Friday, January 23, 2009

IRS Raises The Standard Deduction

Inflation is a serious concern to everyone. The IRS knows this too. That’s why the IRS is raising the standard deduction for 2008. This is the basic deduction that all taxpayers get when they fill out their tax returns. The deduction is based on the taxpayer’s filing status. The 2008 standard deductions are as follows:

Filing Status Amount
Married filing jointly or qualifying widow or widower $10,900
Head of Household $ 8,000
Single $ 5,450
Married filing separately $ 5,450

When filing out your tax returns your should not take only the standard deduction if you qualify to take more deductions. If your itemized deductions are more than your standard deductions then you need to itemize! This can get very complicated and very confusing. The best advice I have is to consult a professional tax preparation firm.

Should You File Your Own Tax Returns?

Each year as we approach tax time many taxpayers ask themselves the question, “Should I do my own taxes?” This is a question that requires much thought. Let’s consider a few things. For one, as tax time approaches a taxpayer who is planning on preparing their own tax return has to know exactly what to gather to support the information they put on their return. This within itself can be a formidable task.

Once all the information is gathered then the time comes to assimilate everything and begin putting it all in the right places on all the forms. Unless the taxpayer knows exactly what they are doing they will quickly become confused and frustrated. In the meantime they are burning up valuable time. Eventually they may have to turn it over to a tax professional, which may have to file an extension, which may ultimately wind up costing the taxpayer money by filing late (under certain circumstances).

If you are thinking about filing your own tax return then you may want to take a test to assess your skill level at preparing tax returns. Right now it’s not too late to get a professional on board. Good luck!

Tuesday, January 13, 2009

Becoming An S Corporation

In order for a corporation to become an S corporation it must meet all of the requirements of an S corporation status. All of the shareholders must agree to the S corporation status. The corporation must use a permitted tax year, or it may elect to use a tax year other than a permitted tax year, and must file Form 2553, Election by a Small Business Corporation to indicate it chooses the S corporation status.

All of the following requirements must be met in order for a corporation to qualify as an S corporation:
Shareholders must be citizens or residents of the US
Must not be a financial institution that uses the reserve method of accounting for bad debts
Must have no more than 100 shareholders
Must be a domestic corporation
Must have only one class of stock
Shareholders must be individuals, estates, and certain trusts and financial institutions
Shareholders cannot be corporations or partnerships

When setting up a business the business owner usually has a few different options with pros and cons to each method of organization. A CPA should be consulted in order to make the best decision in setting up the new organization.

Corporations – Organizational Expenses

Just like start-up expenses new corporations have organizational expenses and these expenses can be deducted too. Up to $5,000 of organizational costs can be deducted as current expenses under the current tax code with the remaining costs amortized over a 180-month period. The catch is that these expenses must be incurred before the end of the first year the corporation is in business. The corporation can amortize organizational costs incurred in the first year even if the corporation does not pay them in that year if the business is being run on a cash or accrual basis.
Organizational expenses that may be deducted include accounting and legal fees incurred by the organization, incorporation fees and expenses related to temporary directors, organizational meetings of directors and/or shareholder meetings. Expenses related to the transfer of assets to the corporation, printing costs, professional fees and commissions cannot be deducted. Preparing all the necessary documentation for corporate organizational expenses can be tricky and is best left to the tax professionals.

Corporations – Start-Up Expenses

Many people start their own business and set the business up as a corporation. And like all corporations they have start-up expenses. These expenses are incurred before the corporation begins business operations. When starting a new business a business owner has costs such as investigating the business and getting it started and may incur some of the following expenses:
Market research
Operations facilities and labor market analysis
Payroll expenses for training employees
Various professional services
Business related travel
For tax purposes the corporation can elect to deduct up to $5,000 of start-up costs as current expenses and amortize all remaining costs over a 180-month time frame. Form 4562 must be filled out and attached the corporate return for the year in which the amortization period begins. It is highly advisable to obtain the services of a tax professional for preparing all IRS related documents related to corporate returns.

Partnerships – Filing Requirements

Tax time is here and that means its time to file your partnership return. If your business is organized as a partnership and is engaged in a trade or business or has gross income then you must file an informational return on Form 1065. During the tax year if the partnership does not receive income no has any expenses that the partnership is treating as deductions or credits for federal tax purposes then the partnership is not required to file a return.
The due date of the return, Form 1065, is the 15th day of the 4th month following the close of the partnership’s tax year. If the partnership has more than 100 partners then the return must be e-filed. The return must be signed by a general partner of the partnership. There are many rules and regulations governing partnership returns. It may be best to consult with a professional tax preparer for preparing a partnership return. This could save big headaches later on.

S Corporation Taxes

An S corporation is subject to a variety of taxes. For example, an S corporation may be subject to a tax on excess net passive income if an S corporation has pre-S corporation earnings and profits and its passive investment income is more than 25% of its gross receipts. The S corporation’s status will be terminated if passive investment income is more than 25% of gross receipts for 3 consecutive tax years and the corporation had pre-S corporation earnings and profit at the end of each of those tax years.

Gross receipts from royalties, rents, dividends, interest and annuities would be classified as passive investment income. Net passive income is passive income reduced by deductions directly connected with the production of passive investment income. The tax code is very complex and it is advised that any business owner faced with any of the circumstances mentioned above should get a tax professional involved to make sure there are no problems in any of these areas.

Saturday, January 10, 2009

Keep Good Mileage Records

If you are in business for yourself (self-employed) and you drive a lot with your business then you may deduct the mileage used for business purposes. The most important thing though is to keep good mileage records. Currently the mileage deduction is right at 58.5 cents per mile. If you drive a lot this can add up to a sizeable deduction come tax time.

The rule is you can deduct mileage or you can claim all other automobile expenses such as tires, gas, oil changes, etc. However, once you choose one of these methods for tax purposes you cannot change it. Generally, the mileage deduction works best. All that is needed is some form of a logbook indicating the miles driven and the date. This should be enough to properly document your mileage and would serve appropriately in the event you were audited, in which case it would not be a bad idea to get professional representation.

Interest Free Loan from the IRS

The IRS is a business and they are in business to make money. That is one of the reasons the IRS does not make interest free loans. As a tax resolution specialist I have people ask me all the time if our firm is able to get the IRS to waive the penalties and interest on their tax debt. I tell them there may be certain circumstances under which the IRS may waive the penalties, but not interest.

The IRS must charge taxpayers interest by law. Think about it this way, if you did not pay taxes for a period of time and took the money you should have used to pay the taxes and invested the money then you would be earning interest on it. Likewise, the IRS is owed money they could be putting to use somewhere else in the economy and could be getting a return on their money. This is a very basic illustration but is does give a good reason why the IRS does not make interest free loans by waiving the interest portion of a tax debt.

Don't Claim Exempt

I work in the tax resolution field and one problem I see is individuals who owe big money to the IRS and the culprit is the taxpayer claiming exempt on their W-4. Many times there is no reason at all why the taxpayer made this particular designation. Sometimes it was because they were ill advised and sometimes it was due to the fact that they knew if they filed exempt they would take home more money immediately and would worry about the taxes later.

For most of these people they never got around to addressing the concern. Then after a few years had accumulated the IRS finally sends them a nice hefty tax bill and WHAM, they are caught in the trap. The IRS then seeks to collect. Fortunately most of these types of problems can be worked out thru a professional tax resolution firm. So remember, don’t claim exempt!

Claiming Your Refunds

If you have a string of unfiled tax returns with the IRS and you would like to get them all filed and get your refunds just keep in mind you are entitled to refunds going back only thee years. As the time approaches to file your 2008 tax return, due April 15, 2009, you will be able to claim a refund going back to 2006 (3 years – 2008, 2007 and 2006).

Likewise, if you have a refund due from years prior to 2006 then the IRS will not apply those refunds to any taxes owed. For example, if you owed the IRS $20,000 for the past 6 years, $4,000 from each year, and the IRS owed you a refund of say $3,000 from 2004, then the IRS would not apply that $3,000 to the total tax liability. I know this sounds rather stinky, however that’s the way it works. For more information as to how to best handle situations like these you should contact a tax professional.

An Important Note About Installment Agreements

Many taxpayers have installment agreements with the IRS for prior tax debts. If you have an installment agreement with the IRS then there is something you need to know especially as we approach the 2009 tax season. An installment agreement, believe it or not, is a luxury the IRS affords taxpayers who are not in a position to pay their tax debt in full and it is something that you want to maintain and protect if you have it.

One provision, or agreement, to the installment agreement is that you will file and pay all of your future tax obligations on time. As a tax resolution specialist I have spoken with many individuals who have not filed their returns for many years and all of a sudden they have to file because the IRS is about to levy their wages. They get into an installment agreement and then default the agreement shortly thereafter by not filing their next tax return on time. Don’t let this happen to you is you have an installment agreement. Get your next return filed ASAP!