small business tax credit Archives

Tax Scams Can Hit All Year, Especially During Tax Season

Imagine getting a call or e-mail from an “IRS Agent” who claims that you owe them a lot of money and will have your bank account levied? Just reading that sentence may raise the heart rate of some of you.

Here are some warnings from the IRS and some steps you can take to protect yourself:

Be vigilant of any unexpected communication purportedly from the IRS at the start of tax season.
Don’t fall for phone and phishing email scams that use the IRS as a lure. Thieves often pose as the IRS using a bogus refund scheme or warnings to pay past-due taxes.
The IRS doesn’t initiate contact with taxpayers by email to request personal or financial information. This includes any type of e-communication, such as text messages and social media channels.
The IRS doesn’t ask for PINs, passwords or similar confidential information for credit card, bank or other accounts.
If you get an unexpected email, don’t open any attachments or click on any links contained in the message. Instead, forward the email to phishing@irs.gov. For more about how to report phishing scams involving the IRS visit the genuine IRS website, IRS.gov.

Here are several steps you can take to help protect yourself against scams and identity theft:

Don’t carry your Social Security card or any documents that include your Social Security number or Individual Taxpayer Identification Number.
Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
Protect your financial information.
Check your credit report every 12 months.
Secure personal information in your home.
Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact and are sure of the recipient.
Be careful when you choose a tax preparer. Most preparers provide excellent service, but there are a few who are unscrupulous. Refer to Tips to Help you Choose a Tax Preparer for more details.

For more on this topic, see the special identity theft section on IRS.gov. Also check out IRS Fact Sheet 2014-1, IRS Combats Identity Theft and Refund Fraud on Many Fronts.

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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.

Obamacare and the Mixed Up World of Small Business

“If I had a world of my own, everything would be nonsense. Nothing would be what it is because everything would be what it isn’t. And contrary-wise; what it is it wouldn’t be, and what it wouldn’t be, it would. You see?” Alice from Alice in Wonderland.

Welcome to Alice’s world. The Patient Protection and Affordable Care Act (aka Obamacare), has rekindled the debate of its essence. However, regardless of your political views on the law, here are some facts that a small business needs to know. A majority of these tax points come from Supreme Court Upholds Health Care Act by Schreiber and Nevus written in the Journal of Accountancy article.

Premium-assistance credit (Sec. 36B): Some individuals can take advantage of refundable tax credits to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange. (Effective 2014.)
Small business tax credit (Sec. 45R): Just like last year, small businesses—defined as businesses with 25 or fewer employees and average annual wages of $50,000 or less—would be eligible for a credit of up to 50% of non-elective contributions the business makes on behalf of their employees for insurance premiums. (Effective 2010.)
Medical care itemized deduction threshold (Sec. 213): Unfortunately the threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of adjusted gross income (AGI) to 10% of AGI for regular income tax purposes. This makes any medical deduction almost impossible to deduct unless catastrophic. Try opening a flexible benefit plan or incorporate (Effective 2013 generally, 2017 for certain taxpayers.)
Additional hospital insurance tax on high-income taxpayers (Sec. 3101): Employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% on wages that exceed a threshold amount. (Effective 2013.)
Employer responsibility (Sec. 4980H): An “applicable large employer” that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. (Effective 2014.)
Excise tax on high-cost employer plans (Sec. 4980I): Excise tax on coverage providers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse, and any other primary insured individual) exceeds a threshold amount. (Effective 2018.)
Tax on health savings account (HSA) distributions (Sec. 223): Additional tax on distributions from an HSA or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20% of the disbursed amount. Be careful what you put into these accounts (Effective 2011.)
Health flexible spending arrangements (FSAs) (Sec. 125(i)): Maximum amount available for reimbursement of incurred medical expenses under a health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500. This is up from $5,000, and definitely will hurt employees (Effective 2013.)
SIMPLE cafeteria plans for small business (Sec. 125): An eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan. (Effective 2011.)
Information reporting (Sec. 6051(a)(14)): Requires employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer. (Effective 2012.)

Small businesses must be very vigilant over the next two years to verify that they are eligible for the credit and that they are conforming to the law in very respect.

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

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.

Year End Small Business Tax Tips

As Los Angeles Certified Public Accountants, we have the opportunity to work in different industries. Each industry has its own special personality, yet there are some tax breaks that many are not taking:

Healthcare credit: This credit is not only new to Certified Public Accountants, but to small business owners. If your company pays health insurance for your employees, you may be able to claim this credit. Don’t be discouraged because you, as the owner, pay for your own health insurance. That payment is not included in the computation.
Section 199 domestic production manufacturing deduction: Companies seem to ignore this gem of a deduction if their core process is not manufacturing. However, that is not the proper way to look at things. If there is ANY part of your business that you “manufacture,” then we certified public accountants are interested. Music production, magazine publishing, and metal duct fabrication are some areas that one would not think are manufacturing, but they are.
Tax withholdings: Recompute your tax withholdings for 2012. If you are overwithholding, then the IRS is using your tax dollars interest free. Any certified public accountant or bookkeeper can help you.
Moving Expenses: Times are tough and many are moving to engage new employment. Check with your certified public accountant as to whether you qualify for this deduction. Job seeking expenses also could be deducted if they qualify.
Energy Tax Credits: There still may be a chance that you can take energy credits for things like exterior doors, windows, etc. Also, you may be able to better if you acquire alternative energy equipment. Make sure you speak with your certified public accountant before making these decisions.
Section 179 Accelerated Depreciation: Many businesses know about this, but make sure there are good business decisions for making your purchase. Don’t have tax considerations guide your business decisions.
Retirement Plan: If you don’t have one, get one. With the decrease in the stock market, so many people are ill prepared for retirement. The current tax savings can take a giant chunk out of your tax bill.

As certified public accountants, we try to be proactive in advising our clients. However, you, the business or individual must not procrastinate. Listen to the certified public accountant tax specialists and retain some money in your pockets on tax day. Discuss your situation with your tax advisor before acting.

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The IRS Does Not Send Tax E-Mails. Don’t Get Fooled.

It happened again this week. A nervous client, who owns an entertainment partnership, received an E-mail from the IRS (with the IRS logo and such) claiming that his tax payment was rejected. My gut reaction was “scam,” he didn’t make any tax payments for either his partnership, or individual tax return.

The IRS is warning clients again. https://www.irs.gov/newsroom/article/0,,id=98129,00.html

The IRS does not send unsolicited e-mail to taxpayers either about their tax accounts or requesting sensitive personal and financial information.

Nevertheless, taxpayers do receive e-mails claiming to come from the IRS, sometimes containing a real or made-up employee name, address and similar information to make an e-mail seem credible.

These e-mails usually are scams whose purpose is to obtain personal and financial information — such as name, Social Security number, bank account and credit card or even PIN numbers — from taxpayers which can be used by the scammers to commit identity theft. Identity thieves use the data to empty the victim’s financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name, file fraudulent tax returns and more.

Typically, IRS-impersonation scam e-mails state that the IRS needs certain personal and financial information to process a tax return, tax payment or refund. They may claim the e-mail recipient is being audited. They may mention specific monetary amounts or genuine programs, such as the Electronic Federal Tax Payment System (EFTPS), to add credible detail to the scam. The e-mails often contain links or attachments to what appears to be the IRS web site or an IRS form. However genuine in appearance, these phonies are designed to elicit the information the scammers are looking for.

Alternatively, a link in a scam e-mail may download malicious software onto the taxpayer’s computer when clicked. The software is often designed to search out and send back to the scammer personal and financial information contained on the taxpayer’s computer or obtained through keystrokes that the scammer can use to commit identity theft.

Unsolicited e-mails claiming to be from the IRS or an IRS-related component, such as EFTPS, should be reported to phishing@irs.gov.

Anytime you are asked for sensitive information in an email, e.g., PayPal, IRS, or your bank, assume first that it is a scam. You can call these organizations, or e-mail them directly to inquire about the issue. Never, never e-mail them using a link they have provided you.

Taxes seems to be the topic that prompts people to lose objectivity. Taxes cause anxiety because most people don’t understand the tax law and procedures. Don’t let the pseudo-IRS inflict such emotions. Call your tax professional before making any decisions.

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How to Launder(for More)Money Without Getting Washed Up

I know that title can get me into trouble, but I couldn’t resist.

I had lunch today with a childhood friend (no he is not nine years old). I hadn’t seen Gary in about 30 years. He still looks the same (except for the white hair and long white beard). Anyway, Gary is in the Laundromat business. His story came back to me tonight when I was reading the article, Grow Your Sales Without Selling by Mike Periu.

All in all, it wasn’t a bad piece. He gave a handfull of suggestions to growing your small business outside the sales cycle. The first suggestion he offered was the one that reminded me of Gary: Grow through acquisitions. He offered his support for it, but then he narrowed it by industry. He wrote, “…if companies in your industry are selling at relatively low valuations, and if existing customers generate recurring revenues then growth through acquisition could be a very viable strategy.”

I always have cautioned clients about acquiring small businesses. (See my video Selling a Small Business for the flip side). Many times, a small business financial statements (and sometimes tax returns) don’t truly reflect the reality.

Gary owned a small business laundromat and found a opportunity to buy another one. The other small business was selling for a low price and it generated recurring revenues. Sounds simple? Not always. Even though these aspects exist, there are many other variables that can sink a laundromat (pun intended). For example, repairs. If you buy a laundry mat whose machines are old and breaking down, your profit margin can evaporate.

Gary, however, had a solution for that. He was (and is) mechanically inclined and had developed systems to personally fix all of his machines. Thus, his cost of repairs was usually limited to parts, even used parts.

I find that so many new small business owners do now look at the threats of a business acquisiation, or if they do, they do not have a plan (like Gary) to address them. So, though Mr. Periu offers an option in growing your small business, he fails to even mention this serious drawback.

A friend of mine bought an accounting practice. He acquired dozens of clients for a fixed fee. To his suprise the seller accountant was grossly negligent in maintaining his client’s financial records. This unexpected turn forced my friend to incur many, many hours to correct the financial records that he did not get paid for because he had acquired the accounting business. In addition, he lost a substantial number of clients.

In the small business arena, I always recommend that my clients prepare a bullet proof contract with their attorney and of course do their due diligence. It is very rare that a buyer can walk into a small business with a plan to comfront the downside like Gary did. That kind of strategy takes a special skill. If you have that skill, then you minimize your risk. If you don’t, find someone that does. Either way, you must look at all possible and develop strategies to

Small businesses usually don’t have the depth to absorb such oversights in an acquisition.

The Tightrope of Employee Tax Classification is Getting Frayed

My grandfather was Alfano the Great. In the 1920’s he walked between 2 eight story buildings with no net. In addition, he walked on his hands, rode a bicycle and did wheelies. All for a few bucks. Obviously, he never fell, or I wouldn’t be here.

The IRS, US Labor Department, and several state labor departments are about to cut the tight rope of some employers who classify employees as independent contractors.

Michael Cohen report, IRS to Team with Labor Dept. on Employee Classification, discusses the IRS and the Labor Dept. combine efforts with seven states to tackle the problem of employee tax classification. This could be a game-changer because one of the problems in employee tax classification has been defining what an “employee” is.

This move among all of these agencies (and I can only guess that the number of states signing on will grow), will allow a sharing of information about employee tax classifications. Now, this may seem harmless, but remember when you can operate a business in Los Angeles without a business license? Ten or fifteen years ago, one of the main ways L A City found you was to look at the business marques in buildings and cross-check them to the business license lists. Now, they get their information from Sacramento and individual tax return schedule C. All they do now is match the addresses to the individual tax return and send out penalty notices.

I have been writing about this issue for a long time. Here is an article in relation to the healthcare deduction. Healthcare Reform: If It Walks Like a Duck and Quacks Like a Duck…We’ll Call it a Toad

Employee tax classification databases may change the odds for those employers who are skirting the issue. The penalties could be stiff. Discuss your tax situation with your advisor before making any decisions.

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Business Vision and Goals: Understand the Target You are Aiming For

In the early 1970s, I watched a Stanford professor choose Jim Plunkett, (Stanford’s star quarterback) to demonstrate perception and the brain. The professor placed a pair of glasses on Jim that caused his vision to be distorted, shifting everything he sees to the right about 20 degrees. Jim missed his attended receiver throwing consistantly to the right by 20 degrees.

Drawing his share of laughter, Jim compensated and started aiming 20 degrees to the left, thus hitting his receiver about five times. The professor explained his point about perception and congratulated Jim on his adjustment. As Jim took off the glasses and proceeded to sit down, the professor asked him to throw one more pass with no impairment to show the crowd that the professor did not ruin the star quarterback’s talents. Jim laughed and passed the ball one last time. The ball soared past the receiver by 20 degrees to the left. His brain had not re-adjusted.

The Association for Strategic Planning-Los Angeles (ASP) had the honor of hearing Deepa Prahalad speak on September 13 at the beautiful Dole Corporation auditoium. Deepa spoke of her book, Predictable Magic, and its message to identify company goals. She stressed that if you have only broad goals, both your customers and employees will not understand what the company stands for. She suggested that you must become the interpretor of your message.

As in the case of Jim Plunkett, if you cannot see what you are aiming for, you will miss your target. The start of a good strategy is to have a clear vision of what you want to accomplish. Just to have a vision to be your industry leader is not good enough. Once a business establishes a viable vision, they can create a path with quantitative metrics to move towards that vision. Jim Plunkett’s vision changed, so he has to alter his tactics to get there.

Business today is always changing, so a vision you had five years ago will most likely be obsolete, or commonplace in your industry. The ASP preaches the steps of Think-Plan-Act, but if you are thinking about the wrong vision, your plans and actions will lead you towards a failing destination.

Are Business Strategies Obsolete? Does it Matter?

My wife and I have started a new hobby of collecting and reselling small antiques. We really enjoy “the hunt,” but one of the most rewarding aspects is our increased knowledge of 100 year old household tools. One such item was a nickle/steel handle with a cone cup on the end. The cone cup had a butterfly handle on the end of the cone that turned blades inside the cone, scraping the sides.

Almost nobody guessed its function, which was a Delmonico ice cream scoop.

Today, the basic operation of the Delmonico ice cream scoop is the same, scoop it up, and scrape it out.

The McKinsey Quarterly published an article by Bradley, Hirt, and Smit entitled Have you tested your strategy lately? The article listed ten tests of which most companies strategies failed. The first test was the most comprehensive, “Will your strategy beat the market?”

Looking at my Delmonico ice cream scoop, I question whether any of today’s companies can execute a strategy that can produce a product or service that can be an industry standard 100 years from now.

A major complaint about American corporations is that in the last 25 years, they have been striving for the short-term profits, and not planning for the distant future. We have seen that in the auto industry.

But what about small/medium-sized business strategies? Will they follow in the footsteps of the some of the large corporations?

That all depends. If you are like most small/medium-sized businesses, you are only concerned about Sales and whether you have enough cash to meet payroll.

Bradley’s ten tests may be a good place whether you are in the business plan or seasoned stage. In my experience, most businesses of these sizes could not pass three of these tests.

Managers and owners must review their strategies continuously during its implementation. Too many fall into The E Myth (Michael Gerber) and have the business run them, and not them running the business. Or as Gerber puts it, ” working on your business” as to “working in your business.”

When it comes to strategy, Bradley et al proclaim that it is not the newest strategy that a business owner should find, but flaws in their current strategy.

Business Acumen: Beware of Useless Advice

There are brilliant people that study for years to provide brilliant advice based on solid, empirical evidence. Then, there are others that just talk well.

Financing, Outsourcing And 7 Other Tips from an Expertby Shira Levine, touts the advice of two business women, Amy Abrams, and Adelaide Lancaster who are releasing a book in September based on 100 interviews of entrepreneurs.

The article sets forth the following advice:

You’re never finished with your homework
Really ask yourself what you want out of your business
Focus on what is meaningful to you vs. what you are passionate about
Figure out your business goals
Determine what to outsource
Find access to capital
Specialization is key

Now, I have not read the book. And based on these seven points, I probably won’t buy it. The reason is because these points don’t present a case that is no more than common sense. Business people do not need motivational speakers or cheerleaders. Instead, they need experience, knowledgeable and trained people to give them real advice of what, how, and when to do things.

To prove my point, if you were to buy this book, may I suggest that you spend an extra $50 and buy the following:

Good to Great by Jim Collins

Blue Ocean Strategy by W. Chan Kim and Renee’ Maugorgne

Predictable Success by Les McKeown

If you do not have the time or budget to read those, at least buy a smaller guide, Achieving Strategic Alignment by Barry MacKechanie.

Most of these books are critically acclaimed with sound business advice based on years of research by highly educated and experienced strategists. In these books, you will find recurring themes.

Compare what they say to Abrams/Adelaide book if you choose to buy it. Small business owners cannot hire the seasoned professional, but can learn from them through their writings. Business acumen has a price, but the inability to develop it has a much bigger price.