Monthly Archives: June 2014

   Avoiding the Top Tax Mistakes that Small Businesses Make

As we are half way through the year, now is the best time to take action and avoid most common tax mistakes that small businesses make. Following are some of the best practices to help your business avoid tax trouble.

Maintain Good Records

Mid-year is an ideal time to examine your recordkeeping habits. Good recordkeeping not only allows you to monitor the progress of your business but also provide you with the information you need to help you calculate and support your income and support your expense deductions. The better your records throughout the year, the less challenging the year-end tax preparation will be. Key things to consider:

  • Maintain records needed to figure your income
  • Keep records needed to figure your deductions (e.g. cancelled checks, receipt, other evidence)
  • Retain records as long as you may need them

Report all your taxable income on your tax return

Most income is taxable unless it is specifically exempted by law. There are many ways in which you receive your business income (e.g. cash, check, credit card, bartering, 1099 misc). Regardless of the form, business income must be reported on your tax return.  Remember, IRS has established audit techniques to determine potential underreporting of income.

Keep Business Expenses Separate

There are several types of business deductible expense. However, for an expense to be deductible, it must be necessary and ordinary in your trade or business. An expense is ordinary if it is common and accepted in your trade or business.  An expense is necessary if it is helpful and appropriate for your trade or business. Good recordkeeping dictates that in addition to maintaining supporting documents (e.g. invoices), the record of expense should have adequate details to substantiate that the expense is necessary and ordinary (not personal expense) in the trade or business. In addition, if you keep your business and personal records separate, you will avoid future headaches with regards to disallowed deductible expense.

Top Three Expenses Looked at Carefully by the IRS

Following are the top three expenses that the IRS carefully looked at. To avoid tax trouble or paying interest and penalties for disallowable expenses, ensure that in addition to maintaining adequate supporting documents/receipts, appropriate details for the following expenses must be recorded:

  • Home Office Deduction

    If you have a home office, personal expense are never allowed as deductible expense. Business expense must be kept separate and good recordkeeping is necessary if you have a home office. There are certain requirements to meet to claim a home office deduction.  Check out the new guidance on IRS.gov.

  • Auto Expenses

    If you use a vehicle for both personal and business, you need to keep track of the miles you drive for business as basis for claiming deductible business expense. You should also maintain record of date, destination, mileage, and business purpose.

  • Travel and Entertainment Expenses

    You should record who was in the meeting or the people entertained, date, location, and business purpose.

Mid-year Review

Mid-year is a good time to revisit your bookkeeping or meet with an accountant to ensure you are in a better position for your year-end tax return preparation. Also, consider meeting with a Dallas CPA to review your year- to-date business financial position and devise strategies that you can follow for the balance of the year that are unique to your situation.

   Alert of New Email Phishing Scam

The IRS has been alerted to a new email phishing scam. The emails appear to be from the IRS and include a link to a bogus web site intended to mirror the official IRS web site. These emails contain the direction “you are to update your IRS e-file immediately.”  The emails mention USA.gov and IRSgov, though notably, not IRS.gov (IRS-dot-gov). Don’t get scammed. These emails are not coming from the IRS.

Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at phishing@irs.gov. For more information, visit the IRS’s Report Phishing web page. Additionally, clicking on attachments to or links within an unsolicited email claiming to come from the IRS may download a malicious computer virus onto your computer.

The IRS does not initiate contact with taxpayers by email, texting or any social media, and taxpayers will always receive a written notification of any tax due via the U.S. mail. The IRS never asks for credit card, debit card or prepaid card information over the telephone.

Several consumer warnings have been issued about the fraudulent use of the IRS name or logo by scamsters trying to gain access to consumers’ financial information in order to steal their identity and assets. Scamsters will use the regular mail, telephone, fax or email to set up their victims. When identity theft takes place over the Internet (email), it is called phishing.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. As a final reminder, the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. Also, the IRS does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.

If you receive a letter in the mail from the IRS, please contact us so we can determine which action, if any, is necessary in response to the letter.

   Supreme Court Rules Inherited IRAs are Not Protected in Bankruptcy

A unanimous Supreme Court has held that the funds in an inherited IRA do not qualify for exemption in bankruptcy because they do not share the same characteristics as “retirement funds” that traditional IRAs have.

In 2000, Ruth Heffron established a traditional IRA and named her daughter, Heidi Heffron-Clark, as the sole beneficiary. When Ms. Heffron died the next year, the IRA, worth at the time about $450,000, passed to Heidi as an inherited IRA. Heidi elected to take monthly distributions from the account.

In October 2010, Heidi and her husband filed a Chapter 7 bankruptcy petition. They identified the inherited IRA, by then worth around $300,000, as exempt from the bankruptcy estate. The bankruptcy trustee and the unsecured creditors of the estate objected on the ground that the funds in the inherited IRA were not “retirement funds” within the meaning of the statute. The Bankruptcy Court agreed, concluding that an inherited IRA does not contain anyone’s retirement funds, since, unlike traditional IRAs, the funds are not segregated to meet the needs of any person’s retirement.

The District Court reversed the Bankruptcy Court, and the Seventh Circuit reversed the District Court. The Supreme Court was then given the case to resolve the conflicting decisions.

Justice Sonia Sotomayor said that the text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not retirement funds within the meaning of the Section 522(b)(3)(C) bankruptcy exemption.

“Three legal characteristics of inherited IRAs lead us to conclude that funds held in such accounts are not objectively set aside for the purpose of retirement,” she stated. “First, the holder of an inherited IRA may never invest additional money in the account. Inherited IRAs are thus unlike traditional and Roth IRAs, both of which are quintessential ‘retirement funds.”

“Second, holders of inherited IRAs are required to withdraw money from such accounts, no matter how many years they may be from retirement. Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time—and for any purpose —without penalty. Whereas a withdrawal from a traditional or Roth IRA prior to the age of 59 1/2 triggers a 10 percent tax penalty subject to narrow exceptions—a rule that encourages individuals to leave such funds untouched until retirement age—there is no similar limit on the holder of an inherited IRA.”

Sotomayor observed that as a general matter, “the provisions of the Bankruptcy Code’s exemption provisions effectuate a careful balance between the interests of creditors and debtors.” Exemptions serve the important purpose of protecting the debtor’s essential needs. While allowing debtors to protect funds held in traditional and Roth IRAs comports with this purpose by helping to ensure that debtors will be able to meet their basic needs during their retirement years, the same cannot be said of an inherited IRA, she indicated.

“For if an individual is allowed to exempt an inherited IRA from her bankruptcy estate, nothing about the inherited IRA’s legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete,” she wrote. “Allowing that kind of exemption would convert the Bankruptcy Code’s purposes of preserving debtors’ ability to meet their basic needs and ensuring that they have a ‘fresh start,’ into a ‘free pass.’ We decline to read the retirement funds provision in that manner.”

Dealing with retirement accounts, especially those that are inherited, require a certain level of finesse and strategy in order to remain in compliance with the IRS. Unfortunately, Mrs. Heffron-Clark was not on the right side of the law in this case.

   Reclassify Your Independent Contractors to Employees and Save

Having to add to payroll can be a momentous step for budding small businesses, but the tax implications can be burdensome.

By hiring employees, a small business owner is subject to payroll processing fees, extra paperwork with quarterly and annual filings, payment of payroll tax deposits, as well as the added cost of matching Social Security, Medicare and funding the federal unemployment fund (FUTA) as well as the state unemployment fund.

In an effort to ease the paperwork and monetary demands, many owners hire “independent contractors” instead. However, not every outside laborer is properly classified as such. The IRS has a set of rules governing the use of independent contractors and they will occasionally audit a business and reclassify some (or all) of the workers in this category to employees. At that point, the agency might go back three years to levy penalties, interest  and additional payroll taxes. It will share this information with the state taxing agencies who will add their share of payroll tax, penalties and interest. An experience like this could run a small business out of business.

Some business owners even play ball with independent contractors that don’t want to report their income from the activity and won’t issue a 1099. What the business owner may not realize is that when this happens, he is picking up on the tab on the worker’s taxes. He normally doesn’t declare the expense, and he therefore is paying a higher amount of income as well as self-employment tax. Even if he declares the expense, it will likely be disallowed in audit because a  1099 wasn’t issued.

You can save yourself the stress of this situation by complying with the tax laws. The IRS has initiated a program to help small businesses who voluntarily come forward for reclassification.

According to the IRS, “By prospectively reclassifying workers, making a minimal payment and meeting a few other requirements, eligible businesses can achieve greater certainty for themselves, their workers and the government.” The agency also claims more than 1,500 employers have applied to participate in the IRS Voluntary Classification Settlement Program (VCSP) since it was launched in September 2011.

According to the IRS, to be eligible for VCSP, an employer must:

  • Consistently have treated the workers in the past as nonemployees;
  • Have filed all required Forms 1099 for the workers for the previous three years;
  • Not currently be under audit for employment taxes by the IRS;
  • Not currently be under audit by the Department of Labor or a state agency on the classification of these workers. If either the IRS or Labor Department previously audited the employer on the classification of the workers, the employer must have complied with the results of the audit and not currently be contesting the classification in court.

You can apply for the program by filing IRS Form 8952. If you are accepted into the program, you will be required to pay in an amount effectively equaling just over 1% of the wages paid to the reclassified workers for the past year. When you consider the cost of an employee: matching Social Security and Medicare at 7.65%, FUTA tax at 0.8%, plus whatever your state charges you in payroll taxes, this is a considerable savings.

To determine if your workers are properly classified, check out the rules here:  IRS Guidelines to Independent Contractor of Employee. Questions about classifying your workers? Contact us today for a consultation.

   Are You Exempt from Affordable Care Act Penalties?

Are you unsure if you need to sign up for health insurance? Don’t worry, we can help you understand who is exempt from having insurance under the Affordable Care Act.

The Affordable Care Act requires that all Americans have health insurance starting in 2014. Those who choose to not have insurance will have to pay a tax penalty unless they qualify for an exemption.

The tax penalty can also be called an “individual responsibility payment.”

The tax penalty is based on family size and income. For 2014, the fee is $95 per adult or one percent of your total yearly income depending on your income and is paid when you file your 2014 federal tax return (the one you file in 2015).

The annual fee will increase each year. If you go without coverage for only part of the year, you’ll pay a partial fee; if you’re uninsured for less than three consecutive months, you won’t have to pay a fee at all.

But for some Americans who do not already have insurance through their employer, their parents, Medicaid, Medicare, TRICARE, the Veterans health care program, or individual insurance – you may be exempt.

The Affordable Care Act exemptions cover a variety of people, like followers of particular religious groups, members of Native American tribes, and people who do not meet the minimum income requirement, for which health care coverage would be considered unaffordable.

Most people must have health care coverage or pay the tax penalty, but here’s a list of specific cases where you may be able to get an exemption.

Exemptions include:

  • You’re uninsured for less than 3 consecutive months of the year
  • Your lowest-priced coverage option is more than 8% of your household income
  • You don’t have to file a tax return because your income is under the IRS filing requirement ($10,000 if single, 20,000 married filing jointly)
  • You’re a member of a federally recognized tribe or eligible for services through an Indian Health Services provider
  • You’re a member of a recognized health care sharing ministry
  • You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare
  • You’re incarcerated, and not awaiting the administering of charges against you
  • You’re not lawfully present in the United States,
  • You may qualify for the Cancellation Hardship Exemption if you received a cancellation notice due to your health plan not meeting minimum requirements.
  • You also may qualify for a hardship exemption if your circumstances affected your ability to purchase health coverage

See a full list of hardship exemptions here.

How to apply for exemptions

Do you qualify for one of these conditions? If so, then what’s next?

If you’ve been uninsured for less than three consecutive months of the year, or you aren’t lawfully present in the U.S., you don’t need to apply for an exemption. This will be handled when you file your 2014 taxes next year.

Also, if you don’t have to file a tax return because your income is too low, you don’t need to apply.

You can claim certain other exemptions on your 2014 tax return when you file in 2015, such as exemptions based on coverage being unaffordable or being a member of a federally recognized tribe or ministry.

For all other exemptions, you’ll have to submit an application to the Health Insurance Marketplace along with required documentation in certain cases. Different exemptions require different forms, so be sure to apply with the correct form.

Gurian CPA Firm is here for you throughout the year for your tax questions, tax planning and consulting. Contact us today!