business taxes Archives

CPA Tax Tip: Late Payroll Taxes?

During my CPA career I have seen business owners shirking their responsibility to withhold and pay federal income taxes, too many times. The taxes can be both federal and state. On the federal side, FICA (social security), Medicare, income taxes, and unemployment insurance (FUTA) can add up to large amounts that these employers cannot seem to part with when their business is in a bind. Penalties and interest usually compound the problem.

Not only are the owners responsible, but any “responsible party.” See The Consequences of willful failure to pay payroll taxes by Vani Murthy for a more comprehensive discussion on the responsible party. There has been limitations on who these people are, but just because you delegate the duty does not mean you are off the hook. If you are the owner or officer, the responsibility may put your personal assets at risk. Worse yet, in the most egregious cases, the IRS has imposed criminal penalties including jail time.

So, what can a business owner do to avoid falling into this situation? And, if in it, what can they do?

Manage your cash flow: This is always the first step. Too many business owners look at payroll taxes as a necessary evil that can be placed on the back burner. Instead, place this item at the top of your cash disbursements along with the payroll. Pay them at the same time as your payroll, not the 15th of of the following month, or any time before that just because it is mandated by law.
Defer your personal payroll to the next month: As a small business owner, if you can personally afford paying yourself for a few weeks, defer your personal paycheck to the next month. That can be only one day when you pay payroll on the last day of the month. This could delay your payroll tax liability due date.
Understand the danger signs: If you are using your business credit line to “make payroll,” then your business model is probably broken. It could be for a number of reasons: Uncollectible receivables, too low of a gross profit ratio, unproductive sales employees are just to name a few. I have seen all of these sink businesses.
Talk to the IRS: If you find your company without funds, rectify the problem as stated above but also open a dialog with the IRS. Keep the communication open and implement a payment plan for back taxes. This may keep them from levying your bank account thus sabotaging any efforts to save your business.
Take your head out of the sand: There is a type of business owner that I have come across that uses the ostrich method. They just put business problems out of their mind and don’t plan on rectifying them. When I would make recommendations they would delay until forgotten. Please try to avoid this.

Meeting a challenge before it happens, and after it happens will usually be the best route to take with payroll taxes. Since all situations are unique, please consult a tax adviser before making any decisions.

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IRS CIRCULAR 230 DISCLAIMER: 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. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, (Firm) would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

Business California Sales Tax: Why Pay More When Buying Equipment?

On July 1, 2014, a new law will allow manufacturers and certain research and developers obtain a partial exemption of sales and use tax on certain qualified equipment purchases and leases. You must meet all three requirements:

“Qualified Person” : These are enterprises that are engaged in certain types of businesses. A “qualified person” means a person who is primarily engaged (50 percent or more of the time) in those lines of business described in the North American Industry Classification System (NAICS). These industries generally include those primarily engaged in the business of all forms of manufacturing, research and development in biotechnology, and research and development in the physical, engineering, and life sciences. (NAICS was developed under the auspices of the Office of Management and Budget (OMB), and adopted in 1997 to replace the Standard Industrial Classification (SIC) system. It was developed jointly by the U.S. Economic Classification Policy Committee (ECPC), Statistics Canada, and Mexico’s Instituto Nacional de Estadistica y Geografia , to allow for a high level of comparability in business statistics among the North American countries.)

To be primarily engaged as a legal entity or as an establishment you must, in the prior financial year, either derive 50 percent or more of gross revenue (including inter-company charges) from, or expend 50 percent or more of operating expenses in a qualifying line of business. Alternatively, an establishment is primarily engaged if, in the prior financial year, it allocates, assigns or derives 50 percent or more of either of the following to a qualifying line of business: (1) employee salaries and wages, (2) value of production, or (3) number of employees based on a full-time equivalency.

2. “Qualified Properties”: Machinery, equipment, and tangible personal property. However, look at the description because there are some exceptions.

3. Use Qualified personal property for uses (50% +) allowed by law:

Any stage of manufacturing, processing, refining, fabricating, or recycling.
Research and development
Maintaining qualified personal and tangible property.
Contractor’s purchases of property used in construction for a qualified person if that person uses it for a qualified purpose.

Make sure you understand the rules. These are explained on this site: https://www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Qualifications

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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.

CPA Tip:Check out the IRS Scam List and Protect Yourself

The IRS publishes a list of tax scams that they are focusing. It is good to understand the basic premise of these in order to protect you, your family, and your business.

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Pervasive Telephone Scams

People may call you pretending to be from the IRS in hopes of stealing money or identities from victims.

These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.

Characteristics of these scams can include:

Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
Scammers may be able to recite the last four digits of a victim’s Social Security Number.
Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
Victims hear background noise of other calls being conducted to mimic a call site.

After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

False Promises of “Free Money” from Inflated Refunds

Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program(OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009. It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

To help disaster victims, donate to recognized charities.
Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

False Income, Expenses or Exemptions

Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.

Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter. Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.

Falsely Claiming Zero Wages or Using False Form 1099

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Abusive Tax Structures

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI’s primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers). Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

Misuse of Trusts

Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

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CPA Alert: Top Ten Tips to Help You Choose a Tax Preparer

Believe it or not, taxpayers are not the only persons hurt by fraudulent or unprepared tax preparers. The IRS has an interest in weeding those people out. Every year we acquired new clients that have tax returns that were improperly prepared. Sometimes we have to amend the prior years return. One time a person came to us because their S-corporation was suspended for not filing its returns. After we checked into it, we discovered that the tax preparer had not filed ANY corporate returns from its inception. The tax preparer had been fabricating numbers from the corporation onto the client’s personal return. We had to file five years of tax returns which racked up penalties and interest.

The IRS has some good tips when reviewing a tax preparer because you are still responsible for what is on it regardless if you prepared it or not.

1. Check the preparer’s qualifications. All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. In addition to making sure they have a PTIN, ask the preparer if they belong to a professional organization and attend continuing education classes.

2. Check the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. For enrolled agents, check with the IRS Office of Enrollment.

3. Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.

4. Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.

5. Make sure the preparer is available. Make sure you’ll be able to contact the tax preparer after you file your return – even after the April 15 due date. This may be helpful in the event questions come up about your tax return.

6. Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.

7. Never sign a blank return. Don’t use a tax preparer that asks you to sign a blank tax form.

8. Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.

9. Ensure the preparer signs and includes their PTIN. Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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How Long Should You Keep Your Tax Records?

My mom showed me an old tax return filed the year I was born. It was for tax year 1957 filed in 1958. There wasn’t much to the return, but the one thing that caught my attention was a receipt for a medical deduction that my dad had kept with the return…a vasectomy. (Was I really that bad?)

I don’t recommend you necessarily keep tax receipts for the rest of your life, but here are some tips provided in part by the IRS:

• You should keep copies of your filed tax returns as part of your tax records. They can help you prepare future tax returns. You’ll also need them if you need to file an amended return. (Of course there is a statute of limitation rule that eliminates any refund if you file too late.)
• You must keep records to support items reported on your tax return. You should keep basic records that relate to your federal tax return for at least three years. Basic records are documents that prove your income and expenses. This includes income information such as Forms W-2 and 1099. It also includes information that supports tax credits or deductions you claimed. This might include sales slips, credit card receipts and other proofs of payment, invoices, cancelled checks, bank statements and mileage logs.
• If you own a home or investment property, you should keep records of your purchases and other records related to those items. You should typically keep these records, including home improvements, at least three years after you have sold or disposed of the property. This may also support your depreciation deduction which have a life much greater than a normal deduction.
• If you own a business, you should keep records that show total receipts, proof of purchases of business expenses and assets. These may include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices. Also include credit card receipts, sales slips, canceled checks, account statements and petty cash slips. Electronic records can include databases, saved files, emails, instant messages, faxes and voice messages.
• If you own a business with employees, you should generally keep all employment-related tax records for at least four years after the tax is due, or after the tax is paid, whichever is later.
• The IRS doesn’t require any special method to keep records, but it’s a good idea to keep them organized and in one place. This will make it easier for you to prepare and file a complete and accurate return. You’ll also be better able to respond if there are questions about your tax return after you file. We recommend using a paperless system for most records that can be attached to your accounting software. This method saves space and keeps the supporting tax documents at your fingertips.

Looking for help with all this, contact yours truly, The LA CPA!

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IRS Tax Notices: And Who Says People Don’t Write Letters Anymore?

Though out the year, we get emails from a handful of clients who have received a tax notice from a government agency. Believe it or not, the vast majority do not result in the client paying money. But still, it is nerve-racking for our clients, especially since they are due to an IRS oversight.

The IRS also offers some tips:

Don’t panic. Many of these letters require a simple response.

2. There are many reasons why the IRS sends correspondence. If you
receive an IRS notice, it will typically cover a very specific issue about your
account or tax return. Notices may require payment, notify you of changes to
your account or ask you to provide more information.

3. Each notice offers specific instructions on what you need to do to
satisfy the inquiry.

4. If you receive a notice advising you that the IRS has corrected your
tax return, you should review the correspondence and compare it with the
information on your return.

5. If you agree with the correction to your account, then usually no
reply is necessary unless a payment is due or the notice directs otherwise.

6. If you do not agree with the correction the IRS made, it is
important that you respond as requested. You should send a written explanation
of why you disagree. Include any information and documents you want the IRS to
consider with your response. Mail your reply with the bottom tear-off portion
of the IRS letter to the address shown in the upper left-hand corner of the
notice. Allow at least 30 days for a response.

7. You should be able to resolve most notices that you receive without
calling or visiting an IRS office. If you do have questions, call the telephone
number in the upper right-hand corner of the notice. Have a copy of your tax
return and the notice with you when you call. This will help the IRS answer
your inquiry.

8. Remember to keep copies of any notices you receive with your other
income tax records.

9. The IRS sends notices and letters by mail. The agency never contacts
taxpayers about their tax account or tax return by email.

Your CPA can help you muddle through these letters. A CPA usually deals with these letters and understands how to respond. For example, just today I received a call from a client who was assessed for a late filing fee for a return a prior accountant filed. However, I probably got the penalties abated because of a little-known exception.

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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.

Staying Abreast of Stripper Tips Tax Deductibility

What!? I couldn’t believe the recorded message. A Fortune magazine writer left me a message requesting my opinion on the tax treatment of some rappers deducting tens of thousands of dollars on strippers. After a few comedic quips, I actually answered his questions. I forgot the whole interview took place until this: Fortune Magazine, April 29, 2012. My friend Seena text-ed me from an airport in Atlanta stating that my comments had appeared in Fortune.

But what does this short blurb say or not say about tax deductible items? It is true that the entertainment industry does offer tax deductions that other industries may not offer just by it’s nature. For example: Most industries would be challenged to deduct movie tickets and pay per view movies. Yet, for a producer these expenses are a necessity. Or, take a stuntman, they can make a good case for deducting gym expenses. However, an accountant was denied such deductions in recent memory.

Generally, tax deductions must be ordinary and necessary to the conduct of your business. Sometimes, you cannot deduct an expenditure (completely) in the year you spent the money because it may have a “tax life.” An example would be a building, furniture, and automobiles. There are some elections you can make that can even allow you to deduct some of these though in the first year.

These concepts should be something that you should be thinking about during the tax year, not after it when you are preparing your tax return.

In the case of the rappers they were drawing a nexus between then tipping the strippers and the rappers’songs they were dancing to. I heard that they felt it was necessary to tip the strippers in order to get their songs played.

In law, there is such thing as public policy. Sometimes, the spirit of the law trumps a literal application of it. The IRS and the tax court may say that these kind of expenses are against public policy, not to mention, unsubstantiated. You also may be required to show a connection between the expense and its ultimate generation of income or publicity. In other words, if audited, you may get caught with your pants down. Be careful.

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IRS Small Business Tax Calendar

Running a small business is cumbersome. The last thing a business owner needs is to keep a tax calendar. However, to not know some of the small business tax deadlines can be costly. Check out the IRS site https://www.tax.gov/calendar/ for a complete calendar by month for all of your tax needs. For example:

Thu	3	Deposit payroll tax for payments on Dec 26-28 if the semiweekly deposit rule applies.
Fri	4	Deposit payroll tax for payments on Dec 29 – Jan 1 if the semiweekly deposit rule applies.
Wed	9	Deposit payroll tax for payments on Jan 2-4 if the semiweekly deposit rule applies.
Thu	10	Employers: Employees are required to report to you tips of $20 or more earned during Dec 2012
Fri	11	Deposit payroll tax for payments on Jan 5-8 if the semiweekly deposit rule applies.
Tue	15	Individuals: Pay the final installment of your 2012 estimated tax. Use Form 1040-ES.
Tue	15	Farmers and fishermen: Pay your estimated tax for 2012. Use Form 1040-ES.
Tue	15	Employers: Deposit payroll tax for Dec 2012 if the monthly deposit rule applies.
Wed	16	Deposit payroll tax for payments on Jan 9-11 if the semiweekly deposit rule applies.
Fri	18	Deposit payroll tax for payments on Jan 12-15 if the semiweekly deposit rule applies.
Thu	24	Deposit payroll tax for payments on Jan 16-18 if the semiweekly deposit rule applies.
Fri	25	Deposit payroll tax for payments on Jan 19-22 if the semiweekly deposit rule applies.
Wed	30	Deposit payroll tax for payments on Jan 23-25 if the semiweekly deposit rule applies.
Thu	31	File Form 720 for the fourth quarter of 2012.
Thu	31	Furnish Forms 1098, 1099 and W-2G to recipients for certain payments during 2012. Furnish Form W-2 to employees who worked for you during 2012.
Thu	31	File Form 730 and pay the tax on wagers accepted during Dec 2012.
Thu	31	Deposit any FUTA tax owed through Dec 2012.
Thu	31	File Form 2290 and pay the tax for vehicles first used in Dec 2012.
Thu	31	Files Forms 940, 941, 943, 944 and/or 945 if you did not deposit all taxes when due.
Thu	31	File your tax return if you did not pay your last installment of esimated tax by January 15th

Check the appropriate boxes on the site to taylor it to your needs. Whether a small business or individual, always check with your tax advisor if unsure about any tax issue.

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Home Office Tax Deduction Simplification: Sort of…

I cook at home. A few times on my birthday my wife would present me with a cooking class at Laguna Beach, California. At one of these events, I recall the chef asking us to separate the whites from the yolks of several eggs. A couple of people cracked the eggs in half and tossed the yolk back and forth until all of the whites had fallen into the bowl leaving the yolks in the shells. This of course took a couple of minutes for each egg.

After watching, the chef said, “No, I’ll show you how to do this quickly.” He then cracked an egg in his hand letting the whites run through his fingers into a bowl for about five seconds and threw the yolk into another bowl. “That’s how it is done,” he scowled. “Simplified!”

If you were ever audited for taking a home in office deduction, you my have found some broken shells in your deduction. I recall an audit of a screenwriter. The auditor challenged me on the details of the deduction. I told her the screen writer wrote a successful Disney cartoon from that office. That auditor said her kids loved the movie, and allowed the deduction.

If you want to simplify your home office deduction, look at this safe harbor from the IRS web site:

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and record keeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014.

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Additional Medicare Tax For Upper Income Earners Explained

A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status.

The threshold amounts are:

• $250,000 for married taxpayers who file jointly,
• $125,000 for married taxpayers who file separately, and
• $200,000 for all other taxpayers.

An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year.

The IRS and the Treasury Department have issued proposed regulations on the Additional Medicare Tax.

Self-employed individuals must be careful when making their estimated tax payments which will include these taxes if they are above the threshholds. Make sure you check with your tax professional before making any decisions.

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