy the debt. It’s called the “Fresh Start” which offers more flexible terms in paying your taxes using its Offer-in-Compromise Program. I gathered this information from the IRS Tax Tips–July 9, 2012.

An offer-in-compromise (OIC) is an agreement between a taxpayer and the IRS
that settles the taxpayer’s tax liabilities for less than the full amount owed.
An OIC is generally not accepted if the IRS believes the tax 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 determine the reasonable tax collection potential.

This expansion of the “Fresh Start” initiative focuses on the financial
analysis used to determine which taxpayers qualify for an OIC.

Here are the OIC changes:

Revising the calculation for a taxpayer’s future income
The IRS will now look at only one year (instead of four years) of future
income for offers paid in five or fewer months; and two years (instead of
five years) of future income for offers paid in six to 24 months. All OICs
must be paid in full within 24 months of the date the offer is accepted.
Allowing taxpayers to repay their student loans Minimum
payments on student loans guaranteed by the federal government will be
allowed for the taxpayer’s post-high school education. Proof of payment must
be provided.
When a taxpayer owes delinquent federal and state or local taxes,
and does not have the ability to fully pay the liabilities, monthly
payments to state taxing authorities may be allowed in certain
circumstances.
Standard allowances incorporate average expenses for basic necessities for
citizens in similar geographic areas. These standards are used when
evaluating installment agreement and offer-in-compromise requests. The
National Standard miscellaneous allowance has been expanded. Taxpayers can
use the allowance to cover expenses such as credit card payments and bank
fees and charges.

One thing to remember is once you start the payment plan, you cannot miss a month. To do so could result in unpleasent consequences. You must keep the communication open with the IRS. Discuss this with a tax advisor before taking any action since all situations are different.

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Child and Dependent Care Tax Credit

I remember the days when our young ones were in childcare. We would allot the maximum amount allowed under my wife’s flexcare (or cafeteria) plan in order to deduct as much of childcare on our tax return.

However, there are also tax credits you may be able to declare. Always check with your tax advisor before making any decisions, but here is a list of requirements to get you started:

1. Children must be under age 13 in order to qualify.

2. Taxpayers may qualify for the credit, whether the childcare provider
is a sitter at home or a daycare facility outside the home.

3. You may use up to $3,000 of the unreimbursed expenses paid in a year
for one qualifying individual or $6,000 for two or more qualifying individuals
to figure the credit.

4. The credit can be up to 35 percent of qualifying expenses, depending
on income.

5. Expenses for overnight camps or summer school/tutoring do not
qualify.

6. Save receipts and paperwork as a reminder
when filing your tax return. Remember to note the Employee Identification
Number (EIN) of the camp as well as its location and the dates attended.

This list should be considered anytime of the year, not in April for the previous year. Proper tax planning with a CPA can save money. Discuss this with a professional before taking any action.

Source: IRS Publication 503

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Frivolous Constitutional Claims Against Taxes

Thirty years ago, I lived around the corner from the San Fernando Valley Main Post Office in Van Nuys. My CPA tax filing season ended on April 14, so I was home on the night of April 15. I used to walk my dog down to the Post Office that night and watch the people depositing their tax returns at 10:00 pm. Cars were lined up Sherman Way onto the freeway offramp conjesting the slow lane for about a quarter of a mile.

My favorite pasttime were the people picketing on the sidewalk telling people not to fiile tax returns because it was a violation of the Constitution. I didn’t let on I was a CPA, but wanted to know their reasoning.

There are piles of case law that has rejected Congress’s right to tax. Here are a few from: https://www.irs.gov/pub/irs-utl/friv_tax.pdf

Contention: Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment.

There is no constitutional right to refuse to file an income tax return on the ground that it violates the Fifth Amendment privilege against self-incrimination. As the Supreme Court has stated, a taxpayer cannot “draw a conjurer’s circle around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law.” (So, don’t take the 5th, it may land you in 3 to 5 in a penitentiary.)

2. Contention: Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment.

“If the requirements of the tax laws were to be classed as servitude, they would not be the kind of involuntary servitude referred to in the Thirteenth Amendment.” (It may feel like slavery, but not the kind imagined in the 13th Amendment.)

3. MY FAVORITE, Contention: Federal Reserve Notes are not income.

Proponents of this contention assert that Federal Reserve Notes currently used in the United States are not valid currency and cannot be taxed because Federal Reserve Notes are not gold or silver and may not be exchanged for gold or silver.

The Court has completely obliterated this contention, so don’t try it.

As a CPA, we don’t really consider any basic contention to taxes constitutionality. Don’t get convinced by a protester, or it can cost you your freedom. Speak to your CPA or tax advisor before you do anything in the tax arena.

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CPA Tips: Tax Extensions and Payment Options

CPAs work hard this time of year, but for those of you who do not (or cannot) get your taxes done in time, here are some options that are listed on the IRS site. But don’t wait, the post office will be a mess if you decide to mail something in.

If you need more time to file your return, you can get an automatic
six-month extension of time to file from the IRS. You must file for an
extension by the April deadline. An extension will give you extra time
to get your paperwork to the IRS, but it does not extend the time you have to
pay any tax due. You will owe interest on any amount not paid by the deadline,
plus you may owe penalties. To get an extension:

• IRS Free File – Traditional Free File and Free File
Fillable Forms can both be used to file an extension for FREE. Access the
Free File page at www.irs.gov.

• IRS e-file – Use IRS e-file to request an extension by
using tax preparation software on your own computer or by going to a tax
preparer.

• Form to File – Mail in IRS Form 4868, Application for
Automatic Extension of Time to File U.S. Individual Income Tax Return. It must
be postmarked by April 15, 2013. A CPA can create this for you with your authorization. Just provide your name, address, and social security numbers.

Taxpayers that are ready to file their returns and those that have already
filed and need to pay a tax bill have payment options:

• E-file – File electronically and authorize an electronic
funds withdrawal via tax preparation software or a tax professional. Your CPA can explain the situations when the State of California require mandatory electronic payments.

• Phone – Pay by phone or online using a credit card.

• Mail – Pay by check or money order made payable to the
“United States Treasury.” Be sure to include your name, address, Social
Security number listed first on the tax form, daytime telephone number, tax
year and form number. Complete and include Form 1040-V, Payment Voucher, when
mailing your payment to the IRS.

If you owe tax with your federal tax return, but can’t afford to pay it all
when you file, the IRS has options to help you keep interest and penalties to a
minimum. File your return on time and pay as much as you can with the return,
then:

• Request an installment agreement – Use the Online Payment
Agreement application at www.irs.gov
or by file Form 9465, Installment Agreement Request with your return. The IRS
charges a user fee to set up your payment agreement. Your CPA can represent you on setting this up, but you need to provide a Power of Attorney.

• Additional time to pay – You may request a short
additional time to pay your tax in full using the Online Payment Agreement
application on www.irs.gov.
Taxpayers who request and are granted an additional 120 days to pay the tax in
full generally will pay less in penalties and interest than if the debt were
repaid through an installment agreement over a greater period of time. There is
no fee for this short extension of time to pay.

• Extension of time to pay – Qualifying individuals may
request an extension of time to pay and have late payment penalties waived as
part of the IRS Fresh Start initiative. To see if you qualify visit www.irs.gov
and get Form 1127-A, Application for Extension of Time for Payment. This
application must be filed by April 15, 2013.

CPA’s are always trying to get client’s to plan ahead whether they have businesses, or not. If you are running late this year, this would be a good opportunity to start preparing for 2013. You can accumulate receipts in envelopes and start EXCEL spreadsheets to keep track of them. The reward will not only be your peace of mind, but also you may save more money in taxes next year.

All situations are different, so discuss this with a tax professional before making any decisions.

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