Business Matters
By Sumeet Shah In 1990, the U.S. Congress created the Immigration Investor program through the EB-5 visa. The EB-5 program is a unique U.S. immigration program for foreign investors who are interested in acquiring a green card to immigrate to the United States. The U.S. Citizenship and Immigration Services (USCIS) administer the program in which 10,000 EB-5 visas are available each year. If you have family or friends that have the means to invest and would like to come to the U.S., obtaining an EB-5 visa may be the best way to quickly gain admittance to the country. EB-5 Visa requirements: * Applicants must invest $1,000,000, or $500,000 in some targeted employment areas (high unemployment or rural area), into new or struggling businesses in the U.S. * Applicants must be involved, in some way, in the management of the business. * All EB-5 investors must invest in a new or existing commercial enterprise or through a designated “Regional Center” which are private companies that match overseas investors with businesses in need of capital. Commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business. * Capital investment means cash, equipment, inventory, other tangible property, cash equivalents and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness. All capital shall be valued at fair-market value in United States dollars. Assets acquired, directly or indirectly, by unlawful means (such as criminal activities) shall not be considered capital. Investment capital cannot be borrowed. * Create or preserve at least 10 full-time jobs for qualifying U.S. workers within two years (or under certain circumstances, within a reasonable time after the two-year period) of the immigrant investor’s admission to the United States as a Conditional Permanent Resident. * Create or preserve either direct or indirect jobs: EB-5 Visa Benefits for the Foreign Investor: * The EB-5 Visa holder and their qualifying family members (spouse and unmarried, minor children) receive a “conditional” green card. * After approximately 21 months from receipt of the conditional green card, the investor may apply to remove the conditional basis of his green card. * EB-5 investors and their families can live, work, and attend school anywhere in the United States. * The ability to apply for citizenship approximately five years after obtaining the conditional permanent resident status. If you have family or friends that are interested in a way to obtain a visa to come to the U.S., they should look at the EB-5 Visa. If people from another country are looking for a secure and safe place to invest their money and possibly earn a decent return on their investment then they should consider coming to the U.S. through this visa program and investing here. If they are looking for a country where they can get a good education for their children then this visa can help get them here. To find out more about the program and about potential projects needing investment funds consult with legal and financial professionals to help you with the process. Disclaimer: The information presented in this article is for general information only, and does not constitute legal, tax or other professional advice. Starting a Business? By Sumeet Shah As the beginning of the year is always a time many new business ventures are in the midst of opening, I felt it appropriate to republish this article that I previously wrote. As a fellow entrepreneur, I understand the excitement of turning a dream or vision into reality and starting that business you’ve always wanted to! Here is a quick rundown of some legal aspects you need to consider for your new business venture. Make Sure You Can Use the Name You’ve Selected for Your Business Setup the Legal Structure of Your Business Obtain a Federal Tax ID Number Register a Fictitious Business Name/DBA Obtain the Necessary Business Permits and Licenses Comply with Employment Laws Creating Non-Disclosure Agreements In sum, no matter how excited, stressed or busy you are with setting up your new business, set aside some time to address these legal matters before you open the doors. As with a lot of things, hiring an attorney or accountant to help guide you through all of this can go a long way toward helping you steer clear of trouble. This will help you avoid any hiccups down the road, and will set you up for a successful run at growing your business! Disclaimer: The information presented in this article is for general information only, and does not constitute legal, tax or other professional advice. Is your Vacant Property Actually Insured? Billion Dollar Legs By A. J. Shah Most months, this space is used to discuss various topics regarding insurance such as commercial, auto, liability, property, and workers compensation policies for businesses and homeowners policies for individuals. All of these policies are standard fare within the insurance industry. Every now and then, however, it’s worth noting some of the more unusual policies – like celebrity insurance. Gennaro Pelliccia’s Tongue Troy Polamalu’s Hair America Ferrera’s Smile Michael Flately’s Legs Bruce Springstein’s Voice David Beckham’s Legs Mariah Carey’s Legs Whether you’re a soccer star insuring your legs or a small business owner insuring your livelihood and family, the fact of the matter is, it’s always important to protect the things that matter most and the proper insurance policy gives you the opportunity to do just that. Revisiting Flood Insurance By A. J. Shah We have written articles in Saathee previously regarding flood insurance, but in the aftermath of superstorm Sandy, as many homeowners and businesses are once again contemplating the idea of purchasing flood insurance, it will be beneficial to go through the analysis one more time. As images of waterlogged houses and businesses dominate the news, many are realizing that most homeowners and business property policies do not cover damage from flooding. Many typically think flood insurance is just for homeowners and businesses on the coast or along the banks of a river. However, as we have recently learned, flooding can occur anywhere because of storms, heavy rains, or water main breaks. Residences and Businesses in High-Risk Areas Flood Insurance is Affordable Business Insurance By A. J. Shah Business owners ask me, “Do I really need insurance?” The answer is simple - Yes. We know we need insurance for our home and automobiles to protect us financially in case an accident or disaster happens. We accept these types of insurance and understand the value because we realize that it would be difficult to replace something so valuable without insurance. This same principle should be applied to business insurance. 1. My business does not make enough money to warrant insurance: 2. My business operates as a corporation. This protects me from personal responsibility and liability. I don’t need insurance: 3. If I become disabled or die, my partners and family would work out what do with the business: Now that you understand why business insurance is important, let’s review the basic types of business insurance available: 1. Workers’ Compensation – Workers’ compensation is a state-mandated system that pays benefits to workers injured on the job to cover medical care, part of lost wages and permanent disability. Usually, companies with five or more employees are required to carry this insurance. Companies with less than five employees may elect this coverage. Those that do not are exposed to civil lawsuits by injured workers. 2. Property Insurance – Property insurance covers everything related to the loss and damage of a business’s property due to a wide-variety of events such as fire, smoke, wind, hail storms and vandalism. The definition of “property” is broad, and includes lost income, business interruption, buildings, computers, company papers and money. Most property policies exclude flood coverage, which can be purchased separately. 3. General Liability – General liability insurance covers legal hassles due to accident, injuries and claims of negligence. It protects against payments for bodily injury, property damage, medical expenses, libel, slander, the cost of defending lawsuits and settlement bonds or judgments required during an appeal. Types of general liability claims include injuries from customer slips and falls on your business premises, breach of contract lawsuits and products completed liability. 4. Business Owners Policy (BOP) – BOPs combines property and liability policies into one lower cost affordable package. BOPs target small and medium-sized businesses, such as professional offices, convenience stores, motels, liquor stores, restaurants, and mailbox stores, and include business interruption insurance, which provides reimbursement for up to a year of lost revenue resulting from an insured property claim. Eligibility for BOPs includes factors such as industry, location, financial stability and building construction. 5. Commercial Automobile – If your business uses automobiles in some manner, collision and liability insurance should be utilized. The policy should include Hired & Non-Owned coverage which covers employees and owners if they use a personal vehicle for business. 6. Professional Liability – Businesses providing services should have professional liability insurance (also known as Errors and Omissions insurance). This coverage protects businesses against malpractice, errors, negligence in provision of services to your customers. Depending on your profession, you may be required by your state government to carry such a policy. 7. Home-Based Business Insurance - Homeowners’ insurance policies do not generally cover home-based business losses. While you may be able to add on certain property damage riders to your policy, you may need to purchase additional policies to cover other risks, such as general and professional liability. 8. Umbrella/Excess Liability – For a single premium, umbrella liability or excess liability policies add another layer of protection to several other polices that you might hold, including general liability, employer’s liability and auto liability policies. This policy is usually the most affordable way to get higher policy limits on several small business insurance policies. While many small business owners seek to get away with minimal coverage, others overpay on insurance they don’t need. You can avoid both of these extremes by consulting a business insurance expert to advise you on the right coverage for your business. Property Co-Insurance: Avoid the Surprise By A. J. Shah When insuring property of any kind – building, personal, or business property – it is important to understand how your insurance company will value that property and buy appropriate limits accordingly. Appropriate limits can be determined by the valuation and the terms of the co-insurance clause if there is one. The two common types of valuations methods are: Replacement Cost: The cost to replace the property with property of like kind and value. Co-Insurance Explained Co-Insurance is a term recognized by many, but not always understood. Co-Insurance exists in most insurance policies and works with your Replacement Cost or your Actual Cash Value coverage, and can affect your claims settlements in a dramatic way. When you purchase insurance on a building, insurance companies will expect that you insure the entire building, for its true full value. All premiums and rates are based on the premise that the amount of insurance carried equals the full value of a building. Co-Insurance Example You have a building you believe would cost $100,000 to replace and a co-insurance clause in your commercial property policy of 80%. You insure the building for $80,000 thinking you have fulfilled the co-insurance clause. A fire causes $60,000 worth of damage, so you submit a claim. The insurance company, however, subsequently determines that the replacement cost of the building is actually $150,000, not the $80,000 you reported. When looking into your co-insurance needs, a few tips to keep in mind: You are required to carry insurance equal to specified percentage (co-insurance percentage) of the value of your property. If you do not, your losses are reduced proportionately by the percentage you are underinsured. When determining your co-insurance requirements, the most important tip is: Talk to a qualified commercial insurance broker. One who understands these clauses and can help you through the maze of determining just how you should insure your property and avoid any unwanted surprises if you have to file a property claim. By Krutika Chheda Past few months we discussed about the different tax deductions for small businesses and special tax situations for individuals. While it is very encouraging to maximize legitimate deductions and receive big tax refund, it can be extremely painful to come under an IRS audit scrutiny. Many in the tax community believe that the audit-free ride for tax payers is likely to get over soon. IRS is likely to step up its audit enforcement in coming years as the federal government decides to close the massive budget deficit gap. IRS audits around 1.2 to 1.5 million tax returns – a small fraction of the total tax returns filed in the US. So, while it is still unlikely that you will be audited, the odds are increasing rapidly in middle to high income groups. How Does IRS pick a Tax Return for Audit? IRS has automated processes to scan tax returns. First there are some basic data verification checks that the computer performs such as checking the name, social security number, W2 information etc. Next the IRS computers assign a rating to each tax return based on audit triggers from the statistical analysis of every item on the tax return and correlating averages found on a cross-section of past successfully audited tax returns. The exact formula is kept secret by the IRS so it is impossible to find out what triggers are being given more weight in any particular year, but the tax community monitors closely to see any new trends. After the IRS computer kicks out the audit worthy tax returns, an IRS agent will review them and make the determination to audit it or let it pass. For a long time some accountants believed that in order to escape IRS audit, one should file a paper return with an extension. IRS claims that it treats all returns in the same way irrespective of how and when they were filed. Five Mistakes to Avoid an IRS Audit 1) Report all sources of Income, including 1099s, 1098s 2) Math – Facts 3) Schedule C – Business Losses 4) Don’t use Round Numbers 5) Documentation Save for your Future Expenses while Saving on Taxes Winter has set in and along with the heavy coats and jackets, the burden of pulling all the paperwork for the tax return will soon be upon all of us. And like every tax season there will be a hope for a bigger tax refund. With the cost of education and the risk of retiring with fewer savings rising each year, tax payers often wonder how they can keep more of their hard earned money for themselves and their family. 529 College Savings Plan Tax Benefits of a 529 College Savings Plan State Income Tax Benefits In case of South Carolina, the absolute tax benefits can be even greater. The state offers unlimited state tax deductions for 529 contributions by South Carolina State residents into a South Carolina qualified plan. So South Carolina Taxpayers can deduct any amount they contribute to a South Carolina 529 Plan, so long as there is income to deduct. Gift and Estate Tax Benefits Gift and Estate tax is a complex subject and requires extensive tax planning. For grandparents that invest the time in the planning process, this is a great way to leave behind a legacy of higher education for the next generation while saving on the heavy burden of taxes. Here is a link for more details on the estate tax planning: http://kmtaxservices.com/estateplan.php Year End Tax Strategies for Small Businesses and Professionals This has been an eventful year with a lot of new regulations and tax breaks from the Obama Administration. As the budget deficit keeps on increasing, it is becoming clear that very soon our tax rates are likely to go up so as to help the treasury department bridge the deficit. Whether the government increases taxes in 2012 or further, it is never too early for businesses and individual professionals to start their tax planning. Advance Tax Planning Strategies for Small Businesses and Individual Professionals Type of Business Entity Inventory Valuation Equipment Purchases Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case. What to do with your Cash Mid-Year Business Performance Review Closing a Business Tax Documents you Must Maintain How to Qualify for a Home Office Tax Deduction? H1, L1 Visa Holder Special Tax Situation and Tax Audits Last month we discussed how to choose between different tax software programs and professionals suitable for different tax situations. A large number of readers called us for more details on the H1, L1 visa holder special tax situation and potential tax fraud by offshore tax service providers. With a view to benefit the H1 L1 visa holder community, this article covers the potential tax audit issues that H1 L1 information technology (IT) consultants may be facing. The Tax Audit department in our office has come across several IRS Audit cases involving H1, L1 tax payers. Most of these tax returns were prepared and filed by offshore based tax preparers. The audit trigger seems to have been the excessive business travel expense deduction. Before we dive deeper into the issue, let us cover some fundamentals around the tax laws. H1, L1 Visa Workers may be considered US Resident for Tax Purposes IRS Determination of H1, L1 tax payer’s “Tax Home” and Temporary Assignment Top Tax Audit Traps for H1, L1 and Information Technology (IT) Consultants - Business Travel Expense Deductions Filing Tax return as US Non Resident Alien IRS Taxes Penalties and Impact to Immigration Case In addition the tax payer may have to bear the cost of hiring a Tax Attorney or an Enrolled Agent to represent their case in front of the IRS. During approval for the Green Card as well as citizenship, having the tax status clear with the IRS is critical. Pending tax audits, penalties or tax dues, may negatively impact the immigration case as well as the potential to sponsor others. Having a good immigration lawyer and a reliable tax accountant may provide some peace of mind as you go through the immigration and tax matters together. Keep in mind this column and the articles published here are only meant to provide you with high level information about taxes and in no way should you consider this as tax advice. Hopefully we have got you started thinking about protecting your hard earned money, and reduce your tax audit and immigration risks. Consult your tax advisor regarding your individual tax situation and your immigration attorney for any immigration related situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for independent tax advice provided by a Tax Accountant or a Tax Attorney familiar with your case. Choosing the Right Do-it-Yourself Program and Professional Tax Preparer Year End Tax Strategies for Businesses and Individuals What a year 2010 has been with all the changes in the regulations and now it is coming to an end with the uncertainty over the fate of the Bush tax cuts. If the Congress fails to act in the next month or so, the tax cuts enacted by President Bush in 2001 and 2003 will expire on December 31, 2010. Top Small Businesses and Individual Tax Saving Strategies Charitable Contributions Start-up Expenses Roth IRA Conversion Home Office Deduction Keep in mind this column and the articles published here are only meant to provide you with high level information about taxes and in no way should you consider this as tax advice. Hopefully I have got you started thinking about saving more of your hard earned money and paying less to the IRS as you brave through the economic head winds in a recession. Consult your Tax Advisor and Financial Advisor regarding your individual situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case. Year End Tax Strategies for Small Businesses and Professionals Many small business owners and professionals underestimate the savings potential when it comes to taxes. It is surprising how many small business owners and individual professionals come during the tax season to figure out how to reduce their tax liability, not realizing that it is too late by then and the books have already closed for the tax year. And it is shocking how often the same mistake is repeated each year! Advance Tax Planning Strategies for Small Businesses and Individual Professionals Type of Business Entity Whereas another partner may be relying solely from the income within the business and perhaps like to show a higher income in order to establish personal credit to secure home mortgage. Inventory Valuation Equipment Purchases Keep in mind this column and the articles published here are only meant to provide you with high level information about taxes and in no way should you consider this as tax advice. Hopefully I have got you started thinking about saving more of your hard earned money and paying less to the IRS. Consult your Tax Adviser regarding your business and individual situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case. Small Business Jobs Bill Small Business and Health Care Back-to-School – Tax Savings with a 529 Plan What to look for when buying a Business? Is your Accounting System Broken? Tax Documents you must Maintain We are in the final lap of this year’s tax season and the April 15th Tax Deadline is approaching fast. I hope the articles from the past few months have been helpful. We’ve discussed different tax deductions for small businesses, special tax situations for individuals and audit proofing your tax returns. This has been one of the best years for tax payers to get their biggest tax refund. The tax cuts and incentives combined from Bush and Obama administrations have reduced the effective tax rate of US tax payers to the lowest levels seen in many years. Retirement Savings, IRA Tax Breaks If eligible you may be able to contribute to your Retirement Savings under an IRA (Individual Retirement Account) and claim up to $5000 in tax deductions. If by the end of 2009 you are 50 years or older, you may be able to deduct up to $6000 contributed in an IRA account. You have until April 15th to make the contribution for the year 2009 and claim it as a deduction on your 2009 tax return. Last Minute Check List for 2009 Tax Deductions and Tax Credits Here is a last minute check list for some of the new and changed tax deductions and tax credits that you may be eligible to claim in tax year 2009. Education Credit: More parents and students can use a $2500 federal education tax credit under the new American Opportunity Credit for at least $4000 paid in qualified college tuition in 2009. Home Buyer’s Credit: First time home buyers can claim up to $8000 in tax credit in 2009. If you claim this credit, you cannot file the tax return online. Be ready to make the last minute rush to the post office to file the paper return. Home Energy Credit: You may be able to claim up to $1500 in tax credits if you weatherized your home or bought energy efficient heating and air-conditioning systems, water heaters and stoves. If you installed alternative energy equipment such as solar electric systems you may be able to claim tax credit up to 30 percent of the cost with no upper cap on the amount. For those that want to go green the government is willing to foot up to 30 percent of the costs under this tax credit (depending on your income and tax liability). New Vehicle Purchase: You may be able to deduct the state and local taxes paid on your new vehicle purchased in 2009. File an Extension, if you are not able to file the Tax Return by April 15th If you are not able to file your return by April 15th, at least check in with your Tax Consultant and find out if you may be able to file an extension with the IRS that gives you until October to file the actual tax return. Not filing a return and an extension with the IRS is not a very good scenario. Filing an extension however is not enough if you owe the IRS tax. If you owe IRS any tax you may be charged a penalty and interest on the amount owed. You are better off paying the IRS an estimated tax before April 15th and then filing the detailed tax return by October. Keep in mind this column and the articles published here are only meant to provide you with information about taxes and in no way should you consider this as tax advice. I hope you have started thinking about saving more of your hard earned money, paying less to the IRS and at the same time reduce your audit risks as you brave through the economic head winds in a recession. Consult your tax advisor regarding your individual tax situation and your financial advisor for any financial investments related situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case. Audit Proof your Business and Individual Tax Returns In the past few articles we have discussed the different tax deductions for small businesses and special tax situations for individuals. While it is very encouraging to maximize legitimate deductions and receive a big tax refund, it can be extremely painful to come under an IRS audit scrutiny. Many in the tax community believe that the audit-free ride for tax payers is likely to get over soon. IRS is likely to step up its audit enforcement in coming years as the federal government decides to close the massive budget deficit gap. IRS audits around 1.2 to 1.5 million tax returns – a small fraction of the total tax returns filed in the US. So, while it is still unlikely that you will be audited, the odds are increasing rapidly in middle to high income groups. How Does IRS pick a Tax Return for Audit? IRS has automated processes to scan tax returns. First there are some basic data verification checks that the computer performs such as checking the name, social security number, W2 information etc. Next the IRS computers assign a rating to each tax return based on audit triggers from the statistical analysis of every item on the tax return and correlating averages found on a cross-section of past successfully audited tax returns. The exact formula is kept secret by the IRS so it is impossible to find out what triggers are being given more weight in any particular year, but the tax community monitors closely to see any new trends. After the IRS computer kicks out the audit worthy tax returns, an IRS agent will review them and make the determination to audit them or let them pass. Five Mistakes to Avoid an IRS Audit 1) Report all sources of Income, including 1099s, 1098s This sounds very obvious but many tax payers forget to include all of their incomes. Form 1099 includes 1099-INT for interest, 1099-DIV for dividends, 1099-G for tax refunds, 1099-R for pensions and 1099-MISC for miscellaneous income. Forms 1098 include interest you paid to banks and lenders such as student loans, mortgage etc. Just like your W2 information, this information is received and tracked in the IRS computers. The IRS matches your return against the 1098s and 1099s. If there is a mismatch you will definitely hear from the IRS. So regardless of how many 1099s and 1098s you receive, make sure they are all accounted for on your return. 2) Math – Facts Check your numbers through each step and do some simple math checks when you finish. Even if you use a software program, make sure you check the numbers before filing electronically. If the numbers don’t add up, you will definitely get a notice from IRS. This is not an audit, but once the software kicks your return out of the automated process to an IRS agent, there is no telling what else might get uncovered! 3) Schedule C – Business Losses Schedule C is by far the biggest trigger for audits. Consistently filing losses under schedule C is likely to trigger an audit especially if main source of income continues to be W2 wages. IRS auditors go after these returns very aggressively. In order for these business losses to stand up, you must pass both the “passive loss” and “hobby loss” rules. Most tax payers are not familiar with these rules, and the IRS knows it. Another trigger is taking earned income credit while filing schedule C. Make sure you take the proper Schedule C deductions if you have a business and especially if you make around $16,000. Also on the Schedule C a big audit flag is claiming a car for 100 percent business, but you don’t have another car. These are simple logical catches; make sure you cover your basis. If you have a genuine long term business, I would strongly recommend changing your business entity into a corporation and file separate business return. Schedule C’s are 10 times more likely to be audited than Partnerships, multiple member LLCs, C and S Corporations. In any case, take help of a professional tax accountant if you need to file a business loss or profit. 4) Don’t use Round Numbers Too many round numbers can be a red flag to the IRS. Rounded numbers just don’t happen very often in the real world. For example in Entertainment and Meals Expenses, don’t use $6000 when your actual expenses are $5985. 5) Documentation The golden rule of taxes is documentation, documentation, documentation. Keep good records of all your expenses. Several tax payers assume that maintaining accounts in a software or excel sheet is sufficient proof of their expenses. This is not true. You are required to maintain receipts or proof of payment – cancelled checks, credit card statements, etc if you claim a deduction. You don’t have to forgo your right to a good tax refund for the fear of a tax audit. Just make sure you have all the documentation for the deductions that you are claiming. If you are not sure about a certain deduction, check with your tax accountant and make the final determination. Keep in mind this column and the articles published here are only meant to provide you with information about taxes and in no way should you consider this as tax advice. I hope this helps in getting you thinking about saving more of your hard earned money, paying less to the IRS and at the same time reduce your audit risks as you brave through the economic head winds in a recession. Consult your Tax Advisor regarding your individual tax situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case. H1, L1 Visa Holder Special Tax Situation and Deductions Does H1, L1 Tax Situation require Special Treatment? H1, L1 Visa Workers may be considered US Resident for Tax Purposes Top Tax Deductions for H1, L1 Consultants Home Office Deduction for IT Consultants H1, L1 Dependent Tax Deductions, ITIN Business Travel Expense Deductions Immigration and Taxes Matters Together Keep in mind this column and the articles published here are only meant to provide high level information about taxes and in no way should you consider this as tax advice. I hope you’ve started thinking about saving more of your hard earned money, paying less to the IRS and at the same time reduce your immigration risks as you brave through the economic head winds in a recession. Consult your Tax Advisor regarding your individual tax situation and your immigration attorney for any immigration related situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case. Choosing the Right Program for Tax Return Preparation and Filing Taxes are Your Biggest Expense this Year… (But who cares?) As a Business owner and professional your normal week may look like this. This may include meeting clients, preparing weekly payroll, checking inventory, paying suppliers, meeting with the banker for Line of Credit, working on the marketing plan and advertising, hiring and supervising employees and thousands of other tasks. Small Businesses and Individual Professionals can Reduce their Taxes Taxes are the biggest expense for most small businesses and individual professionals. And yet most of us provide minimal time for planning and reducing this expense, except perhaps an annual visit to the accountant’s office during taxes! Is it any surprise then that small businesses and professionals contribute the most to Tax Revenues? Large corporations with help from expert tax professionals pay at a much lower effective tax rate. An extreme example is that of Goldman Sachs, which paid an effective tax rate of one percent on a $2.3 Billion profit last year. Independent studies over the years suggest that small businesses pay up to $160 Billion in excess taxes each year. This is money you can save through proper tax planning. As with everything else in your business, it takes careful planning and professional execution. There are over 350 tax deductions and credits for small businesses and individual professionals. Although it is almost impossible to say how many of these may be applicable to your specific business without considering your particular scenario, here are some deductions that may apply to most small businesses and professionals. 1. Start-up Expenses 2. Business Travel, Meals and Entertainment 3. Charitable Contributions 4. Bad Debts 5. Home Office Deduction There are other rules and definitions that IRS uses to qualify the Home office deductions. If you are planning to take advantage of this deduction, I strongly recommend you take help from an expert tax accountant. The money you will save on the taxes will be well worth the professional fees. Keep in mind this column and the articles published here are only meant to provide you with information about taxes and in no way should you consider this as tax advice. I’m hoping I have got you started thinking about saving more of your hard earned money and paying less to the IRS as you brave through the economic head winds in a recession. Consult your Tax Advisor regarding your individual situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case. Contact: kmchheda@kmaccountant.com
What is the EB-5 Visa?
“EB stands for “employment based” because the program is designed to stimulate investment in American business and to encourage growth of the U.S. economy through the creation of jobs. It is a wonderful way for immigration to enhance the U.S. economy at no expense to the U.S. taxpayer!
* Direct jobs are actual identifiable jobs for qualified employees located within the commercial enterprise into which the EB-5 investor has directly invested his or her capital.
* Indirect jobs are those jobs shown to have been created collaterally or as a result of capital invested in a commercial enterprise affiliated with a regional center by an EB-5 investor. A foreign investor may only use the indirect job calculation if affiliated with a regional center.
Don’t forget these legal matters before opening the doors
You are overflowing with energy, optimism and ideas but may not have totally mapped out the course of actions it takes to begin your business. In the flurry of dreaming up ways to attract customers, mastering your sales speech, and building your website; it’s all too easy to put off some of the less exciting, administrative aspects of running a company including the legal aspects that must be implemented before your doors open.
Yes, registering your company and thinking of the best legal structure for your business are not the most exciting parts of your startup venture; however, they are crucial to the health of your business.
Make sure the great new name you thought of isn’t infringing on the rights of an already existing business. You can perform a free search online that looks at business names registered with the Secretary of State — that will tell you if the name is available in your state. Then, you may want to take your search to the national level and conduct a search to see if your name is available for use in all 50 states and make sure you are not infringing on someone else’s trademark.
Forming an LLC or corporation such as an S Corporation or C Corporation is an essential step to protect your personal assets from any liabilities of the company. Every business structure has its own advantages and disadvantages; therefore, speaking to an accountant is advised before choosing a legal structure for your business.
To distinguish your business as a separate legal entity, you’ll need to obtain a Federal Tax Identification Number from the IRS, also referred to as an Employer Identification Number (EIN). If you’re a sole proprietor, you’re not obligated to get a Tax ID number, but it may be a good idea so that you don’t have to provide your personal social security number for your business matters.
Ever notice those endless fictitious name announcements in the classifieds of your local paper? You may need one, too. A DBA (Doing Business As) must be filed whenever your company does business under a different name. If you’ve got a sole proprietorship or general partnership, a DBA is needed if your company name is different from your own name. For an LLC or corporation, a DBA must be filed to conduct business using a name that’s different from the official Corporation or LLC name you filed.
Depending on your business type and physical location, you may be required to have one or more business licenses or permits from the state, local or even federal level. Such licenses may include: a general business operation license, zoning and land use permits, sales tax license, health department permits, and occupational or professional licenses.
Your legal obligations as an employer begin as soon as you hire your first employee. You should spend time with an employment law professional to fully understand your obligations for the following: federal and state payroll and withholding taxes, self-employment taxes, anti-discrimination laws, OSHA regulations, unemployment insurance, workers’ compensation rules, wage and hour requirements, differences between employee and independent contractor, and employment agreements.
If you will be setting up financing for your business or entering into contracts with employees, independent contractors, suppliers, etc. you should consider confidentiality and non-disclosure agreements. These individuals or companies will have access to information about your new business venture that you may want to keep private, so you should consider having them sign these agreements.
By A.J. Shah
In a period when so many homes and commercial buildings are for sale or rent, you should make sure that if you are a seller or landlord, you notify your insurance agent. Insurance companies have long recognized that they are assuming a greater risk by covering any vacant property. Unfortunately, many property owners do not realize their insurance policy contains a “vacancy clause” that limits or eliminates coverage under those conditions and in some cases, cause a claim to be denied.
It is important to understand when an insurance company considers a home or commercial building to be vacant. The answer usually depends on the type property to be covered and the particular policy issued.
While each company’s policy is a bit different, it is standard that after 60 consecutive days of vacancy (30 days for some companies) the policy either cancels altogether so that there is no insurance in place, or if the policy does remain in force, it is for limited coverage.
Insurance policies generally do not have a specific policy condition or exclusion for vacancy. Instead, there are usually several references to specific types of losses that could be restricted or denied because of a vacant property condition. This combination of exclusions is referred to as the “vacancy clause.”
For a commercial policy, once a building has met the 30 or 60-day standard, a policy’s before mentioned “vacancy clause” is automatically triggered. A vacancy clause removes coverage occurring from the following perils:
Vandalism
Building glass breakage
Water damage
Theft or attempted theft
Sprinkler leakage
In addition to the removal of those perils, any other covered cause of loss (fire, wind, collapse, etc.) can be penalized by 15 percent. For example, a total loss due to are on a building valued at $100,000 would be paid at $70,000.
For a Homeowners Policy, when a home becomes vacant, a standard homeowner policy may give the carrier the right to cancel mid-term, lower coverage levels, or even deny a claim.
Companies and homeowners that have faced reduced settlements from an insurance carrier often ask why they were not noticed that coverage would be restricted. Since insurance carriers often only discover a vacancy after a loss has occurred, no notice is required from them. In addition, since the vacancy clause is part of the original policy form, there is no premium reduction associated with the restriction in coverage.
Insurance companies do not insure vacant structures because often times they are a target for thieves and vandals, and a haven for vagrants and criminals. The most common losses resulting from this situation is theft of copper wiring and pipes, air conditioners, heaters, and other valuable items, as well as fire. This is easy to understand. If the property is unoccupied there is no one there to minimize or deter these hazards by making a quick call to the police or fire department.
Vacant Property Insurance is needed where there are no possessions pertaining to activity or occupancy in a structure, and the property is not being used for any other purpose. Vacant Property Insurance may be purchased based on the length of time the owner thinks the property will remain vacant. Coverage can be purchased for one month, three months, six months, or one year. Some policies will allow some sort of vacancy coverage, but only with proper notification and information.
In most cases, the money paid for a vacant insurance policy is only partially refundable, even though the coverage automatically cancels when the property is once again occupied, or it is sold.
The options available for a vacant dwelling or vacant building consist of the following coverage:
Vacant Building Insurance Coverage
This insurance coverage protects the building structure; this coverage limit should be the cost to replace the building only. Many insurers offer this coverage in Actual Cash Value only.
Other Structures Insurance Coverage
This optional insurance coverage protects other structures on the property. This may include pools, decks, sheds, and wells.
Liability Insurance Coverage
This optional insurance coverage protects the owner of the property against suits arising out of injury that is sustained on the property or even damage to the property of others that arise from your property. Vacant structures are considered attractive nuisances and the liability exposure and premium is considered greater.
When insuring a vacant property you need to be realistic. As mentioned earlier, a vacant structure is an attractive nuisance. It is a potential haven for kids, the homeless, squatters and vagrants. As such, it is more expensive to insure than a home or an occupied building. Most times, a vacant structure policy is more than double the premium of a standard property or homeowner policy.
Coverage and clauses vary state to state and insurance carrier to insurance carrier. If you have a vacant structure of any kind, whether it is a home for a sale or an empty commercial space, please contact your insurance agent or broker and make you understand your coverage.
Athletes and celebrities depend on their physical prowess and appearance to earn their livelihoods and some will go to great lengths to secure them. Though the practice may seem outrageous to many, these stars have shelled out big money for insurance policies on the assets that have been benchmarks of their success: their bodies.
Taking out a policy on a body part, although rare, has been around for decades. During the 1920s, silent film clown Ben Turpin, who was known for his crossed eyes, took an insurance policy out if his eyes were to ever become uncrossed, as reported by Time Magazine. From their legs to the hair on their head and everything in between, the rich and famous are seeking to protect their money makers, and sometimes to gain a little publicity as well. Modern day examples include:
As master taster for Costa Coffee, the world’s second largest coffeehouse chain behind Starbucks, Pelliccia personally samples every batch of coffee beans before they are marketed. Having insured his taste buds that enable him to distinguish defects which in turn protects the company’s Mocha Italia blend, the policy will pay out if Pelliccia loses his mastery.
National Football League (NFL) strong safety Troy Polamalu is known for his hard-hitting style on the field and for his lush hair which cascades down his back off the field. After Proctor & Gamble signed Polamalu in 2010 to endorse its Head & Shoulders shampoo, the company took out a $1 million insurance policy on his hair. The policy will pay out if he loses more than 60 percent of his hair in an accident and specifies that he can’t participate in activities that may endanger his hair, like fire breathing or climbing Mount Everest.
The star of the former ABC hit Ugly Betty, America Ferrera’s smile was insured in 2007 for $10 million. The policy was taken out by toothpaste and teeth whitening product maker Aquafresh after Ferrera began working with the company to promote the nonprofit group Smiles for Success Foundation.
During the height of his career, Irish step dancer Michael Flatley, the star of Riverdance and Lord of the Dance, insured his legs for a whopping $47 million.
Rock and Roll Hall of Famer Bruce Springsteen is known to his fans as “The Boss,” but Springsteen knows that “The Boss” could be no more with a case of laryngitis. That’s why in the 1980s he insured his famous gravelly voice for $6 million.
Soccer legend David Beckham’s legs were insured for £100 million (roughly about $195 million at the time) in 2006. The policy, considered to be the largest personal insurance policy for a sports figure in history, insured Beckham’s legs, feet, toes, and famous good looks. Allegedly, the policy covers Beckham if he was unable to play soccer or if he was disfigured.
Singer-songwriter Mariah Carey isn’t famous only for her powerful voice. She’s also famous for her great legs - famous enough that in 2006, women’s razor brand Gillette Venus named Carey the first “Celebrity Legs of a Goddess” and reportedly insured Carey’s legs for an amazing $1 billion.
When Hurricane Katrina hit, only 33 percent of homeowners and 25 percent of businesses carried a federal flood policy. In the Sandy hit areas of New Jersey, New York, and Connecticut the number of those insured are expected to be similar. According to the Federal Emergency Management Association (FEMA), 20 percent, or 1 in 5, of flood claims from areas that have low to moderate flood risk. FEMA expects to pay out $7 Billion in covered flood insurance claims from superstorm Sandy.
By securing flood insurance, you have the option to protect two types of insurable property: building and contents. The first type covers your building, while the latter covers your possessions; but neither covers the land they occupy.
Flood insurance is not optional for everyone. If you live in a Special Flood Hazard Area (SFHA) or high-risk area and have a federally backed mortgage, your mortgage lender requires you to have flood insurance. If during the life of the loan, the maps are revised and the property is now in the high-risk area, your lender should notify you that you must purchase flood insurance. For high risk areas of flooding, Congress has mandated federally regulated or insured lenders to require flood insurance on properties.
Homes and buildings in high-risk flood areas with mortgages from federally regulated or insured lenders are required to have flood insurance. These areas have a 1 percent or greater chance of flooding in any given year, which is equivalent to a 26 percent chance of flooding during a 30-year mortgage. According to the National Flood Insurance Program (NFIP), these claims have averaged over $33,000 each over the past ten years, and the average annual U.S. flood losses from 2001-2010 were more than $2.7 billion.
Residents and Businesses in Moderate-to-Low Risk Areas
Homes and businesses located in moderate-to-low risk areas that have mortgages from federally regulated or insured lenders are typically not required to have flood insurance, however, flood insurance is highly recommended because anyone can be financially vulnerable to floods. People outside of high-risk areas file over 20 percent of NFIP claims and receive one-third of disaster assistance for flooding. When it’s available, disaster assistance is typically a loan you must repay with interest.
In comparison to other forms of homeowners and property insurance, flood insurance is significantly less expensive. Part of the reason for that is flood insurance is underwritten by the National Flood Insurance Program (NFIP.) A flood protection plan can be purchased from most independent insurance agents, so you can probably get a policy from the same company you regularly deal with. The NFIP is under the administration of FEMA so rates are fairly consistent no matter where you live in the country, but variables apply, such as proximity to a floodplain. If you live in a moderate-to-low risk area and are eligible for the Preferred Risk Policy, your flood insurance premium may be as low as $129 a year, including coverage for your property’s contents. The closer you live to a flood zone the higher your rate. There is one difference, the amount of coverage. If you want to make sure you are fully covered, the cost of your policy will depend on the extent of the coverage you choose.
The National Association of Insurance Commissioners (NAIC) found that 33 percent of household hold the false belief that flood damage is covered by a standard homeowners’ policy. FEMA states approximately 50 percent of low flood zone risk borrowers think they are ineligible and cannot buy flood insurance.
Anyone can buy flood insurance as long as their community participates in the NFIP, even renters. Unless one lives in a designated floodplain (high-risk) and is required under the terms of a mortgage to purchase flood insurance, flood insurance does not go into effect until 30 days after the policy is first purchased.
If you are eligible, you must purchase a separate flood insurance policy through an insurance company that participates in the National Flood Insurance Program (NFIP). Flood insurance is available for residents of approximately 19,000 communities nationwide.
According to the FEMA flooding is consistently the leading cause of property damage in the United States. Natural disasters can’t be prevented, but you may be able to better deal with the results if you’re prepared. Getting your affairs back in order after a flood has disrupted your life or business may be done in a timely manner if you carry flood insurance.
You may visit www.floodsmart.gov/floodsmart/ regarding flood insurance, flood zone maps, flood plain maps and flood information. You can also contact your insurance agent or company to find out more about federal flood insurance.
Many small business owners don’t have proper business insurance because they think they can’t afford it. In reality, a small business owner can’t afford not to have adequate coverage. Common myths for not buying insurance are:
The truth is any business can be sued. Business insurance can help you protect assets in the case of a lawsuit so that your business doesn’t have to sell assets such as property and equipment. Underinsured businesses face stiff coinsurance penalties and all claims may not be covered. Also, you could be in violation of your lease or loan requirements if you are uninsured or underinsured.
The truth is operating as a corporation intends to protect investors, owners and managers from personal liability. However, as the owner, in most states, you could still be liable. This means, without insurance, you could lose your personal assets – your home, your business, your car. Having business insurance minimizes personal exposure. The rule of thumb is, the smaller your corporation, more likely you may lose the case.
Family members and business partners rarely work things out after the primary owner passes away. When the primary owner passes, often, there isn’t enough cash flow to pay the estate of the deceased member. Key Person Insurance and a Buy-Sell Agreement for your business ensure that each member and their estate is properly protected and valued.
Actual Cash Value: The replacement cost minus depreciation of the property due to wear and tear.
The co-insurance clause is the insurance company’s protection that if you have not insured the complete building, you will become a co-insurer. It prevents you from deliberately underinsuring because you feel you could never suffer a total loss. Since 98 percent of fire losses are only partial losses, it would be possible to underinsure a property, knowing full well that there was little chance of loss in excess of the insured value. Co-insurance is a device to discourage this practice and is used by insurance companies to limit their own liability.
The co-insurance clause stipulates that in order to be fully reimbursed for a loss, or even a partial one, the insured must carry insurance for at least a specified percentage of the total value of the property, usually 80%, 90%, or 100%. If the property is insured for less than that amount, the insured, you, assumes a higher risk and becomes a co-insurer with the insurance company for losses within the policy coverage amount.
If the prospect of bearing part of the loss is too concerning, you should file a statement of value with your insurer. The statement should be backed up by a professional appraisal and this too should be filed with your insurance company. It is then unlikely to be challenged if you subsequently have a claim.
It is the insured’s responsibility to ensure that the value of the coverage accurately reflects the true value of the property. If the property is undervalued inadvertently, or in a deliberate attempt to reduce insurance premiums, the insurance company will pay the claim only in proportion to the amount of coverage carried.
To determine how much to pay you for your claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two-thirds, or $40,000) is the amount of your claim the insurance company will pay. If the building had been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss.
Make sure that the amount of insurance and the type of clauses in the policy match. In other words, don’t permit a replacement cost endorsement to be in your policy if your insurance values are equal to the actual cash value of the property.
Try to determine as best you can the true value of your property, both the actual cash value and the replacement cost.
Determine what form of insurance you wish to carry based on what you might do should the property be damaged.
Obtain an appraisal if you can which shows you the replacement cost figure, the actual cash figure, as well as the market value figure. An appraisal is recommended every 3-5 years and should show all of the valuation methods.
Audit Proof your Business and Individual Tax Returns
This sounds very obvious but many tax payers forget to include all of their incomes. Form 1099 includes 1099-INT for interest, 1099-DIV for dividends, 1099-G for tax refunds, 1099-R for pensions and 1099-MISC for miscellaneous income. Forms 1098 which lenders send to you and the IRS recording how much interest you paid.
Just like your W2 information, this information is received and tracked in the IRS computers. The IRS matches your return against the 1098s and 1099s. If there is a mismatch you will definitely hear from the IRS. So regardless of how many 1099s and 1098s you receive, make sure they all are accounted for on your return.
Check your numbers through each step and do some simple math checks when you finish. Even if you use a software program, make sure you check the numbers before filing electronically. If the numbers don’t add up, you will definitely get a notice from IRS. This is not an audit, but once the software kicks your return out of the automated process to an IRS agent, there is no telling what else they might uncover!
Schedule C is by far the biggest trigger for audits. Consistently filing losses under schedule C is likely to trigger an audit especially if main source of income continues to be W2 wages. IRS auditors go after these returns very aggressively. In order for these business losses to stand up, you must pass both the “passive loss” and “hobby loss” rules. Most tax payers are not familiar with these rules, and the IRS knows it.
Another trigger is taking earned income credit while filing schedule C. Make sure you take the proper Schedule C deductions if you have a business and especially if you make around $16,000. Also on the Schedule C a big audit flag is claiming a car for 100% business, but you don’t have another car. These are simple logical catches; make sure you cover your basis.
If you have a genuine long-term business, I would strongly recommend changing your business entity in to a corporation and file separate business return. Schedule C’s are 10 times more likely to be audited than Partnerships, multiple member LLCs, C and S Corporations. In any case, take help of a professional tax accountant if you need to file a Business Loss or Profit.
Too many round numbers can be a red flag to the IRS. Rounded numbers just don’t happen very often in the real world. For example in Entertainment and Meals Expenses, don’t use $6000 instead of $5985.
The golden rule of taxes is documentation, documentation, documentation. Keep good records of all your expenses. Several tax payers assume that maintaining accounts in a software or excel sheet is sufficient proof of their expenses. This is not true. You are required to maintain receipts or proof of payment – cancelled checks, credit card statements etc if you claim a deduction.
You don’t have to forgo your right to a good tax refund for the fear of a tax audit. Just make sure you have all the documentation for the deductions that you are claiming. If you are not sure about a certain deduction, check with your tax accountant and make the final determination.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
Higher education in the US is not only very competitive, but also very expensive. Based several reports, the average cost for undergraduate college tuition, fee and boarding has been rising each year at an astonishing 8 percent. It was on average about $15,300 per year for 4-year public in-state college and $35,700 per year for 4-year private college a few years ago. Not all of the money needs to come from the parents or students. Many full time students manage to get financial aid in the form of grants, scholarships. Some reports indicate that students on average secure financial aid up to $14,400 per year in a private college and $5,400 per year in a public college. In addition to that there is potential for tax breaks and tax savings for parents.
Saving for children’s education requires a long term plan. And like saving for retirement, the earlier one begins to plan the better! Use this calculator on K&M Accounting and Tax Services website to help develop and fine tune your education savings plan: http://kmtaxservices.com/calc-section.php
One of the most popular vehicles for college savings is the 529 Plan. Most states have a 529 program allowing parents to save for future higher education with tax benefits.
Parents can make regular contributions to the 529 account. Each state has different rules on the nature of the account and beneficiaries, however in general the account owner (contributor to the fund) controls the funds and the beneficiary (student) gets to use the funds for qualified higher education. States also vary in the limits to the extent of the annual contributions and tax deductions allowed on the state income tax return. Here’s a site that provides a list of different state rules: http://www.collegesavings.org
There are multiple ways one can derive tax benefits from the 529 college savings plan. Although contributions made by the account owner are not deductible for federal income tax purposes, earnings on contributions grow tax-free in the program. For example if your initial investment of $5000 in the 529 plan grows over time to $20,000, you will not have to pay any federal income tax on the $15,000 in gains when you withdraw the money to pay for qualified higher education. This is a great benefit as compared to the capital gains tax or marginal individual tax rate you would have to pay on the $15,000 in gains.
Distributions from the 529 college fund are tax-free to the extent used for qualified higher education expenses such as college tuition fees, books, supplies, equipment, and special needs services. Distribution for a purpose other than qualified education is taxed to the one receiving the distribution. In addition, a 10% penalty must be imposed on the taxable portion of the distribution.
Several states including North Carolina offer tax deductions for 529 contributions. North Carolina residents who contribute to a North Carolina 529 Plan receive a state income tax deduction of up to $2,500 per contributor if filing single and $5,000 if married filing jointly.
Considering that the top income tax rate in North Carolina is 7.75 percent, a full $5000 contribution can save a taxpayer up to $387.5 at tax time. Given the current low deposit rates offered by banks, a 7.75 percent upfront return in the very first year is pretty good! Add to it the federal tax benefit on the future gains in the account and you may have as much as 15 percent or more in tax savings depending on your individual tax situation. Over a period of time this can add up to a substantially large sum of money. A little tax planning can take your savings much further.
Friends and family members can also help contribute to your child’s education by way of gifts. They can contribute up to $13,000 annually to be excluded from gift tax. 529 programs can also be an attractive estate planning move for wealthy grandparents planning to pass on their wealth to grandchildren. There are no income limits, and the account owner giving up to $65,000 avoids gift tax and estate tax by living 5 years after the gift.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
Many small business owners and quite a few professionals underestimate the savings potential when it comes to taxes. It is surprising how many small business owners and individual professionals come during the tax season to figure out how to reduce their tax liability, not realizing that it is too late by then and the books have already closed for the tax year. And it is shocking how often the same mistake is repeated each year!
As difficult as it is to keep pace with all the business and professional challenges, one way to handle economic slowdown is to continue to reduce your business expenses. Reviewing your business performance and planning for taxes may not only help you reduce the tax liability but also help assess your business profitability and uncover other hidden expenses.
The best time to plan for your taxes is before the year end. Last quarter is also a good time for your accountant to spend quality time with you going over your business performance and planning for taxes in advance.
Year-end tax planning is complicated this year due to the fact that there are several changes being put in place for the tax rules in 2011. As we discussed in this column last month, the Small Business Jobs Act would also make significant changes in the tax rules.
There may be additional clarification forthcoming about tax rules after 2011, so stay tuned to this space and consult with your tax adviser to learn which strategies are best for your company’s situation in light of any tax changes.
The first step in your tax planning effort is to determine whether you expect this year to be a profitable or losing year. This will help determine tax strategies before the end of the year to optimize your tax liability. Here are some tax-planning strategies that you may want to consider prior to the end of the year.
Tax planning may vary greatly depending on the type of business entity you are operating under such as sole proprietorships, partnerships, C corporations, and S corporations. For example as a sole proprietorship you may have to pay an additional payroll tax (up to 15 percent) in addition to the Federal and State Income tax on your profits. S corporations are pass-through tax entities and the tax liability falls upon individual shareholders or owners of the business. Different business partners may have varying and sometime conflicting individual situations and require additional tax planning. For example if one of the partners (or their spouse) has a substantial income from salary (W2 income), he or she would like to use the business loss to offset some of the individual income and reduce taxes. Whereas another partner may be relying solely from the income within the business and perhaps like to show a higher income in order to establish personal credit to secure home mortgage.
Retail businesses that are required to hold inventory can reduce the amount they deduct for inventory purchases over the course of a year by the amount remaining in inventory at the end of the year. For example, a business that purchased $100,000 in inventory during the year but had $40,000 remaining in inventory at the end of the year can only count $60,000 as an expense for inventory purchases, even though the actual cash outflow was much larger. Valuing the remaining inventory could vary the amount deducted from income and thus change the amount of tax owed by the business.
Under Section 179 of IRS, businesses are allowed to deduct equipment purchases during the year in which the purchases are made. It is often advantageous for small businesses to use this tax incentive to increase their deductions for business expenses, thus reducing their taxable income and their tax liability. Necessary equipment purchases up to the limit can be timed at year end and still be fully deductible for the year. The Small Business Bill introduced last year temporarily increases the first-year write-off for business equipment from $250,000 to $500,000. There are several other tax-planning strategies that may help small business owners and individual professionals; for example adopting a qualified retirement plan if you expect the business to be profitable in 2011. We will cover more strategies in coming months as the tax filing deadline approaches, but the key point is that you need to start the planning process before the end of the tax year. In the meantime you can find more tax saving ideas and case studies on www.kmaccountant.com.
It was an eventful summer this year with the volatile stock market and the political drama unfolding at home in the US and across Europe. With the unemployment rate above nine percent in the US, there are many families still struggling to make ends meet and this continues to put pressure on US consumer spending and the global economy. However, this is only one half of the story. There is the other half of the story about the rest of the Americans that are still employed or in business and continue to earn a paycheck every month. But, most of those employed also seem to have cut back on spending their disposal incomes on new homes, new cars, and exotic vacations, resulting in accumulation of cash every month.
Small businesses seem to have cut back on their expenses and stopped making new business investments in recent months, and are holding on to their cash. Large Corporate balance sheets indicate record cash holdings in more than a decade. Large companies are generating profits but have stopped making new investments in business expansion and hiring new employees. The average balance on CDs, Money Market Funds and other cash equivalents has been rising to an all time high. So, with the businesses and individuals both cutting back on expenses and investments in recent months, cash balances have sky rocketed.
Cash has been sitting idle for a while without earning any return. For the past few months, individuals and businesses have had to contend with paltry yields on CDs, money market funds, and other cash investments. With interest rates so low, you wonder if one should just stuff the cash under a mattress! The question on several fortunate folks’ minds this fall is going to be what to do with the cash. That’s a good problem to have!
Confronting Risk for Additional Income
It is challenging, but not impossible to find a higher rate of return or yield for your cash. This means you will have to confront with risk as you look at options for deploying your cash in search of additional income or higher yields. Here are some tips for small business owners and individual professionals on evaluating the risks of deploying their cash in today’s environment.
Remember there is no single formula that will fit all. Each business has its own set of challenges and risks associated with the industry, local economy, management etc. However, you will benefit if you consider these as basic guidelines for further risk analysis of your individual and business situation.
Liquidity Risk: Most businesses go under because they become illiquid. They simply do not have the cash to pay for their bills and loan re-payments. It does not necessarily mean that the business is making a loss. Profitable businesses can also undergo a liquidity crisis. If you owned a business during 2009 credit crisis you probably felt a liquidity crunch in your business, as banks withdrew credit. Several businesses and investors were forced to liquidate their long-term assets at throwaway prices in order to stay liquid and pay their bills.
Before you decide what to do with your hard earned cash, mitigate this risk diligently. Small businesses need to review their fixed and variable expenses over a period of time and assess if they have enough cash to cover their future fixed expenses in case the economy goes into a 2009 like recession. For example, if you own a motel, you may want to consider various occupancy rate scenarios and determine what your minimum cash flow is likely to be in case of a recession. An accountant can help clients determine their cash flow under various scenarios and mitigate liquidity risks.
Once you have determined your cash flow needs under the best and worst case scenario, you may decide to maintain cash at a minimum level to sustain your expenses for the foreseeable future in case of a recession. Individuals need to make a similar determination considering personal expenses and any key life-events such as college tuitions or retirement expenses coming up in the foreseeable future.
Capital Risk: Whenever you deploy cash into a business or an investment, there is a risk that you may lose part of your capital or in some cases the whole investment. Small Businesses and individuals must evaluate their Capital Loss Tolerance before making an investment.
For example if you are planning to expand your business by buying an additional retail location, you need to evaluate how much of your capital you can afford to lose without affecting your existing business or household cash flow. If your assessment suggests that you can afford to lose a substantial part of the capital required for the new location, without affecting your existing cash flow, it may be worth taking that plunge.
Credit Risk: Most businesses and individuals have access to business and personal bank loans. Be careful as you invest your capital and take on additional loans or personal guarantees on business loans. Lower interest rates are lucrative right now, but access to credit may not be guaranteed in a downward spiraling economy as was evident in 2009. Missing or defaulting on loan payments may affect your ability to invest in future.
For example if you are trying to invest in an additional rental property using bank loans, you may want to evaluate the credit terms and the risk associated with it as interest rates change over time and your ability to repay the loan in case of a stagnant real estate and rental market.
Opportunity Risk: As a business owner, you are always looking for new opportunities to make that additional income. But if you are sitting on a pile of cash endlessly pondering over the risks of investment, you may just miss out on the investment opportunity of a lifetime!
Work closely with your financial accountants so you can confront the risks intelligently and at the right opportunity you can confidently take a mitigated risk. Cash may be king for a while, but there may be no reward without risk.
This column is only meant to provide you with information about taxes and in no way should you consider this as tax advice. I hope this helps in getting you thinking about saving more of your hard earned money, paying less to the IRS and at the same time reduce your audit risks as you brave through the economic recession. Consult your Tax Advisor regarding your individual tax situation.This Article provides only an overview to the complex Tax Laws. It is not a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
This is turning out to be quite a year for small businesses. If the various state and local government revenue figures from the first quarter of the year are any indication, business incomes are likely to be better in 2011 than last year. Most State and Federal government agencies and large corporations take a mid-year review of their incomes, expenses and overall performance of the business as well as employees. Small businesses may overlook this important milestone check and miss out on any key changes in their business performance.
It is imperative to create annual business plans in order to be successful in any business. It is also equally important to collect continuous feedback on how well the plan is working. As a business owner, you need to know what is working and what isn’t, allowing you to make smart business decisions to keep your business on track for success.
The Mid-Year business performance analysis not only allows to you better navigate your business, but also may give you some idea on the overall profitability in the current year and get you thinking on some tax planning if necessary. Here are some key elements to note while you are reviewing your business performance.
Tips for Small Business Performance Review:
Crystal Clear Goals: If you want to have a crystal ball that can help you forecast and predict the success of your business; you must start with clear goals for your business. For example you may have a goal of increasing sales. That in itself is not enough. You must quantify the goal. You may want to increase your sales by 5 percent or by 30 percent. The decisions that follow in each case may be very different. You may have to increase your advertising budget, hire additional staff to handle the increase in business, acquire additional office or storage space. The more specific and clear you can get about your goals, the better the chances of being able to achieve them.
Create a Budget: Once you have formulated your goals for the year, the next step is to create a budget. Previous year’s actual income and expense statement is a good starting point to create the budget. Creating the budget will force you to get into details of your goals. Budgeting exercise will help you think about how one business decision impacts all other areas of the business.
In the example before, let’s say your goal was to increase income by 30 percent. This may require additional budget for advertising. Also this may require a higher salary expense for the year, as you increase staff. You will have to think through the timing of the additional sales. In which months the revenue will start increasing, etc. It may turn out that in the process of increasing revenue, your profitability may suffer during that year. Budget is a great planning tool that can help you clarify your goals and create the detail plan on how you will achieve your goals.
Track the “Actual” vs. the “Budget”: Now that you have formulated clear goals and have a detail plan as part of your annual budget, you can track the success or failure by comparing the actual performance of the business against the budget. The difference between the two is the “Variance.” Officials in charge of government agencies and Executives running large corporations dread negative variances during their mid-year reviews. Negative variance suggests that you are not meeting your plan and are likely to miss the stated goals.
The variance between your budgeted sales and expenses to your actual mid-year results will show you how far you are off your plan. Good news is you still have half the year to correct the course. Sometimes you may need to adjust your plan and restate your goals. Sometimes you may need to focus on areas of your business that are not producing the desired results as per your plan. In either case, you will have valuable insights into your business. It’s like navigating a ship. You are off-course most of the time; but having a clear goal and comparing your actual position against the projected path allows you to take corrective action and helps you reach the destination.
Most Small Business Owners simply run their business on “gut” feel. The idea of creating a budget and then comparing mid-year results with budget plan seems overwhelming. You can seek professional help from your accountant to help you get started with the process. There are several professional business consultants that can assist you as well. They can guide you through the budgeting process. Ask relevant questions that help drive clarity in your goals. You can also use the Mid-year review to prepare for tax planning and save on taxes.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
In the past couple of years several good businesses faced a downturn due to economic conditions and turmoil in the financial and credit markets. Even though the underlying business model may be strong, due to several uncontrolled circumstances related to the owner’s and partner’s personal finances or credit leverage, these businesses may be facing a difficult situation. There are cases with a great amount of perseverance and patience the business can be turned around and made profitable. But at times it may simply make sense to close the business and move on.
But there is more involved in closing the business than just locking the doors and putting up a “going out of business” sale. Many business owners are forced to make the decision to close the business under stress and they often overlook some of the important aspects of closing down the business. Some of these mistakes can take years to unwind and cost the business owners a lot of money. Before you lock down your business, make sure you consider the following checklist and consult with your local tax accountant.
Do you have an Exit Strategy?
Most business owners have a good business start-up plan. But hardly anyone has a good plan on how to exit the business. You may have a dream of taking your company public, selling the business for cash, or retiring and handing over your business to your family. In some cases you may even be facing a forced exit due to business losses. In any case, you must have a proper exit plan.
Planning your exit strategy will have implications on your employees, vendors and partners. The business structure, assets, and tax obligation are also likely to be impacted. Before finalizing your exit strategy, be sure to engage your accountant and even a lawyer. That way, you will be sure that you have explored all the options available to you. There is a great proverb in Tamil when translated, it means the following: “Do not dig the well when the house is on fire.” It pays to plan in advance and strategize your exit from the business.
#1: Closing Agreement
Most businesses in forced exit are closed in haste. Partners do not discuss specific terms or forget to document these for future reference. If you are a Sole proprietor, you may close the business yourself. If you are in a partnership, limited liability company (LLC), or a C-Corp you and other co-owners must make joint decision to dissolve the business according to the guidelines established in your articles of organization. The final decision along with all the terms must be a written agreement.
#2: Hire Professional Help
A qualified attorney and an accountant will be your best allies as you evaluate the legal and financial condition of the closing business. You may also hire a business evaluator in case you are inclined on selling the business or if you anticipate a distribution of assets amongst partners.
#3: Tax Documents, Registrations, Permits and Licenses
You are required to take following actions with regards to the taxes and other documentation:
File annual income tax return for the year you close your business.
Final employment tax returns, if you had employees.
Make final federal and state tax deposits.
Issue final form W2 and 1099 to employees and contractors.
Report capital gains or losses and partner share.
File returns to report disposing of business property, asset sales, exchange of like-kind property.
Contact local and federal government agencies to cancel your permits or licenses. If you fail to do so, you may still be liable for any taxes or fees. You may also be required to legally dissolve your business depending on the state in which your business is incorporated. If you are unsure if you should file dissolution papers, consult a small business attorney in that state.
Closing the business and informing government authorities is a critical and tedious process. Many business owners falter in this area since they are too pre-occupied with the stress of closing the business and starting something else to support their lifestyle. For more information about business closing process you may visit www.kmaccountant.com.
#4: Maintain Records
Even after the business has been closed, you are liable to maintain all business records for a period of at least three years and up to seven years or more in some cases. Make sure you specify in the closing agreement which partner will be responsible for maintaining the records and producing the same when required in future. The IRS can come back and audit your business and demand to see all income and expense-related records.
Finally, as you close your business, don’t forget to document the lessons learned from this venture. Make notes of all good and bad decisions you may have made during the course of the business and this will be among the best learning opportunities in your life.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
What a great year this year has been for the tax payers in the US. Perhaps this may have been the best year for tax payers to get tax refund in recent history. Massive tax cuts from Bush administration and huge tax incentives from the Obama administration for individuals such as the home buyer’s credit have reduced the effective tax rate of US tax payers to the lowest levels seen in many years. We shall wait for the official figures from the US treasury, but this year has been a bonanza of huge tax refunds for many taxpayers. Now that the tax returns have been filed, what to do with all the paperwork and documents? This may be a good time to clean out the growing pile of tax and financial papers that clutters your home and office. Here’s a list of what you need to keep and what can be safely recycled (make sure to shred any documents with personal information) without fearing IRS’s audit and queries.
IRS Statute of Limitations - Three Year Rule
This rule limits the number of years that IRS can audit your tax returns. For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. The idea behind this is that after a period of years, records are lost or misplaced and memory isn’t as accurate as well. Once the statute of limitations has expired, the IRS can’t go after you for additional taxes. There are, however, exceptions to this general three year rule:
Assuming that you’ve filed on time and paid what you should, you only need to keep your tax records for three years, but some records have to be kept longer than that. Here’s a checklist of documents you must maintain:
Employment, bank and brokerage statements:
All W-2s, 1099s, brokerage and bank statements that prove your income must be maintained for at least three years.
Itemized Deduction expense documents:
In case you itemized your deductions you will have to maintain all the expense receipts, mileage logs and other documentation that help substantiate your expenses. Remember, with IRS the rule during an audit is you prove it or lose it! I recommend to my clients that they maintain a scanned backup of their documents in case originals are lost or misplaced.
Business records:
Business records can become a nightmare to maintain. Since your income is not directly reported to the IRS as in the case of a salaried W2 income, the IRS is even more stringent when it comes to checking business records. If you have a sole proprietorship and have filed business loss on your personal return, make sure you maintain all possible income and expense records.
Tax returns:
Keep copies of your tax returns for at least three years. Those of you that are in the midst of the immigration process may want to hold on to the tax returns at least until after your immigration case is completed. I recommend clients to hold on to the tax returns for at least three years after the immigration case is completed.
Social Security Records:
Check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If the Social Security Administration records are wrong, you will need the W-2 or copy of your Schedule C (if you are self employed) to prove the correct amounts. Don’t dump those records until after you’ve validated those contributions.
Keep in mind this column and the articles published here are only meant to provide you with high level information about taxes and in no way should you consider this as tax advice. Hopefully we have got you started thinking about protecting your hard earned money, and reduce your tax audit and immigration risks. Consult your tax advisor regarding your individual tax situation and your immigration attorney for any immigration related situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for independent tax advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
The Home Office Deduction was considered a red flag by many CPAs, inviting IRS Audit for many years. But that may no longer be the case, with more and more businesses and individuals taking advantage of working from home and maintaining a healthy work-life balance. IRS is well aware of the rising trend in working from home office. As long as the tax payers use the “Home Office” as IRS defines it, this one deduction alone can save the taxpayers several hundred dollars in Federal and State taxes.
If you are working in a city away from your company’s principal office (base office) and for the convenience of your employer, use your home or apartment to work on client projects, meet with clients on a regular basis and have part of your home or apartment exclusively for use as an office, you may be able to deduct part of your rent or mortgage under the business use of your home deduction. If you rent part of your home or apartment to your employer, or if your employer reimburses part of the rent and other expenses to you, your deduction will be limited.
There are three most basic qualifiers defined by the IRS for Small Businesses and Professionals to be able to take advantage of the Home Office tax deduction while filing income tax return.
Top 3 Rules to Qualify for Home Office Deduction
Rule 1: Trade or Business Use
First of all you must be engaged in a trade or business to take advantage of this deduction. Employees can also take Home Office Deduction in certain situations. We will cover more on individual deductions for Employees in the next article. You cannot take a home office deduction if you are using it for an activity that is not your trade or business. For example you use part of your home to review investment journals and carry out your personal investments. You are not a broker or a dealer, so your activities may not be considered part of a trade or business and hence you cannot take home office deduction.
Rule 2: Regular and Exclusive Use
Specific area of your home must be used exclusively and regularly for your business or trade. You don’t need a permanent partition to mark the space. For example you use part of your basement exclusively to perform administrative and management tasks of your business, review business paperwork, check online communications, teleconference with clients etc. on a regular basis and not just once in a while. Your family does not use the same space for recreation or other non-business purposes. You may be able to claim costs associated with part of the basement as a deduction for use as home office, provided you qualify on other rules.
Exception to Exclusive Use Rule: There are exceptions to the Exclusive rule. If you are in a wholesale or retail trade and you use part of your home for storage of inventory or product samples and your home is the only fixed location of your trade, you can take the home office tax deduction. For example, if you sell cosmetic goods in an online store and use your basement to store samples and inventory, you may be able to take home office tax deduction. Even though you may use your basement for personal use, you can still take the deduction.
Rule 3: Principle place of Business
You can have more than one business location for your trade or business including your Home Office. If your Home office can qualify as the principle place of business, you can take the Home Office deduction. For example you may have multiple retail outlet stores for your trade. However you use your home office exclusively and regularly for administration or management activities such as preparing financial and business performance reports, running payroll for employees, online banking, planning, marketing, advertising etc., you can take the home office tax deduction.
Exception to Principle place of Business:
You may be able to take home office deduction, even though your home office may not qualify as Principle Place of Business, if you meet with your clients, patients or customers on a regular basis. Doctors, Dentists, Attorneys, Brokers, Consultants seeing clients and patients at home generally meet this requirement. If you have a home based retail business wherein you organize a group of customers to get together and share your product samples with the intent to sell the goods, you may qualify for the home office tax deduction.
Day Care Facility:
If you are using part of your home as a licensed day care Facility for children or persons older than 65 years of age or persons that are mentally or physically challenged, you can take advantage of this Home Office tax deduction.
There are several other rules and definitions that IRS uses to qualify the Home Office deductions. If you are planning to take advantage of this deduction, it is recommended that you take help from an expert tax accountant. The money you will save on the taxes will be well worth the professional fees.
Keep in mind this column and the articles published here are only meant to provide you with high level information about taxes and in no way should you consider this as tax advice. Hopefully we have got you started thinking about protecting your hard earned money, and reduce your tax audit and immigration risks. Consult your tax advisor regarding your individual tax situation and your immigration attorney for any immigration related situation.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for independent tax advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
The first tax distinction IRS makes is between a Non Resident and a Resident Alien. Although H1, L1 consultants may be considered as temporary workers on a Non Resident Alien visa status, IRS may consider them as US Resident for tax purposes. IRS has specific guidelines to determine Resident Status for tax purposes through the “Substantial Presence Test.” Once it is established that someone is a US Resident (for tax purposes only), they are subject to US taxes on their global income, including income in their home country. For more detailed information on how to determine your tax status, visit online http://www.h1bvisataxes.com.
To be able to claim any travel expenses away from home, one must first determine the “Tax Home” based on IRS guidelines. Generally “Tax Home” is the regular place of business or post of duty, regardless of where the family home is maintained. If the assignment or job away from the main place of work is temporary, the “Tax Home” does not change. Generally, a temporary assignment in a single location is one that is realistically expected to (and does in fact) last for one year or less.
Business travel expenses or away from home expense deductions can be taken for non-reimbursed meals, lodging and travel if you have a regular job somewhere else, and are on a temporary assignment for work or training. Sec. 162(a) of the IRS Code limits the period to less than one year. So for example if the employer posts an IT Consultant in a different city on a temporary project for eight months, they may qualify to take all of their meals, lodging and travel expenses as deduction. If the employer reimburses any of the expenses, the deduction may be limited. However, if the assignment is realistically expected to last for more than one year (and does last for more than a year), the “Tax Home” would change and the IT Consultant may not qualify for travel expense deduction. Even if the tax payer continues to maintain their family home in a different city, they may not be able to claim the travel expense deduction. Some offshore and local tax preparers seem to be taking a liberal interpretation of the IRS code and assisting H1 L1 consultants to claim per diem living expenses including lodging, mileage, food, laundry etc, as per IRS publication 463. IRS is aggressive about this deduction and several tax audits are being triggered. Make sure you consult with a tax accountant and evaluate the overall audit risk of your tax return prior to submitting your tax return with this particular deduction.
We are seeing some cases where the offshore tax preparers have considered H1 L1 consultants as US Non Residents while filing their tax return with a view to claim a larger deduction for living expenses. This may not be accurate representation of their actual tax residency status. Check your US Resident status using the Substantial Presence Test. Also, if you have filed (or intend to file) for an I-140 immigration petition for alien worker or an I-485 petition for adjustment of status to permanent resident, you may not qualify as a US Non resident for tax purposes.
Tax penalties assessed by the IRS for fraudulent tax return are very harsh. In many cases H1, L1 IT consultants may owe the IRS thousands of dollars in assessed tax dues, penalties and interest. The law gives IRS agents tremendous power to recover the tax money and they can put a lien on your assets including bank accounts in the US and abroad, house, property etc.
In America we witness the Do-it-Yourself culture in almost every aspect of our lives, right from finishing a new basement in the house and changing the old car battery to managing our own investments and filing our own tax returns. In recent years almost one-third of the individuals are filing simple tax returns using do-it-yourself tax programs. Here are some things you need to consider before you choose how to get your taxes done this tax season.
“Do-it-Yourself” Tax Programs
Most individual tax payers may be able to self-file their tax return using online tax program. However as per the data released by the IRS, close to two-thirds of the tax payers still find comfort in having their tax returns prepared by a tax professional. Here are some factors to consider while selecting a good do-it-yourself tax software program.
Complexity of your Tax Situation: Whether a tax program will work for you or not can be decided by the complexity of your tax situation. If you only have W2 income and no itemized deductions, you probably should try and file your own taxes. There are several online programs that will let you file your federal tax return for free. That’s right free! Check out the IRS e-file website for qualified free programs – www.irs.gov/efile.
On the other hand if you have a complex situation such as multiple states, re-location expenses, home mortgage etc, you may want to consider a more sophisticated program such as Turbo Tax (http://turbotax.intuit.com/). If you have a special tax situation such as H1/L1, ITIN application, self employed or small business owner with K1 consider hiring a good tax preparer that specializes in your tax situation.
Tax Law Updates and Up-to-date Deductions: Good tax software programs have a step-by-step questionnaire and address all relevant tax deductions. 2010 has been a year with several tax law updates and it is important to make sure you are using the most up-to-date version of the program.
Confidential Data Theft: Cyber crime is growing at the fastest rate across the world. Make sure the online E-file provider uses secure technology to transmit data. Identity theft is a real issue and tax returns contain your most confidential data.
Do not trust any online site that does not seem to have proper security credentials. Several websites offer free online trial or free tax refund calculation. Be very careful before parting with your personal information such as the social security number, name, address, income, bank account information (for direct deposit of tax refund). It is very expensive and time consuming to repair the damage from identity theft.
Choosing the Right Tax Professional for your Tax Situation
Certain tax situations are best handled by professional tax preparers. There are several advantages of working with a professional and the biggest among them is getting tax planning tips that will help you plan better and save on taxes over the years. If you decide to get your taxes prepared with a professional tax preparer, you still need to make a judicious choice.
Tax Preparer Credentials and Experience: If your tax situation is not too complicated a chain tax service such as H&R Block may be suitable. However, if you are looking for continuity, avoid a chain service. Employee turnover is high in the chain services and it may be difficult to get the same tax preparer each year.
For complex situations you may want to work with a Certified Public Accountant, Enrolled Agent or Tax Attorney. They are required to maintain continuing education credits to maintain their professional accreditations. They will be able to represent you very well in front of the IRS in case of a tax audit and help you with tax planning.
A good tax accountant understands the health of your overall financial and tax situation over the years. If you are looking to make big financial and business decisions in your life it is important to build a long term relationship with your tax accountant. Is it any surprise that Warren Buffet pays at a lower tax rate than his assistant who earns a fraction of what Warren Buffet makes in a year!
Year-round Accessibility: Tax issues can pop up anytime during the year, especially if you get an IRS notice or an audit. Make sure the tax preparer is available through out the year and does not close the shop after April 15th.
Fraudulent Tax Returns: In recent years several offshore tax preparation firms have started offering tax services from India or some other low cost country. Tax payers forget that these firms have no local presence or accreditations and therefore would not be in a position to provide support during an IRS notice or tax audit.
There are reports of cases wherein offshore based tax service firms have promised higher tax refunds to tax payers using questionable methods which lend to audit investigation by the IRS. H1/L1 consultants may be lured with higher refunds using unqualified deductions. In such situations H1/L1 consultants are likely to become innocent victims to potentially fraudulent tax returns and end up paying a hefty penalty to the IRS. In some cases it may also negatively impact their immigration (Green Card) case. For more info visit www.h1bvisataxes.com.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax, financial or legal advice. Consult your tax accountant, financial advisor and legal advisor regarding your specific individual tax and financial situation.This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
Taxes on personal income, dividends, capital gains and estates will increase if the Congress and the President do not reach an agreement to extend these Tax Cuts. This uncertainty over how the politicians will act during the lame-duck session of the Congress makes the year end tax planning process more difficult than usual.
We will focus on some interesting tax saving strategies for Small Businesses over next few months during the tax season. We will also review tax reducing tips for individual tax payers, H1B consultants and independent contractors. As the government steps up its audit process to increase tax collection, we will focus on how to audit proof your tax returns in the coming months. In case you have any specific questions feel free to email me and if it is in the benefit of the larger audience, I will address it in this column. We will ensure that your identity and personal information is not revealed.
Political analysts believe that there will be a compromise between the Republicans and Democrats in the Congress and the Bush Tax Cuts from 2001 and 2003 will likely be extended for a few years, at least for middle-income households. In the meanwhile here are some tax-saving strategies that may help you prepare for the tax season. There are over 350 Tax Deductions and Credits for Small Businesses and Individual Professionals. Although it is almost impossible to say how many of these may be applicable to your specific business without considering your particular scenario, here are some strategies that may apply to most Small Businesses and Professionals.
This is a great deduction as you can feel good about donating to your favorite cause and save on taxes at the same time; although you may want to consider the timing of the charitable gift and how you are giving. If the Bush Tax Cuts expire this year, you might consider deferring major charitable gifts until rates go up. Higher tax rates make your gift more valuable from a tax saving perspective. For 2010, if you are making a large donation, consider pairing it with other moves such as a Roth IRA conversion to reduce the tax burden. Given the stock market’s gains this year, donating your long-term appreciated securities may be a good tax-saving strategy. As a general rule, donations of long-term appreciated securities (either stock or mutual funds) directly to a qualified charity are deductible at their fair market value on the date of contribution, and you don’t pay capital gains taxes on the donated security.
As you get your business started, there are several costs such as furniture, equipment, computer, fax etc that may be deducted 100%. The Small Business Bill this year has temporarily increased the first-year write-off for business equipment from $250,000 to $500,000. Although if the bush tax cuts expire this year then you may want to depreciate these expenses over the next few years to offset the profits in later years under higher tax rates.
If you believe that tax rates are likely to go up in future, you may want to consider converting your traditional IRA or other retirement account balance into a Roth IRA. If tax rates increase in coming years, it will be more expensive to convert later. Also, traditional IRA withdrawals in later years may attract higher capital gains tax rates. If the tax situation demands, you may also be able to undo your Roth IRA conversion by October 2011. It is a complicated process and you will need some help from your financial advisor.
There are two types of expenses that the IRS allows you to deduct under the home office deduction - direct and in-direct expenses. Direct Expenses are expenses made only for the office part of your home. Examples of direct expenses are painting, repairs, furniture you may buy for your office part of home. These expenses are fully deductible. Indirect expenses are expenses you make to keep your entire home running. Examples of indirect expenses are home insurance, utilities, general repairs. These are only partly deductible based on the percent of home used for business purpose.
As difficult as it is to keep pace with all the business and professional challenges, one way to handle economic slow down is to continue to reduce your business expenses. Reviewing your business performance and planning for taxes may not only help you reduce the tax liability but also help assess your business profitability and uncover other hidden expenses. The best time to plan for your taxes is before the year end. Last quarter is also a good time for your accountant to spend quality time with you going over your business performance and planning for taxes in advance.
Year-end tax planning is complicated this year due to the fact that there are several changes being put in place for the tax rules in 2011. As we discussed in this column last month, the Small Business Jobs Act would also make significant changes in the tax rules. There may be additional clarification forthcoming about tax rules after 2010, so stay tuned to this space and consult with your tax adviser to learn which strategies are best for your company’s situation in light of any tax changes.
The first step in your tax planning effort is to determine whether you expect this year to be a profitable or losing year. This will help determine tax strategies before the end of the year to optimize your tax liability. Here are some tax-planning strategies that you may want to consider prior to the end of the year.
Tax planning may vary greatly depending on the type of business entity you are operating under such as sole proprietorships, partnerships, C corporations, and S corporations. For example as a sole proprietorship you may have to pay an additional payroll tax (up to 15 percent) in addition to the Federal and State Income tax on your profits. S corporations are pass-through tax entities and the tax liability falls upon individual shareholders or owners of the business. Different business partners may have varying and sometime conflicting individual situations and require additional tax planning. For example if one of the partners (or their spouse) has a substantial income from salary (W2 income), he or she would like to use the business loss to offset some of the individual income and reduce taxes.
Retail businesses that are required to hold inventory can reduce the amount they deduct for inventory purchases over the course of a year by the amount remaining in inventory at the end of the year. For example, a business that purchased $100,000 in inventory during the year but had $40,000 remaining in inventory at the end of the year can only count $60,000 as an expense for inventory purchases, even though the actual cash outflow was much larger. Valuing the remaining inventory could vary the amount deducted from income and thus change the amount of tax owed by the business.
Under Section 179 of IRS, businesses are allowed to deduct equipment purchases during the year in which the purchases are made. It is often advantageous for small businesses to use this tax incentive to increase their deductions for business expenses, thus reducing their taxable income and their tax liability. Necessary equipment purchases up to the limit can be timed at year end and still be fully deductible for the year. The Small Business Bill would temporarily increase the first-year write-off for business equipment from $250,000 to $500,000. There are several other tax-planning strategies that may help small business owners and individual professionals; for example adopting a qualified retirement plan if you expect the business to be profitable in 2010. We will cover more strategies in coming months, but the key point is that you need to start the planning process before the end of the tax year. In the meantime you can find more tax saving ideas and case studies on www.kmaccountant.com
This is turning out to be quiet a year for legislative reforms impacting small businesses. Last month we covered the impact from the health care reforms to the small business in this column. As of writing this column (Sep 20th, 2010) there is another bill that just passed through the Senate and is likely to pass the Congress and executed by the President by the time this article is published in the October issue of Saathee. As we saw in last month’s article, many small businesses and tax-exempt organizations that provide health insurance coverage to their employees now qualify for a special tax credit as part of the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama earlier this year. The most recent Small Business Jobs Bill provides additional benefits and tax breaks to Small Businesses. If the bill passes in its current format, small businesses will be able to take advantage of many tax credits and self-employed health insurance premium deductions. At K&M Accounting and Tax Services we see Small Business owners leveraging the tax credits and access to cheaper loans to expand their business and reap huge long term benefits.
Small Business Jobs Bill – What it means to the Small Business Owner
The Bill covers two important areas of benefits for Small Businesses – Tax Credits to reduce the overall tax burden for the Small Business Owner and access to easy and cheaper Credit through the Small Business Administration (SBA) loans. These are designed to provide incentives to entrepreneurs to grow their business and generate economic activity and employment.
Small Business Administration (SBA) Loans
General Business 7(a) and Express Loans: The bill would permanently raise the maximum General Business loan size to $5 million from $2 million and extend the 90 percent guarantee level and waived borrower fees. The bill would also temporarily — for one year from the date it is enacted — raise the maximum Express loan size to $1 million; again a great opportunity for small businesses that were in the past not able to qualify for express loans. Certified Development Company (504) loans: The bill would permanently raise maximum loan sizes from a range of $1.5 million to $4 million to a range of $5 million to $5.5 million. It would temporarily — for two years after the date of enactment — allow 504 loans to be used to refinance some existing commercial mortgages. Alternative size standards: The bill would direct the SBA to set alternative size standards for 7(a) and 504 borrowers in the interim at net worth of up to $15 million and net income of up to $5 million (as opposed to the current standards based on employees or average annual receipts). This is again a potentially dramatic increase in the eligible business size. Micro-loans: The legislation would permanently increase the maximum size of micro-loan to $50,000, from $35,000.
Tax Provisions in the Bill
Capital gains exclusion: The bill shall temporarily increase to 100 percent the capital gains exclusion for stock issued or sold by small business owners from the time the bill is enacted through the end of the year. This benefits the small business owners tremendously as they issue or sell stock. New Business Expenses: The bill would temporarily increase the first-year write-off for business equipment under Section 179 from $250,000 to $500,000 and raise the cap on eligible expenditures that triggers a phase-out of the incentive from $800,000 to $2 million. The bill would increase, for 2010, the deduction for start-up expenditures to $10,000, from $5,000. Deduction for health insurance costs: The bill would allow self-employed individuals to deduct their family’s health insurance expenses from the 2010 self-employment taxes.
There are several other tax provisions in the Bill that we have not covered in detail here. As we have said in this column before, 2010 may be a good opportunity for small business owners and entrepreneurs to start a new business or expand existing business taking advantage of the government incentives, cheap SBA loans and save huge amounts on corporate taxes. Reach out to your tax consultant, accountant and financial loan officers to help you plan in this quarter, before the year ends and you miss the opportunity.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
This has been a milestone year for healthcare reforms in the United States. Among the many changes in the healthcare system, there are some direct benefits and impacts to small businesses and their employees. Weather you like and support what you have seen and heard so far about the health care reform or not, it is important to understand the impact that it is likely to have on the small business landscape in the US over the next few years.
Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees may now qualify for a special tax credit as part of the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama earlier this year. The tax credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
Small businesses can take advantage of this tax credit and add health insurance coverage for their employees. At K&M Accounting and Tax Services we are beginning to see clients leveraging this tax credit to gain a competitive advantage attracting qualified employees that otherwise would not work for a small business.
Small Business Tax Credit for Health Insurance Coverage
Section 45R of the Internal Revenue Code offers tax credit to “eligible small employers” including small businesses and tax exempt organizations that provide health insurance coverage to low and moderate income employees.
Small Business Eligibility Criteria for the Tax Credit
There are specific criteria that help determine the eligibility of small employers:
1. In order to be an “eligible small employer” the employer must have fewer than 25 full-time equivalent employees (FTEs) for the taxable year. There may be more than 25 employees; some of them working part time, as long as the full time equivalent hours worked is less than 25 FTEs.
2. The average annual wages of employees for the year must be less than $50,000 per FTE (Full time equivalent);
3 The employer must maintain a “qualifying arrangement” under which the employer uniformly pays at least 50% of the cost of premiums for each employee enrolled in health insurance coverage.
Calculating the Health Care Tax Credit
The maximum credit is 35 percent of the employer’s premium expenses meeting the “qualifying arrangement” requirements. If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement, with employees paying the rest, the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80 percent of the premiums for employees’ coverage, with employees paying the other 20 percent, the 80 percent premium amount paid by the employer counts in calculating the credit.
Here is an example of how the tax credit would work for a small business. Let us consider a retail fast food business with 8 FTEs (Full Time Equivalents) with average wages of $20,000 per FTE, offers a health insurance plan with single and family coverage. The employer pays 50% of the $10,000 premium for all employees enrolled in health insurance coverage and the employee is responsible for the remainder. The amount of premiums paid by the employer for purposes of computing the credit equals $40,000. The employer can claim up to 35% of this amount as tax credit.
Total Cost of Health care premiums = $80,000 (10,000 x 8 FTEs)
Employer cost of premium expense = $40,000 (50% of $80,000)
Potential Tax Credit = $14,000 (35% of 40,000)
Exceptions and Reductions to the Tax Credit
If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit will be reduced using a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15. If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000.
There may be certain state related benefits and regulations that may have an impact on the overall amount of benefit that a small business may be able to claim. Please check with your tax consultants for more details.
How to Claim the Credit
The credit can be claimed on your 2010 annual income tax return. The credit for a year offsets only your business’s actual income tax liability or Alternative Minimum Tax liability, subject to certain limitations, for that particular year. However, as a general business credit, you may be able to carry forward an unused credit amount to next years return. You cannot offset this credit against any payroll taxes or sales tax. Calculations for the credit may be used towards your estimated quarterly income tax payments.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation. This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
Summer is almost over and as August winds down parents and kids prepare for going back to school. And with the back-to-school season comes the heavy expenses of college tuition, fees and school supplies. Parents always wonder about the cost of their children’s college education and how they will pay for it.
Higher education in the US is not only very competitive, but also very expensive. Based on a 2009 survey for the trends in college pricing, the average cost for undergraduate college tuition, fee and boarding was about $15,300 per year for 4-year public in-state college and $35,700 per year for 4-year private college. Not all of the money needs to come from the parents or students. Many full time students manage to get financial aid in the form of grants, scholarships and tax benefits on average up to $14,400 per year in a private college and $5,400 per year in a public college.
Saving for children’s education requires a long term plan. And like saving for retirement, the earlier one begins to plan the better! Use this calculator on K&M Accounting and Tax Services website to help develop and fine tune your education savings plan: http://kmtaxservices.com/calc-section.php
529 College Savings Plan
One of the most popular vehicles for college savings is the 529 Plan. Most states have a 529 program allowing parents to save for future higher education with tax benefits. Parents can make regular contributions to the 529 account. Each state has different rules on the nature of the account and beneficiaries, however in general the account owner (contributor to the fund) controls the funds and the beneficiary (student) gets to use the funds for qualified higher education. States also vary in the limits to the extent of the annual contributions and tax deductions allowed on the state income tax return. Here’s a site that provides a list of different state rules: www.collegesavings.org
Tax Benefits of a 529 College Savings Plan
There are multiple ways one can derive tax benefits from the 529 college savings plan. Although contributions made by the account owner are not deductible for federal income tax purposes, earnings on contributions grow tax-free in the program. For example if your initial investment of $5000 in the 529 plan grows over time to $20,000, you will not have to pay any federal income tax on the $15,000 in gains when you withdraw the money to pay for qualified higher education. This is a great benefit as compared to the capital gains tax or marginal individual tax rate you would have to pay on the $15,000 in gains. Distributions from the 529 college fund are tax-free to the extent used for qualified higher education expenses such as college tuition fees, books, supplies, equipment, and special needs services. Distribution for a purpose other than qualified education is taxed to the one receiving the distribution. In addition, a 10 percent penalty must be imposed on the taxable portion of the distribution.
State Income Tax Benefits
Several states including North Carolina offer tax deductions for 529 contributions. North Carolina residents who contribute to a North Carolina 529 Plan receive a state income tax deduction of up to $2,500 per contributor if filing single and $5,000 if married filing jointly. Considering that the top income tax rate in North Carolina is 7.75 percent, a full $5000 contribution can save a taxpayer up to $387.5 at tax time. Given the current low deposit rates offered by banks, a 7.75 percent upfront return in the very first year is pretty good! Add to it the federal tax benefit on the future gains in the account and you may have as much as 15 percent or more in tax savings depending on your individual tax situation. Over a period of time this can add up to a substantially large sum of money. A little tax planning can take your savings much further.
Gift and Estate Tax Benefits
Friends and family members can also help contribute to your child’s education by way of gifts. They can contribute up to $13,000 annually to be excluded from gift tax. The 529 programs can also be an attractive estate planning move for wealthy grandparents planning to pass on their wealth to grandchildren. There are no income limits, and the account owner giving up to $65,000 avoids gift tax and estate tax by living 5 years after the gift. Gift and Estate tax is a complex subject and requires extensive tax planning. For grandparents that invest the time in the planning process, this is a great way to leave behind a legacy of higher education for the next generation while saving on the heavy burden of taxes.
Here is a link for more details on the estate tax planning: kmtaxservices.com/estateplan.php
In the past year or so several good businesses faced downturns due to economic conditions and turmoil in the financial and credit markets. Even though the underlying business model may be strong, due to several uncontrolled circumstances related to the owner’s and partner’s personal finances or credit leverage, these businesses may be for sale. As in every crisis, this has created some very good opportunities to buy good businesses at very low prices.
Businesses that have a sound business and financial model are likely to flourish and grow as the economic activity picks up. This may be the perfect time for investors and entrepreneurs with good credit and access to investment funds to benefit by buying these successful businesses at a relatively
lower price. But before you jump in and invest your hard earned savings into your dream business, you may want to conduct a thorough due diligence to make sure the business is right for you.
Examine a Business before buying
Here are the top five things you must do before buying any business. The time and effort you will spend upfront in the due diligence process will go a long way to determine your future success.
#1: Analyze the Business Environment
Once you have narrowed your choice of business that you want to buy, conduct a thorough analysis of the business and its surrounding environment. Look into every aspect of the business including its suppliers; marketing material; list of competitors; location competitiveness in case of a retail outlet; leases and contracts; bank loans, collateral and covenant obligations. Make sure your due diligence discovers all obligations that the business may have entered into during the course of its existence.
#2: Hire Professional Help
A qualified attorney and an accountant will be your best allies as you evaluate the legal and financial condition of the business you are about to purchase. You will require help from an attorney to review several legal documents including existing lease agreements; contracts with customers and suppliers; and also prepare documents that will legally transfer the ownership of the business or its assets in your name. Review the business financial statements and tax returns to determine the profitability of the business with the help of a professional accountant. Structuring the actual transaction also has several tax benefits for the purchaser and the seller. These can become important leverage points during price negotiations.
#3: Cross Examine the Financial Statements
If the business has been in existence for a long time, make sure you review financial statements for at least 3 to 5 years. Don’t accept a simple financial review by the seller. Validate the records by looking at the sales and payroll tax reports, supplier invoices and levels of inventory carried throughout the year. The true value of the business is the free cash flow that it can generate over the next 3 to 5 years. A thorough cash flow forecast will enable you to determine the true value of the business. For more on business evaluation and information on setting up new businesses in Charlotte and Carolinas visit www.kmaccountant.com.
#4: Comparison with Industry Benchmark
Every industry has a benchmark study of the financial and business performance ratios that can be used to compare your business against other similar businesses in the industry. If you are buying a franchised business, you may be able to request a benchmark report that compares the business against other franchise locations from the broker representing the seller. This is perhaps the most valuable data point that can help you analyze and discover turnaround opportunities. You will be able to find out what may be wrong with the business, where can you make improvements and turn the business around.
#5: Management Difference
Before you sign up for the business, take a hard look at your own management skills and expertise. Many businesses require special skills and years of industry experience to be successful. If you are a software programmer venturing into a retail fast food business for the first time, perhaps you may want to consider taking someone with the relevant skills and experience in the industry as your partner. Being an entrepreneur requires one to wear multiple hats managing marketing, production, delivery, vendor purchases, customer service, financing, legal and tax issues all at the same time. This can sometimes prove to be a difficult move from the comforts of a corporate job although those that are able to make the shift successfully reap huge benefits.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
In the last month or so we have heard and seen so much about Greece’s large debt burden and budget deficit leading to a contagion of problems that are likely to take the entire Euro Zone down. You wonder how this problem just revealed itself so suddenly without any prior warning. After all didn’t the Government of Greece and the Euro Zone’s central bank know they were taking on too much debt? Wouldn’t their accounting system tell them the level of debt and growing deficit, as it got worse over the years?
If Greece were not a nation but a corporation, it would probably have had to file for bankruptcy by now. The reason why its problems went undetected for so long is that they had a broken accounting system. Every year, I come across so many small and large businesses that have accounting systems that don’t work. Business owners invest in accounting programs such as QuickBooks and Peach Tree, and pay thousands of dollars in fees to CPA and accounting firms but their accounting systems are just not set up to do what they are supposed to.
How to tell if your Accounting System is Broken?
A broken accounting system can break your business and your financial well-being. Fortunately, you can tell very quickly if your accounting system is working the way it should. Here are some broad indications that can help you assess the health of your business accounting system.
Warning Sign #1: You don’t know how much money your business made last week, month, quarter or year. Many small business owners just don’t know exactly how much money their business is making. They have a “‘general” idea that the business is making money, but have no clue of the exact profit or loss the business made last month or last year. If the accounting system is set up and running right, you should be able to tell at any point in time exactly how much money your business is making looking at the Profit and Loss Statement. Whether you hire a professional accounting firm to manage your books or do it yourself, you need to generate a profit and loss statement that summarizes your revenue and expenses for a specific interval of time. Given the nature of your business, you may not need to know your profit or loss on a daily or weekly basis. But you must be able to tell at least on a monthly basis, exactly how much money your business is making. If you hire an accounting firm to manage your books, make sure you receive a monthly profit and loss statement.
Warning Sign #2: You see items on your Balance Sheet that don’t make any sense to you. Balance Sheet is a record of your business assets, liabilities and owner’s funds. It provides a snapshot view and health of your business at a certain point in time. If there are items on your Balance Sheet that you do not recognize or understand, your accounting system may be broken. Wrong balance sheet numbers include things like big negative bank account balances, incorrect accounts receivable or accounts payable, and any other accounts with strange names or balances. It is difficult to fake a balance sheet. If you see goofy numbers on your Balance Sheet, your accounting system is not capturing the financial data of your business accurately and is not working as it should. The debt and long term value of your business is determined by the Balance Sheet. If you have a professional firm manage your books of accounts, you must be able to review your Balance Sheet at the end of each month or at least at the end of each quarter.
Warning Sign #3: Your CPA gives you lots of adjusting journal entries.
It is common to get adjusting entries at the end of the year, especially during tax return preparation. At K&M Accounting and Tax Services, we often prepare a handful of accounting entries such as tax return depreciation, and deductions for small business clients while preparing the tax return. If your accountant or bookkeeper is making many other adjustments, however, you should verify that the accountant isn’t adjusting accounts at year-end because you’re not regularly tracking the account as you go through the year. Especially making adjusting entries to your Cash or Inventory Accounts is dangerous. Large end-of-year adjustments mean just one thing:
The books aren’t up to date with the financial realities of your operation. This lack of up-to-date information, sadly, means you may be flying blind.
Warning Sign #4: You don’t receive regular financial reports from your accountant for several months.
As a business owner, you must expect regular reporting from your accounting system. Profit and Loss Statement, Balance Sheet, Sales Tax and Payroll Tax Report, Accounts receivables and payables report are some of the standard reports that you should have access to on a monthly basis. If your accounting system is not able to produce accurate and timely reports for your review, it is most likely broken and needs to be reviewed. A well managed and accurate accounting system not only provides you with the information needed to make important business decisions, it also serves as a system of record to prove your point in case of a legal or tax liability. Having a professionally managed accounting system becomes the first step in proving your case in a legal battle with business partners, IRS or any other claimant. Remember, broken accounting systems can eventually take down large corporations such as Enron as well as entire Nations and Regions. As a small business owner it is important to stay on top of your accounting system which in turn will help you stay on top of your business performance.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
What a great year this year has been for the tax payers in the US. Perhaps this may have been the best year for tax payers to get tax refund in recent history. Massive tax cuts from Bush administration and huge tax incentives from the Obama administration for individuals such as the home buyer’s credit have reduced the effective tax rate of US tax payers to the lowest levels seen in many years. We shall wait for the official figures from the US treasury, but this year has been a bonanza of huge tax refunds for our clients. Now that the tax returns have been filed, what to do with all the paperwork and documents? This may be a good time to clean out the growing pile of tax and financial papers that clutters your home and office. Here’s a list of what you need to keep and what can be safely recycled (make to shred any documents with personal information) without fearing IRS’s audit and queries.
IRS Statute of Limitations - Three Year Rule
This rule limits the number of years that IRS can audit your tax returns. For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. The idea behind this is that after a period of years, records are lost or misplaced and memory isn’t as accurate as well. Once the statute of limitations has expired, the IRS can’t go after you for additional taxes. However there are exceptions to this general three year rule:
Failure to report all income (Remember IRS expects you report your global income) and the unreported amount being more than 25 percent of the income shown on the return, increases the limitation period to six years.
Claiming loss from a worthless security increases the limitation period to seven years.
If you file a “fraudulent” return, or don’t file at all, the limitations period never begins to run. The IRS can get you at any time.
Assuming that you’ve filed on time and paid what you should, you only need to keep your tax records for three years, but some records have to be kept longer than that. Here’s a checklist of documents you must maintain:
Employment, bank and brokerage statements: All W-2s, 1099s, brokerage and bank statements that prove your income must be maintained for at least three years.
Itemized Deduction expense documents: In case you itemized your deductions you will have to maintain all the expense receipts, mileage logs and other documentation that help substantiate your expenses. Remember, with IRS the rule during an audit is you prove it or lose it! I recommend to my clients that they maintain a scanned backup of their documents in case originals or lost or misplaced.
Business records: Business records can become a nightmare to maintain. Since your income is not directly reported to the IRS as in the case of a salaried W2 income, the IRS is even more stringent when it comes to checking business records. If you have a sole proprietorship and have filed business loss on your personal return, make sure you maintain all possible income and expense records.
Tax returns: Keep copies of your tax returns for at least three years. Those of you that are in the midst of the immigration process may want to hold on to the tax returns at least until after your immigration case is completed. I recommend clients to hold on to the tax returns for at least three years after the immigration case is completed.
Social Security Records: Check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If the Social Security Administration records are wrong, you will need the W-2 or copy of your Schedule C (if you are self employed) to prove the correct amounts. Don’t dump those records until after you’ve validated those contributions.
Keep in mind this column and the articles published here are only meant to provide you with information about taxes and in no way should you consider this as tax advice. I hope you have started thinking about saving more of your hard earned money, paying less to the IRS and at the same time reduce your audit risks as you brave through the economic head winds in a recession. Consult your tax advisor regarding your individual tax situation and your financial advisor for any financial investments related situation.
This Article provides only an overview to the complex Tax Laws and business matters. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
April 15th Tax Deadline – Last Minute Tax Deduction Check List
If you are among those that wait until the very last minute to file their taxes, there is still enough time to collect all your tax related papers and file your tax return in time. And if you haven’t been able to do much tax planning in 2009, we also have some last minute tax deduction check list that may help reduce your 2009 tax liability and get you a bigger tax refund.
This is perhaps the best tax incentive that the government offers to the tax payers so they may contribute towards their retirement savings. Say for example you fall under 20 percent tax bracket. By contributing $5000 to a traditional IRA account for the year 2009, you can get as much as $1000 in tax refund. You have already earned a 20 percent return on your investment through tax savings!
Not everyone may be eligible to take this tax deduction. The IRS limits the contribution to IRAs that are tax deductible based on your AGI (adjusted gross income) and if you are already covered by retirement plan at work. In 2009, the AGI contribution limits for traditional IRAs were raised. If you are covered by retirement plan at work, then your tax-deductible contribution to a traditional IRA is phased-out if your filing status is married filing jointly and your AGI is more than $89,000; your filing status is single, head of household and your AGI is more than $55,000. If your filing status is married filing separate returns your deductible phase out starts at under $10,000.
If this is the first time you are opening an IRA account, you may need some assistance from a financial advisor to select the best type of IRA account and investment choices suitable to your financial goals and risk appetite. Don’t wait until the last minute to find a good financial advisor. The best advisors are always busy and trying to get their attention on April 15th will not be easy.
For a long time some accountants believed that in order to escape IRS audit, one should file a paper return with an extension. IRS claims that it treats all returns in the same way irrespective of how and when they were filed.
Last month we discussed tax programs suitable for different tax situations. Among the different tax situations we covered, H1, L1 visa holder tax situation stands out as a special tax situation. Several H1, L1 tax payers have reached out with questions around the uniqueness of the H1, L1 visa holder tax situation. With the technology spending tightening and IT consultant billing rates getting crushed, every dollar saved in taxes seems like gold!
Can H1, L1 visa worker tax situation be treated like ordinary Tax Payers filing 1040 Tax Return or does it require any special treatment? Most of the popular tax software and tax consultants may treat H1, L1 tax returns no different than ordinary US citizen Tax Returns. Although IRS regulations allow for special treatment in case of temporary workers in the US. There are specific guidelines in the IRS code to determine the tax status as well as calculate deductions based on special conditions due to temporary work status. Since H1, L1 tax payers account for less than one percent of all tax payers, most popular tax software and tax consultants may not pay specific attention to the regulations that govern US temporary worker taxes. Perhaps it is not cost effective for the big tax software companies to invest in programming code that covers H1, L1 special tax situation. Often H1, L1 tax payers are surprised when they find out the benefits offered in the tax code, especially during the initial year of their assignments in the US. Unfortunately, most of them miss out on these benefits without the help of a qualified tax professional that focuses on H1, L1 related tax issues.
Most H1, L1 consultants may be waiting for years for their US resident card (Green Card), but IRS may already consider them as US Resident for tax purposes. The first tax distinction IRS makes is between a Non Resident Alien and a Resident Alien from a tax code perspective. IRS has specific guidelines to determine Resident Status for tax purposes through the “Substantial Presence Test.” Once it is established that you are a US Resident (for tax purposes only, your immigration status may still be H1, L1 or other temporary work visa), you are subject to US taxes on your global income, including income in your home country. Incomes from different sources such as passive investment income as opposed to active income through a job are also treated differently. For more detailed information on how to determine your tax status, visit online www.h1bvisataxes.com.
Once the tax resident status is determined, H1 L1 consultants may be eligible for certain itemized tax deductions in addition to all of the tax deductions that US citizens are normally eligible. Here are the top itemized deductions that can be used in case of temporary US workers. A word of caution, itemized deductions may not always be suitable. You must review your overall tax situation before deciding on itemized deductions.
Home Office Deduction was considered a red flag by many CPAs, inviting IRS Audit for many years. But that may no longer be the case, with more and more businesses and individuals taking advantage of working from home and maintaining a healthy work-life balance. IRS is well aware of the rising trend in working from home office. As long as you use the “Home Office” as IRS defines it. This one deduction alone can save you several hundred dollars in Federal and State taxes. If you are working in a city away from your company’s principal office (base office) and for the convenience of your employer, use your home or apartment to work on client projects, meet with clients on a regular basis and have part of your home or apartment exclusively for use as an office, you may be able to deduct part of your rent or mortgage under the business use of your home deduction. If you rent part of your home or apartment to your employer, or if your employer reimburses part of the rent and other expenses to you, your deduction will be limited. Once you have determined that you qualify for the home office deduction, you may be able to add several other direct and indirect expenses such as repairs, utilities, phone, internet etc. The deductions, however, may be only partial based on percentage of your home used for business.
Once your tax residency has been established, H1, L1 workers may be able to take full deductions for their spouses and dependent family members. In case dependents do not qualify for a social security number, they may be eligible to get an ITIN (Individual Taxpayer Identification Number). ITIN Application is a paper process along with the tax return. Unfortunately you may not be able to e-file your taxes in many states in the first year that you apply for ITIN.
Business travel expenses, or away from home expense deductions can be taken for non-reimbursed meals, lodging and travel if you have a regular job somewhere else, and are on a temporary assignment for work or training. Sec. 162(a) of the IRS Code limits the period to less than one year. So for example if your employer posts you in a different city on a temporary project for eight months, you may qualify to take all of your meals, lodging and travel expenses as deduction. If your employer reimburses you any of the expenses, your deduction may be limited. IRS is pretty aggressive about this deduction. In the past some large IT outsourcing companies may have taken advantage of this provision in the IRS code. Make sure you consult with your tax accountant and evaluate the overall audit risk of your tax return.
Many H1, L1 workers may be in the immigration process for their Green Card and eventually their Citizenship. During approval for the Green Card as well as Citizenship, having your tax status clear with the IRS is critical. Pending tax audits, penalties or tax dues, may negatively impact your immigration case as well as your potential to sponsor others. Having a good immigration lawyer and a reliable tax accountant may provide some peace of mind as you go through the immigration and tax matters together. Another emerging risk that IRS and tax community is observing is the trend in getting taxes filed by preparers outside the country. Many small and large sized tax service companies have outsourced tax preparation with tax preparers outside the US filing taxes on behalf of their clients. In most cases, all is well until an IRS audit gets triggered. You will definitely need someone that is authorized to represent you in front of the IRS and based in the US. Putting at risk your entire immigration process to save a few dollars in tax preparation fees may not be a wise decision in the long term.
In recent years every aspect of our lives has been transformed by technology. Just as Google and Online Shopping have become part of our lives, preparing and filing tax returns is no exception to the internet revolution. Almost 75 percent of individual tax returns are paperless and received by the IRS through the electronic filing (E-file) service and $180 Billion in tax refunds is paid electronically through direct deposit. Paper returns are quickly becoming a thing of the past, but there is still the difficulty of choosing the right tax program and getting maximum tax refund from the IRS with peace of mind.
Can I self-file my Tax Return using Online Tax Program?
Most individual tax payers can self-file their tax return using an online tax program. However as per the data released by the IRS, close to two-thirds of the tax payers still find comfort in having their tax returns prepared by a tax professional. Individual preferences and complexity of tax situations continue to drive individual and small business tax payers to work with tax professionals. There are advantages in filing the tax return using online programs: 1) Working at your own pace. 2) Convenience of filing taxes while watching a football game at home. 3) Saving money with lower tax filing costs. 4) Simulating different financial scenarios and tax situations. 5) Quick and easy access to tax refund money.
How to Choose the Right Tax Program
Key factors to consider while selecting a good do-it-yourself tax software program:
• Phone Support: Select a company that offers phone support in case of an issue while preparing the return.
• Tax Law updates: Make sure the software is updated with the most recent changes in tax laws.
• Data Protection: Make sure the online E-file provider uses secure technology to transmit data. Identity theft is a real issue and tax returns contain your confidential data.
• Tax Deductions: Good tax software will have a step-by-step guide asking questions and dig up tax deductions.
• Accuracy and Guarantee: Check if the company offers guarantee for accuracy of the program. In most cases the guarantee may be limited only to the extent of the fees paid for the program. You may be out of luck, if an error results in IRS penalty of $1000.
• Audit Support: Check if the software company provides a tax professional to assist you in case of an IRS audit.
Picking the Right Tax Program for your Tax Situation
Having short listed tax programs based on the above criteria, now you need to select a Tax Software that best suits your particular tax situation.
Simple Tax Situations
In a simple tax situation you may have salary (W-2), interest and dividend income and take standard deductions on the tax return. You may be able to prepare your federal and state tax return online very quickly and at a cost of under $30-$50 using several tax programs such as TaxAct (www.taxact.com/), TaxCut (Part of H&R block at home online: www.hrblock.com/) and TurboTax (turbotax.intuit.com/).
These are good products for savvy individuals with simple tax situations. Give yourself 2-3 hours to answer the guided tax questionnaire and review the data once you have collected all the relevant information.
Free Tax Software
If your Adjusted Gross Income is less than $56,000 you may qualify for “Free File” online tax program offered by IRS in partnership with private companies. You need to start on IRS website in order to get the “Free File” version (www.irs.gov/efile). The program provides step-by-step guide to e-file the return and also sets up direct deposit of your tax refund into your bank account. Now, here’s a free lunch in America!
Be careful with “free” tax filing offers on the internet. Halfway through the filing process, the program may inform that your tax situation makes you ineligible for the “free” version. This could be quiet frustrating as you leave your confidential data behind. If the tax program is not approved by the IRS, you are better off staying away from it. The potential damage and cost of losing your personal data could be very high.
Complex Tax Situations
These situations involve more than one source of income (W-2s, self-employed, 1099s etc), investments in stocks, real estate and business partnerships, etc. They need serious number-crunching and you should be comfortable navigating through tax documents and familiar with tax concepts such as figuring the cost basis of your assets before depreciation etc. The web version of TurboTax Premier (turbotax.intuit.com/) is a good place to start.
Working through the complex tax situation can get quiet tiresome, often going back and forth reviewing the data, fixing errors and may take 4 to 6 hours to finish. Many tax payers with a complex tax situation simply prefer to enjoy their hard earned weekends and let a tax professional handle the complex number crunching. Give yourself enough time ahead of the tax deadline as you may run into road blocks and getting an appointment with a tax professional at the last minute may prove difficult.
Special Tax Situations
There are several special tax situations that the tax software may not be able to handle effectively. Investments in small business corporations, net operating losses, home office and other special deductions, active trading with mark-to-market accounting, H1 and other temporary work visa taxes, individuals with income in multiple states, ITIN applications and US tax resident tests for immigrant workers require special tax knowledge and are not suitable for online tax programs.
Most of the tax programs will let you try for free before filing the actual return. This tax season try out some of the online tax programs and see if it works for your tax situation. And finally for those of us that prefer the comfort of human presence and discuss tax saving ideas, there will always be tax professionals that can be counted upon.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
As difficult as it is to keep pace with all the business and professional challenges, you may be facing the economic slowdown and revenue challenges in the business. One way to handle this is to reduce your expenses and position your business or profession to gain market share through smart marketing. Most small businesses and professionals, however, overlook their biggest expense in the year – taxes.
We will cover some interesting tax tidbits here in a series of articles as we embark upon the next tax season. Part one covers tax planning and deductions for small businesses and individual professionals. In Part two we will discuss how to select the right tax software. In Part three we will review some tax reducing tips for individual taxpayers, H1B consultants and independent contractors. Part four will focus on how to audit proof your tax return. In Part five we will share some of the best kept secrets to save on taxes. In case you have any specific questions feel free to write to me and if it is in the benefit of the larger audience, I will address it in this column.
Top 5 Tax Deductions for Small Businesses and Professionals
As you get your business started, there are several costs such as furniture, equipment, computers, and fax that may be deducted 100 percent. Section 179 of the Internal Revenue Code allows you to deduct up to $250,000 of the cost of new equipment or other assets in 2009. Off the shelf Software costs can also be now deducted in the same year as per Section 179. Although if you know that your business is going to take a couple of years to break even and generate profit, you may want to depreciate these expenses over the years to offset the profits in later years.
If you make a trip for business purposes, travel costs including airline ticket, hotel, taxi, meals, shipping business materials, laundry, and telephone calls are fully deductible expenses. How about combining business travel with pleasure? It is allowed, as long as the primary purpose of the trip is for business, although there are strict guidelines on this.
This is a great deduction as you can feel good about donating to your favorite cause and save on taxes at the same time. Charitable contributions are treated slightly different depending on the type of your business entity. If your business is a partnership, a limited liability company, or an S corporation, your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. In case of regular (C) corporations charitable contributions are deducted on the corporation’s tax return. There are some important rules for charitable contribution deductions:
- Only contributions to charities listed as “qualified organizations” by the IRS are deductible and contributions more than $250 require a written acknowledgement from the qualified charitable organization.
- You can deduct donations of assets such as Property or Equipment at their fair market value. Although a fully depreciated (written off) asset cannot be deducted as a contribution even if it is works well.
- You cannot deduct the value of time or services that you volunteer.
- You cannot deduct the part of a contribution that benefits you. If you receive a gift in exchange for a charitable donation or if the contribution made is in lieu of certain benefits, you can deduct only the amount of the contribution that exceeds the value of the gift. If you are making a large donation, make sure you check with your tax accountant first.
Bad debts hurt the most. Especially when you have worked so hard to satisfy all of the customer’s requirements and they do not pay you. The good news is that certain bad debts are tax deductible. If your business sells goods, you can deduct the costs of any goods sold, but not paid for, as an ordinary business expense. However, you cannot deduct any lost profits you would have collected from the sale. If your business provides services, no deduction is allowed for the time you devoted to the customer who doesn’t pay. For example if you provide medical services and the patient does not pay, you cannot deduct the cost of the time you spent in treating the patient. The rationale is that if businesses were able to deduct unpaid services, it would be easy to inflate the unpaid bills and claim large bad debt deductions making it hard for IRS to catch the fraud.
For several years taking a Home Office Deduction was considered a red flag, inviting the IRS to Audit your tax return. But that may no longer be the case, with more and more businesses and individuals taking advantage of working from home and maintaining a healthy work-life balance. IRS is well aware of the rising trend in working from home office. As long as you use the Home Office as IRS defines it. This one deduction alone can save you several thousand dollars in tax. For example if you are an independent Information Technology contractor and mostly work out of your client’s office, but you use part of your home to manage the administrative aspects of your profession or business, you may qualify to take the Home Office deduction. IRS has specific rules to qualify to deduct expenses for home office. I want to share the two most basic qualifiers.
Trade or Business Use: First of all you must be engaged in a trade or business to take advantage of this deduction. Employees can also take Home Office Deduction in certain situations. We will cover more on individual deductions next month. You cannot take a deduction if you are only using it for a profit seeking activity that is not your trade or business. For example, you use part of your home to review investment journals and carry out your personal investments. You are not a broker or a dealer, so your activities may not be considered part of a trade or business and hence you cannot take home office deduction.
Regular and Exclusive Use: Specific area of your home must be used exclusively and regularly for your business or trade. You don’t need a permanent partition to mark the space. For example you use part of your basement exclusively to perform administrative and management tasks of your business, review business paperwork, teleconference or meet with clients etc on a regular basis and not just once in a while. Your family does not use the same space for recreation or other non-business purposes. You may be able to claim costs associated with part of the basement as a deduction for use as home office, provided you qualify on other rules.
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