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  • What expenses can I deduct?

    10 September 2013 / Uncategorized / Comments Off on What expenses can I deduct?


    Welcome to another edition of Tuesday's Tidbits where we make tax and accounting simple, I'm your host Charles D. Shapero, CPA and today we're going to talk about what expenses you can deduct as a business owner. Would you believe that the Internal Revenue Code that you cannot deduct any expenses. It's true, all deductions are a matter of whats called legislative grace. Luckily, the legislature has seen fit to pass code section 162, it's a very important code section for business owners because it allows us to deduct anything that's an ordinary and necessary expense to our business. Is a trip to Hawaii a necessary deduction? Maybe not for a dentist. But what a real estate investor who wants to go look at rental properties in Hawaii? Possibly. What about a travel agent that needs to be able to talk about travel to Hawaii, possibly. But when a taxpayer does that and he takes his whole family that's a mixture of business and personal. Can he deduct his airfare? More than likely. Can he deduct his wife and kids? More than likely....not. When your looking at what expenses can I deduct come down to the ordinary and necessary and kinda talk that through. Or you can feel free to give the experts at Widget Bookkeeping & Tax a call, we'll help you walk through it. This concludes todays Tuesday Tidbit. See you next Tuesday. Widget Bookkeeping & Tax, Know more, Keep More.

  • Reporting your Bartering Income

    03 September 2013 / Uncategorized / Comments Off on Reporting your Bartering Income

    Welcome to another edition of Tuesday's Tidbits where we make tax & accounting simple. I'm your host Charles D. Shapero, CPA with Widget Bookkeeping & Tax and today we're going to talk about bartering income. Small businesses such as ours, often trade services back and forth. The tricky part about bartering is...that there's no cash that trades hands, it's usually services for services. So how do we value those services? Do I have income? What's the amount? When I provide say a tax return for someone, I know what the market value is. Let's just say it's $350, I know that when I provide that service, that I'm looking to get $350 of services back from the person that I'm bartering with. That according to the internal revenue code is taxable income. A lot of people don't report it because there is no cah that trades hands, and that is... incorrect. But a lot of times you can report that bartering income without ever having any tax effect. Here's the example, I prepare a tax return for a videographer, that does videos for me. I report that income but that video is a business video, it's a legitimate, ordinary and necessary business expense it's deductible, so I have income for $350 I have an expense for $350, I have no income tax effect. The area where you run into an income tax effect is if I provide tax services for say massage therapy, $350 of income...oh massage therapy is not deductible. It's a personal expense, therefore I do report income. And that's the way the internal revenue code reads. A lot of people use an exchange, like ITEX or Florida Barter. And the way that works is I'll provide say tax or accounting services for somebody in the group, and I'll earn credits, those credits can be exchanged later for other services Typically, ITEX will issue you a 1099-B at the end of the year. so you can report all that barter income, it doesn't matter that you didn't use those credits, When you earn those credits, that's when income is recorded on barter income In QuickBooks, bartering can be set up like an ITEX account can be set up like a bank account. That way you can treat all earnings as deposits, you can use all expenses as checks in Quickbooks, and you can reconcile that account on a monthly basis. This concludes today's Tuesday's Tidbits, see you next Tuesday! Widget Bookkeeping & Tax Know More, Keep More

  • REASONABLE SALARY?

    26 July 2013 / Uncategorized / Comments Off on REASONABLE SALARY?

    Payroll tax collection continues to vex the Internal Revenue Service despite several court cases that have resulted in rulings favorable for the IRS regarding unreasonably low compensation. A recent high profile case was David E. Watson, P.C. v. United States on which the Eighth Circuit ruled in 2012. Watson was an indirect partner in a CPA firm, practicing through an S corporation that paid him $24,000 of W-2 salary per year and between $175,000 and $203,000 in S corporation distributions. The court adjusted his payroll compensation to $93,000.

    It isn’t hard to see why shareholders of S corporations attempt to justify wage levels below what the IRS considers “reasonable compensation” (assuming the understated compensation is below the FICA wage base). Both the S corporation and employee save the 7.65% FICA and Medicare taxes on the wages not reported.  Combined, for small business owners, it's a savings of 15.3%!

    Another recent case is Herbert v. Commissioner. Herbert received between $24,000 and $29,000 of W-2 wages for the years 2004 through 2006. In 2007, he received $2,400 of W-2 wages. Although the Tax Court noted that the corporation lost money or earned very little income in each of the years, and the corporation closed down in 2009, the Court increased the taxable W-2 compensation for 2007. The IRS wanted to reclassify all of the draws from the S corporation for 2007 as additional wages (i.e., an additional $52,600). Ultimately, the judge averaged the petitioner’s wages for 2002 through 2006 to arrive at $30,445 as a reasonable wage.

    It didn’t help matters that Mr. Herbert used the draws to pay corporate expenses personally. He lost, misplaced or never kept receipts for many corporate expenses he paid with cash. The Court accepted Herbert’s testimony that he in fact paid significant corporate expenses with cash using funds received from the corporation. Nonetheless, the judge also believed that W-2 wages of $2,400 were too low.

    The result? Herbert was found to have under-reported his wages, even though the amount of cash drawn out of the corporation covered corporate expenses. Had he had maintained a better set of books, paid all of the corporate expenses with corporate (rather than what became to be personal) funds, he wouldn’t have had distributions from the corporation to himself.

    Although the wages were quite low, the fact of the matter is the business was failing. There wasn’t an adequate cash flow to pay wages and expenses. By shuffling funds and taking money personally, Mr. Herbert created a payroll tax liability where such liability shouldn’t have existed.

    Payroll tax reduction or avoidance is, perhaps, a major reason for the popularity of S corporation status for an operating entity, even though the formation of an LLC under state law provides similar liability protection for the sole proprietor. The IRS projects that 4.6 million Forms 1120-S will be filed for 2012, compared to 3.6 million Forms 1065 (partnership).

    As part of its tax reform efforts, Congress is evaluating the continuing treatment of the bottom-line S corporation as not subject to payroll taxes or self-employment tax.

    If you have any questions on S corporations and what should be considered "Reasonable Compensation" please contact the experts at Widget.  We can help!

  • Business or a Hobby? What does the IRS think you have?

    22 July 2013 / Uncategorized / Comments Off on Business or a Hobby? What does the IRS think you have?

    Why should we care what the IRS thinks about our activity?

    Because under the hobby loss rules (IRC §183) the deductible expenses of a hobby are limited to the amount of income it generates and are further subject to a floor of 2% of adjusted gross income (AGI) as a miscellaneous itemized deduction.  For an activity to be considered a business (which allows it to deduct related expenses without limitation) it must be engaged in for profit. If the activity is not engaged in for profit, it is considered a hobby and is subject to the hobby loss rules.

    IRS Regulation §1.183-2(b) lists nine factors for determining whether a taxpayer engages in an activity for profit.

    1. Treated like a business?  The first factor is how a taxpayer carries on the activity.  The IRS would first be interested in how the taxpayer handles the entity, ensuring that he or she is conducting all activity in a businesslike manner. The taxpayer can establish this by maintaining separate personal and business bank accounts, keeping records and books, and acting like similar profitable, operational entities.
    2. Is the business owner an expert?  The second factor is the expertise of the taxpayer. A business operator should have extensive knowledge of his or her profession or activity, showing that he or she has studied accepted business methods and sought advice from experts.
    3. Time spent in the activity.  The third factor is whether the taxpayer expends substantial time and effort in carrying out the activity.  Dedicating personal time to an activity indicates that a taxpayer entered into the activity, or continued the activity, with the actual and honest objective of making a profit.
    4. An expectation of profits. The fourth factor is an expectation that assets used in an activity, such as land, may appreciate in value. IRS Regulations §1.183-2(b)(4) says such appreciation may be considered in lieu of current profits: “Even if no profit from current operations is derived, an overall profit will result when appreciation in the value of land used in the activity is realized since income from the activity together with the appreciation of land will exceed expenses of operation.”
    5. Past Experience. The fifth factor recognizes that even if the taxpayer’s activity is currently unprofitable, it may be for-profit if the taxpayer has been able to convert other activities from unprofitable to profitable in the past, especially ones similar to the current activity.
    6. Past Profitability. The sixth factor looks at the taxpayer’s history of income or losses from the activity. The economy plays a big role in how much a business can generate and keep. If taxpayer’s business is conducted with customers whose business fluctuates with the economy, losses may occasionally be incurred. Losses alone are not conclusive, because IRS §162(a) allows “as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” However, a long series of losses warrants consideration, and sustained earnings indicate a for-profit activity.
    7. Amounts of Prior Profits. The seventh factor examines the relative amount of the profits and losses. IRS Regulation §1.183-2(b)(7) states, “The amount of profits in relation to the amount of losses incurred, and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity, may provide useful criteria in determining the taxpayer’s intent.” However, the presumption of profit motive in IRC §183(d) says that if an activity has gross income for three or more of the last five years that exceeds the deductions attributable to the activity, the activity generally is presumed to be for-profit.
    8. Financial Status of Owner. The eighth factor examines the taxpayer’s financial status, including whether he or she has other sources of income, although their presence does not preclude an activity from being considered for-profit.
    9. Is the Activity...FUN?  The ninth factor is whether the activity provides recreation or involves “personal motives” that may, with other factors, indicate lack of a profit motive.  A professional video-game player might have a tough time arguing that the activity is a business as it has large recreational appeal.

     

    After reviewing the records and previous tax returns for an activity, we here at Widget can get an idea of  whether the activity is a hobby or a for-profit activity based on these nine factors. However, taxpayers must understand that there is no single, defining pattern or factor that is conclusive of whether an activity is for-profit or a hobby, and all the facts and circumstances must be considered.

    If an activity is deemed a hobby, its income is reported as other income on line 21 of Form 1040, U.S. Individual Income Tax Return, and the related expenses are reported as miscellaneous itemized deductions on Schedule A, Itemized Deductions, subject to the 2%-of-AGI floor.

    If we at Widget can answer any questions, please contact us!

  • Special Needs Children...And Related Tax Benefits!

    06 June 2013 / Uncategorized / Comments Off on Special Needs Children...And Related Tax Benefits!

    The number of children diagnosed with autism, Asperger’s syndrome, and other neurological disorders continues to skyrocket! The costs of providing care for the special needs child is a huge consideration for their parents.
    The Centers for Disease Control and Prevention (CDC) have estimated as many as 1 out of 50 children born today has an autism spectrum disorder or ASD.  Other disabilities are also becoming more prevalent, according to the CDC. Between 1997–1999 and 2006–2008, there was an 18.2% increase in blindness/sight impairment among children age 3 to 17, a 9.1% increase in seizures, and a 24.7% increase in “other developmental delays” (which excludes autism, attention deficit hyperactivity disorder, and learning disabilities).

    Further complicating the situation, parents with special needs children are often unaware of possible tax benefits that are available and forgo hundreds, if not thousands, of dollars in potential tax deductions and credits. Among these potential tax benefits are deductions or credits for the dependency exemption, medical expenses, special instruction, capital expenditures for medically required home improvements, impairment-related work expenditures, and the earned income tax credit.

    THE DEPENDENCY EXEMPTION

    A taxpayer may claim a dependency exemption ($3,900 for 2013), for a “qualifying child” or a “qualifying relative.” With passage of the Working Families Tax Relief Act of 2004, P.L. 108-311 (effective 2005), the definition of a “qualifying child” and “qualifying relative” in Sec. 152(a) was amended to provide a uniform definition for purposes of the dependency exemption and for the child tax, dependent care, and earned income tax credits.

    Under the definition, to be a qualifying child, in addition to meeting the relationship test, an individual must meet any one of the following requirements:

    1. Under the age of 19 at year end
    2. A student under the age of 24 at the end of the year, OR
    3. Totally and permanently disabled at any time during the year

     

    An individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. A physician must certify in writing that the individual is permanently and totally disabled.

    SPECIAL SCHOOL INSTRUCTION

    In general, to the extent they exceed the 10%-of-adjusted-gross-income (AGI) floor in 2013, a taxpayer can deduct qualifying medical expenses. In most cases, costs related to providing a child’s education are NOT considered medical care and, therefore, are not deductible as a medical expense. However, IRS Regulation §1.213-1(e)(1)(v) states that the unreimbursed cost of attending a “special school” for a neurologically or physically handicapped individual is deductible as a medical expense if the principal reason for sending the individual to the school is to alleviate the handicap through the school’s resources.

    The expenses of a special school that are deductible as medical expenses include amounts paid for lodging, meals, transportation, and the cost of ordinary education that is incidental to the special services the school provides. Also, any costs incurred for the supervision, care, treatment, and training of a physically and/or neurologically handicapped individual are deductible if the institution provides the services.

    Alternatively, taxpayers participating in tax-advantaged plans through work for funding medical expenses, such as flexible spending accounts (FSAs) or health savings accounts (HSAs), can set aside limited amounts of money to finance medical care expenses on a pretax basis, thereby avoiding the 10%-of-AGI limitation. The definition of medical care expenses for this purpose is the same as it is for the medical expense deduction. Amounts that can be set aside pretax under an HSA in 2013 are $3,250 for employees with single coverage and $6,450 for employees with family coverage. The maximum pretax contribution to a health FSA for all taxpayers is $2,500 beginning in 2013.

    A special school is distinguishable from a regular school by the substantive content of its curriculum, and its status is not determined by the institution as a whole but by the nature of the services received by the individual for whom a medical care deduction is sought. The IRS considers the medical facilities and therapeutic orientation of a school as critical factors in determining whether a school qualifies for a medical care deduction.

    Through case law, regulations, and rulings the IRS has recognized several types of schools that qualify as “special schools” for purposes of the medical expense deduction. These include schools that:

    • Teach Braille to the blind and lip reading to the deaf;
    • Train the intellectually disabled;
    • Give personal daily attention to the student to improve the student’s low attention span;
    • Provide an environment in which intellectually or physically handicapped students can adjust to a normal competitive classroom situation; or
    • Design a special curriculum to accommodate the needs of handicapped children with IQ scores ranging from 50 to 75.

     

    A regular school with special curricula can also be classified as a special school for those individuals benefiting from a special curriculum. For example, in IRS Revenue Ruling 70-285, a child attended a regular school that had a special curriculum for intellectually disabled children.  Since the school’s special education curriculum was a severable aspect of the school’s activities, the IRS ruled that the special curriculum qualified the school as a special school with respect to the child.

    In Revenue Ruling 78-340, the IRS concluded that a taxpayer whose child had severe learning disabilities caused by a neurological disorder (e.g., an ASD) could deduct as a medical expense amounts paid for tuition and related fees for the child’s education at a special school that has a program designed to “mainstream” these children so they can ultimately return to a regular school. The ruling further held that amounts paid for private tutoring by a specially trained teacher qualified to deal with severe learning disabilities are also deductible. However, the ruling stated that for the costs to be deductible, a physician must recommend both the special school and the tutoring.

    In a 2005 Letter Ruling (www.irs.gov/pub/irs-wd/0521003.pdf) the IRS expanded the definition of special schooling to include tuition for programs enabling children with dyslexia to deal with their condition. The IRS determined that the children were attending the school for the principal purpose of obtaining medical care in the form of special education required for the years in which the children were diagnosed as having a medical condition that impaired their ability to learn. As a result, the IRS ruled in favor of a medical expense deduction for the tuition paid to the school.

    More recently, in a 2007 Letter Ruling (www.irs.gov/pub/irs-wd/0729019.pdf) the IRS ruled that a school that provides non-academic training and support services designed to help an individual be successful in another academic or vocational school may be deemed a “special school.”  The school included a student population with IQs ranging from low average to gifted and with various learning disorders and ASDs. It designed a self-contained program for the child (who had severe developmental disorders due to a medical condition) as prescribed by her neuropsychological report to enable her to compensate and overcome her diagnosed medical condition and to help her succeed in transitioning to college.

    Costs of additional services provided by schools that do not otherwise qualify as special schools can also be considered deductible medical expenses if the additional services provide therapeutic value. However, while a separate payment is not required, the amount paid must be in excess of the normal tuition charged for regular students, with the premium incurred over and above normal tuition representing the qualifying medical expense. An allocation may be permitted even if the school does not distinguish between normal educational tuition and medical care in its billing.

    The medical care determination does not depend on the title of the person rendering the service, the nature of the institution, or whether it is considered medical care to other individuals. Instead, the final determination depends on whether the care qualifies as medical care under IRC §213. Examples of deductible medical expenses include the additional cost incurred for special programs assisting psychologically, physically, or neurologically impaired students; note takers for deaf students; or psychotherapy services to assist students in adjusting to a normal school.

    CAPITAL EXPENDITURES

    As a general rule, capital expenditures are NOT permitted as a medical expense deduction. However, a medical expense deduction is available when the capital expenditure is made primarily for medical care. To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity primarily for use by the individual requiring medical care.

    Qualifying capital expenditures for medical expense deductions fall into two categories:

    1. Expenditures improving the taxpayer’s residence while also providing medical care.
    2. Expenditures removing structural barriers in the home of an individual with physical limitations.

     

    Capital expenditures in the first category are deductible only to the extent that the cost exceeds the increase in the property’s fair market value as a result of the capital expenditure. For example, after a physician recommends installing an elevator for an individual suffering from a chronic and disabling arthritic condition limiting the individual’s mobility, an elevator costing $15,000 is installed in the taxpayer’s home. As a result of the expenditure, the home increases in value by $10,000. Therefore, $5,000 may be deducted as a medical expense. Expenditures incurred in the second category are fully deductible under the presumption that there is no increase in the property’s value as a result of removing a physical barrier.

    Under either category, costs incurred to operate or maintain the capital expenditure (such as increased utility and maintenance costs to operate the elevator) are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist.

    CONFERENCES AND SEMINARS

    Parents and guardians of special needs children often attend medical conferences and seminars to learn more about their child’s disability. Under Revenue Ruling 2000-24, amounts paid for the registration fees and travel expenses are deductible as medical expenses if the costs are primarily for and essential to the dependent’s medical care.

    Parents should obtain a recommendation from their child’s doctor to ensure the medical deduction is not disallowed. The conference or seminar must deal specifically with the medical condition the child has, not just general health and well-being issues. Moreover, the ruling does not permit deductions for meals and/or lodging costs incurred while attending the conference.

    IMPAIRMENT-RELATED WORK EXPENDITURES

    As special needs individuals mature and enter the workplace, many are entitled to claim itemized deductions for their unreimbursed impairment-related work expenses under IRS §67(d).
    Impairment-related work expenses refer to expenses that a handicapped individual incurs for attendant care services at the place of employment enabling the individual to maintain employment, and that qualify as trade or business expenses.

    Handicapped individuals for this purpose are defined as those having a physical or mental disability that is a functional limitation to employment or a physical or mental impairment (including but not limited to impaired sight or hearing) that substantially limits one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working.

    According to the IRS Publication 502 (www.irs.gov/pub/irs-pdf/p502.pdf) an employee should include impairment-related work expenses on Form 2106, Employee Business Expenses. These expenditures are then transferred to Form 1040’s Schedule A, Itemized Deductions, as an unreimbursed business expenses and are NOT subject to the 2%-of-AGI limitation on miscellaneous itemized deductions.

    EARNED INCOME TAX CREDIT

    The idea behind the earned income tax credit (EITC) is to encourage the economically disadvantaged to work by partially offsetting the Social Security taxes on wages. The income threshold varies depending on filing status and number of children, but as an example, families with AGI in 2013 under $48,378 who file a married joint return and have two qualifying children may qualify for the EITC, which is a refundable credit.

    For EITC purposes, a “qualifying child” has the same definition as discussed above, thus, a severely disabled child is a “qualifying child” regardless of age, even into adulthood, as long as the child continues to live with his or her parent(s) or another person who meets the relationship test with respect to the child. The maximum EITC for 2013 is $6,044 for families with three or more qualifying children.

    CONCLUSION

    The number of individuals with special needs is escalating at unprecedented rates. Some experts argue that this may simply be a matter of better recognition of special needs, as changes in autism diagnostic criteria have evolved over the years. Now, autism is the sixth most commonly classified disability in the United States. Whether due to diagnostic changes or not, these increased numbers are affecting state and local government programs as they face shortfalls because of increasing demand for services, forcing parents to absorb more of their children’s medical care and other related expenses.

    This article provided a brief overview of some of the more common deductions and credits that may be available under current tax law.  However, it’s important to keep in mind that specific rules apply to each benefit and the determination of whether a benefit applies is often fact-specific. For example, to claim a child’s educational expenses as medical expense deductions when the child attends facilities that are primarily educational and not special schools, the particular services provided to the child must be considered. Similarly, deductions for medical conference expenses are case-specific. Even the EITC has multiple requirements and limitations.

    We at Widget can discuss your situation with you to determine how your expenses for your special needs child can be deductible.  Please call us and let us help you!

  • ObamaCare...How does it affect small business and our premiums?

    30 May 2013 / Uncategorized / Comments Off on ObamaCare...How does it affect small business and our premiums?

    The Patient Protection and Affordable Care Act (AKA Obamacare) seeks to change the way health insurance premiums are established, just as the Act Providing Access to Affordable, Quality, Accountable Health Care did in Massachusetts. As small business owners begin to implement the requirements of health care reform, they need to understand two significant ways in which they may be affected.

    The Small Group Insurance Market and Increasing Premiums

    The first big change that health care reform brings is the prospect of “merging” (formally or via rating rules) the small group insurance market with the individual insurance market. The individual market typically has the highest costs of all the health insurance markets due to the actuarial risk of a single covered life and the time and expense of selling single policies.

    The small group market, historically 50 employees or less, but in the case of health care reform, 100 employees or less (mandated to expand the risk pool base of small businesses who might also absorb the cost of the merged individual market), is significantly less risky and thus has lower premiums. As has been the case in Massachusetts, as the formal merger of the two markets’ risk pools takes place it may cause small business premiums to increase dramatically. If you presently have more than 50 employees and are covered in your state’s existing large group market risk pool, premiums could rise once the small group level increase to 100 employees becomes effective in 2014.

    Individual market premiums will go up, even if the merged small group market is absorbing a lot of the cost, because the policies historically sold in the individual market had lower benefits than those sold through employers; health care reform no longer allows the lower benefit limits. Just as having a lower deductible and higher limits on your auto insurance policy results in a higher premium, health care reform requires more expensive policies. The mandated benefits also drive the cost of small business premiums higher.

    It is important to note, however, that regulations issued by the Department of Health and Human Services late in 2011 granted the states considerable flexibility in designing their own mandated benefits or benchmark plans. This, in turn, will result in the mandated benefits varying from state to state, something that was not contemplated when the legislation passed. Thus business owners need to look closely at what their individual state is doing. The National Conference of State Legislatures maintains a website tracking the state-by-state changes.  The link is shown below:
    http://www.ncsl.org/issues-research/health/state-ins-mandates-and-aca-essential-benefits.aspx

    Premium Limits for Older Individuals and Smokers

    In addition to the permitted merger of the individual and small group health insurance markets, the other two most significant changes to insurance premium rate settings involve the following:

    • Limiting the amount insurers can charge older individuals to no more than three times what they charge younger individuals; and
    • Limiting to 1.5 times what insurers can charge smokers versus nonsmokers.

    As the flood of actuarial analysis on the market in 2013 now indicates, 30% to 40% is the range of likely increase for the 20 to 30 year old crowd--many of whom are still dealing with the recession and the burden of student loan debt.

    This has significant added impact on small businesses that employ a lot of young people.

    As we get closer to the date of implementation, our understanding of this law and its impact gets clearer.

    If you should have questions about the new law, please give Widget a call.  We can either answer the question for you, or we’ll find someone who can.

  • 12 Tax Audit Red Flags!

    28 March 2013 / Uncategorized / Comments Off on 12 Tax Audit Red Flags!

    Certain things can increase your likelihood of an audit.  These are called "Red Flags".  They should be avoided, if possible, because an audit is an unpleasant and costly thing to live through.

    Foreign Assets

    Stashing money overseas? Then you're probably well aware that the IRS has been ramping up its efforts to rein in offshore accounts. Launched in 2009, the agency's voluntary disclosure program has already raked in more than $5 billion in back taxes, interest and penalties from tax cheats for illegally hiding assets in offshore accounts.

    Taxpayers are asked to check a box on Schedule B if they have an ownership interest in foreign accounts. If they then fail to provide information about those assets, it will undoubtedly trigger an audit.

    Indicating on your return that you do business in foreign countries or take many trips abroad for work could also raise eyebrows if no foreign assets are reported. And the penalties for hiding offshore accounts are huge, including a fine of $100,000 or 50% of the balance -- whichever amount is greater -- for accounts that are willfully undisclosed.

     Divorced with an angry EX!

    Following messy divorces, many ex-spouses will go to great lengths to get revenge -- some will even try to wreak havoc on your reputation by contacting the IRS.  In years past, people have told the IRS that their ex-spouse laundered money, committed serious financial crimes, underreported income, even owned a brothel. Ex-spouses apparently love writing letters to the IRS.

    Sometimes the claims are completely made up, while others are legitimate. And while some people write in anonymously, others divulge their names, which is required in order to claim a whistleblower reward of 15% to 30% of any extra money collected as a result of their tip.

    Too many zeroes!

    While rounding numbers on your tax return to the nearest dollar is okay, rounding to the nearest thousand is not -- especially when itemizing deductions like business expenses, unreimbursed employee expenses and job hunting costs.

    If you submit figures like $5,000 in travel, $2,000 in auto expenses and $4,000 in meals and entertainment, it may look like you pulled those numbers out of thin air or inflated them by rounding -- since it's unlikely that every single expense was a perfect multiple of $1,000.

    Home Office

    After years of watching people abuse the home-office deduction, the IRS is on the look-out. In order to avoid being scrutinized, make sure you only claim reasonable expenses -- and only those that directly apply to the part of the home used as an office.

    And just because you do some work on your couch while watching TV doesn't mean it qualifies as a home office.  The credit can only be claimed if the home office is your primary place of business and is used exclusively for work. People get into trouble when the IRS suspects they are mixing personal costs with their business costs.

    Forgetting Income

    For people who earn money from various places, remembering to report every single cent can be difficult. But 'I forgot' isn't a legitimate excuse to the IRS.

    For any miscellaneous income over $600 you received throughout the year, the company you worked for should send you a Form 1099.  If you don't receive it for some reason -- it was mistakenly sent to a previous address, for instance -- you should assume that the IRS will still get it.  You can either request the missing form be replaced or simply report the income without the form. This is why it is important to track your income throughout the year.

    Of course, some people earn money that may not get reported on 1099s -- like side money made giving people haircuts. Even if the IRS doesn't know about it, you must report this income as well or you risk the agency finding out and nailing you for tax evasion.

    Questionable Deductions

    Sometimes claiming a tax deduction you know is a stretch just isn't worth the risk of an audit. One of the most common gambles: Writing off a swimming pool or Jacuzzi for medical reasons.

    Just because your back hurts doesn't make your pool or Jacuzzi deductible.

    To qualify, you must be able to prove that you purchased the pool or Jacuzzi solely to help with the treatment of a verifiable medical condition and this remains its primary purpose. If you don't have a doctor's prescription requiring the use of a pool or Jacuzzi, the deduction likely won't be allowed and it may lead the IRS to take another look at the rest of your return as well.

    Being Rich

    Not only do high-income taxpayers have more complicated returns, but they bring in much more revenue for the IRS with each mistake they make.  While only 1% of the overall population gets audited, the odds jump to 21% for taxpayers with income over $5 million and to 30% for those earning $10 million or more, according to the most recent statistics from the IRS.

    Even if you're not rich but live in a wealthy neighborhood, your return could raise questions about how you can afford to live there -- especially if you report surprisingly low income or a big business loss.

    Saying the wrong thing

    Watch what you say and who you say it to. Even if you're joking, you never know when a friend or neighbor will decide to rat on you. Talking with the press about personal or business information or making a public statement that doesn't match the information you provide to the IRS can also get you in trouble.  If a newspaper publishes a profile of your business in which you gloat about surging profits but you then post big losses on your tax returns, the IRS may start digging into your file.

    Celebrities have to be extra cautious. The New York State Department of Taxation went after baseball player Derek Jeter for state income tax, citing public statements he made "professing his love for New York" as part of its argument, according to legal documents from the state agency. That gave the agency enough of a reason to allege the baseball star was a resident of New York (not Florida, as he claimed).

    And who can forget Richard Hatch?  The very first winner of $1,000,000 on the television show “Survivor”.  When that income did not show up on his return, the IRS investigated him and sent him to prison.

    Wesley Snipes is supposed to get out of prison this year, having served his sentence for tax evasion.

    A LOT of driving for work

    With gas prices so high, who wouldn't want to write off all of their driving costs? But unfortunately, you can only deduct gas costs if the driving you did was for business purposes.

    The key to winning this fight with the IRS is to keep a mileage log and track your business miles by indicated where you drove, the miles (round trip, of course) and the business purpose for the trip.

    Exaggerated donations

    Even good deeds can spark suspicion at the IRS. If you report extremely high charitable contributions -- especially relative to your income -- make sure you have the proof to back it up.

    Receipts for cash donations of more than $250 are required in the event the IRS comes knocking.

    Donating items gets a little trickier; because it's common for people to think the items are worth a lot more than someone will actually pay for them. So it's important to be reasonable with your valuations.

    Business Losses

    If you own a business that is reporting losses year after year, the IRS may grow suspicious that it's actually a hobby. There's a rule-of-thumb saying you must have a profit in two out of five years -- if you don't have a profit the presumption is that you are not engaging in that activity to make a profit, thus is can be considered a hobby. The presumption can be rebutted but it’s difficult.

    Using a “shady” tax preparer

    If your tax preparer tries to convince you to claim deductions that sound too good to be true or to report income that doesn't line up with what you would have reported, watch out.

    You want a preparer that will get you the best refund possible -- but not if it means breaking the law.

    The IRS also recommends avoiding tax preparers who calculate their fees as a portion of a taxpayer's refund or promise taxpayers unattainable refunds.

     

    That last one kills us!  We here are Widget have the experience and education to know the law.  We also know when it's worth pushing into the grey areas of the law and when to avoid the black.  If we can assist you in avoiding, defending or living through an audit, please give us a ring.

  • Independent Contractor or Employee? IRS Audits are heating up!

    14 March 2013 / Uncategorized / Comments Off on Independent Contractor or Employee? IRS Audits are heating up!

    So you think because you don't withhold taxes and pay people with a 1099, that you are safe from all those payroll taxes?  Think Again!

    Internal Revenue Service auditors show up every day with little to no warning at businesses all over the country seeking to verify that outside contractors aren't, in fact, full-time employees.  These types of audits are part of a government crackdown on employers who misclassify workers as independent contractors to avoid paying payroll taxes, and other employment-related expenses.

    The legal distinction between full-time staff and independent contractors can be very confusing for many employers.  Even if everyone has been classified correctly, the audits are "nerve wracking" because tax law doesn't make it easy to distinguish between full-time staff and independent contractors doing full-time work.  The legal distinction can be confusing even for an employer with his decades of experience in the labor market.

    The appeal of using outside workers is growing as many small businesses struggle to stay lean. Some employers also are turning to contractors to avoid hitting the 50-employee threshold that would require them to pay for employees' health insurance, starting next year, under the federal health-care law, or pay a penalty.

    State studies have shown that local businesses misclassify anywhere from 10% to more than 60% of their workers as independent contractors. Many business owners blame the complex tax code, which doesn't offer black-and-white standards for telling the difference. The distinction is primarily based on the employer's degree of control over a worker, but there are a series of other factors. But such factors are open to interpretation and past court cases on the issue have had differing outcomes, providing little guidance.

    In the past three years, the IRS, working with the Labor Department and officials in more than a dozen states, set a goal of investigating 6,000 employers to ensure their workers are properly classified. Since September 2011, the government has collected $9.5 million in back wages for more than 11,400 workers who were misclassified as independent contractors by their employers as per the statistics provided by the Labor Department.

    The crackdown is aimed in part at boosting tax revenue. Employers don't pay or withhold income taxes, Social Security, Medicare or unemployment taxes for independent contractors, as they do for employees. The U.S. Treasury estimates that forcing employers to properly classify their workers—while tightening so-called "safe harbor" rules that provide them with leeway in determining who is and isn't an employee—would yield $8.71 billion in added tax revenue over the next decade.

    Despite the threat of a payroll audit, more small employers are finding that independent contractors are essential to remaining competitive. The number of small firms that rely on outside contractors, for everything from technology services and public relations to marketing and sales, has grown sharply over the past five years.

    Using independent workers gives employers flexibility to hire only when there is work to be done, and leaves them with fewer tax obligations—and thus less paperwork—than do regular full-time workers. Using contractors also can cut benefits costs: they typically aren't eligible for such benefits as health insurance and paid maternity leave.

    A Michigan State University study estimates that contractors can save employers as much as 40% on labor costs. Indeed, some business owners say the IRS audits could stifle their ability to grow as demand picks up.  A payroll audit is a major disruption for a small business.   In addition to the legal expenses, the downtime is just not worth taking the risk.

    Rather than risk an audit, and perhaps costly penalties many small-businesses are rushing to convert any long-term contract workers into permanent staff.  In January, the IRS extended an amnesty program designed to encourage employers to voluntarily reclassify contractors as employees by waiving some penalties. Under the program, employers pay as little as 1% of the wages paid to their reclassified workers the previous year, rather than the full amount they owe in back taxes. So far over 1,000 employers have signed on since the program was launched in 2011.

    In recent years, Congress has proposed various bills to clarify the definition of independent contractors, including as recently as December, though none of them have passed. Without a clear definition of who counts as an independent contractor, many employers don't know whether they are complying with tax rules until they get audited.

    The IRS provides a wealth of information on the topic, and a review of Form SS-8 can assist employers with many of the questions they should be asking when making this critical decision.  The link to the IRS is:

    http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-%28Self-Employed%29-or-Employee%3F

    At Widget, we are here to help.  If you would like assistance in this area, please feel free to give us a call!

  • IRS has finally gotten it together!!! Well at least a little bit!

    09 February 2013 / Uncategorized / Comments Off on IRS has finally gotten it together!!! Well at least a little bit!

    Effective Sunday, February 10, 2013, the IRS will begin processing 2012 returns with Form 4562, Depreciation and Amortization. This includes all return types - 1040, 990, 1120, 1120S and 1065.  For many this was the sole hangup in their return.  Thank goodness because the e-file forms are starting to pile up!

    On Thursday, February 14, 2013, the IRS plans to begin processing 2012 returns with Form 8863, Education Credits. A nice Valentine's Day gift, IRS, Thank You!

    The following tax forms will be accepted by the IRS in late February or into March after updating forms and completing programming and testing of its processing systems.  A specific date will be announced in the near future.  The more common forms are bolded.

    • Form 3800 General Business Credit
    • Form 4136 Credit for Federal Tax Paid on Fuels
    • Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
    • Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
    • Form 5695 Residential Energy Credits
    • Form 5735 American Samoa Economic Development Credit
    • Form 5884 Work Opportunity Credit
    • Form 6478 Credit for Alcohol Used as Fuel
    • Form 6765 Credit for Increasing Research Activities
    • Form 8396 Mortgage Interest Credit
    • Form 8582 Passive Activity Loss Limitations
    • Form 8820 Orphan Drug Credit
    • Form 8834 Qualified Plug-in Electric and Electric Vehicle Credit
    • Form 8839 Qualified Adoption Expenses
    • Form 8844 Empowerment Zone and Renewal Community Employment Credit
    • Form 8845 Indian Employment Credit
    • Form 8859 District of Columbia First-Time Homebuyer Credit
    • Form 8864 Biodiesel and Renewable Diesel Fuels Credit
    • Form 8874 New Markets Credits
    • Form 8900 Qualified Railroad Track Maintenance Credit
    • Form 8903 Domestic Production Activities Deduction
    • Form 8908 Energy Efficient Home Credit
    • Form 8909 Energy Efficient Appliance Credit
    • Form 8910 Alternative Motor Vehicle Credit
    • Form 8911 Alternative Fuel Vehicle Refueling Property Credit
    • Form 8912 Credit to Holders of Tax Credit Bonds
    • Form 8923 Mine Rescue Team Training Credit
    • Form 8932 Credit for Employer Differential Wage Payments
    • Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit

    We at Widget are "on top" of the forms as they are released by the IRS.  We will keep you updated as we get deeper into tax season!

  • How to avoid getting audited - Avoid the "Red Flags"

    07 February 2013 / Uncategorized / Comments Off on How to avoid getting audited - Avoid the "Red Flags"

    Be aware of audit flags when filing!

    Increasingly, the Internal Revenue Service has been chasing the big tax cheats and top earners to uncover missing tax revenue. But don’t think you’re immune to an IRS audit just because you’re a middle-class working stiff. Often, a simple mistake or an honest deduction in an area rife with abuse means that you could wind up getting audited anyway.

    Most average Americans think their chance of an audit is slim, and that’s not altogether untrue. Millionaires and big corporations have a higher chance to be audited because they have a bigger tax obligation. Beyond these big guys, only about 1 percent of individuals taking home less than $200,000 annually are audited each year.

    But while the IRS is understaffed, it isn’t foolish; systems are in place to identify those most likely to be tax cheats, and separate them from run-of-the-mill filers, regardless of income levels.  If your return boasts something the IRS sees as a red flag, it can dramatically increase the likelihood of an audit to your 2012 filing.  Here are five important items on your tax return that could grab unwanted attention from the tax man:

    Not reporting all your income. This may seem obvious, but you must declare every penny you earned. Even the slightest variation from your filing and official IRS income records will raise red flags.  If you briefly held a temp job or did one or two freelance projects, you better track down the extra 1099s and W-2s no matter how small the income. If you miss them, there’s a chance the IRS will flag your return simply because the numbers don’t add up.

    Minor mistakes on major information. A common audit prompt is a simple mistake regarding crucial information. Maybe you mixed up some numbers in your spouse’s Social Security number or forgot to carry the 2 when adding up your adjusted gross income (please...if you don't hire a CPA, at least use software!). The mistake may be honest, but unfortunately, IRS auditors don’t like mistakes.  If you’re a do-it-yourself filer, you should double-check every single line before submitting your form.

    Home office deductions.
    These deductions were abused for years by people who did a little work in the den in exchange for a lot of tax benefits they might not have deserved. The IRS frequently audits those claiming home office deductions, making them prove “exclusive use” for business purposes (if you have a daybed in the room...it's NOT exclusive!!).  This is not to say you can’t claim a home office, of course, and those who are eligible can win big deductions for property taxes, utilities and insurance, among other items.  However, complying with IRS guidelines is key, or your deductions won’t survive the audit. That means no double-duty with the office functioning as a guest bedroom or a playroom for the kids, and avoiding seemingly benign dual uses, including stowing skis or Christmas ornaments in the closet!

    Frequent business vehicle use.
    Just as it’s easy to mix personal with business use in a home office, business vehicles are ripe for unqualified deductions and a red flag for auditors. Listing a business vehicle use on your tax form can warrant IRS attention whether you deserve it or not. This doesn’t mean you can’t claim a business vehicle, but make sure you have a detailed log with the date, destination and mileage for each trip – and that you don’t include stop-offs for coffee or dry cleaning.  It’s very rare for a vehicle to be solely for work (100% business use) without a single personal trip all year, so be honest when you file, and be aware that heavy business vehicle use means the tax man could likely come looking for your mileage log down the road.

    Business “entertainment.”
    If you’re self-employed, it’s tempting to claim lots of meals and travel on your tax return. However, while Schedule C allows for big-time deductions, it also historically has been a source of big-time overstatement. That means the IRS watches these kinds of items like a hawk.  If you’re claiming business-related trips and entertainment, it’s crucial to keep detailed records and receipts of who was there and what business was discussed at the meeting. Many Americans try to sneak in personal expenses, and that means even honest filers risk a red flag by claiming these kinds of deductions.

    We here at Widget do NOT want you to be audited.  We preach good accounting and documentation to our clients so that the audit flags are minimized and that if they ARE audited, they will survive with their deductions intact.  If we can help you, please give us a call!

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