The Latest Tax Tips

Tax Tips for Small Business
Summer 2010

New Health Care Law Brings Changes
Expanded coverage for older children now available

In today’s economy, many parents have adult children who still rely on them for some financial support. As a result of the recently passed landmark health legislation that overhauls the current health care system, many adult children may now be able to rely on their parents for assistance with health care coverage as well.

The Affordable Care Act requires group health plans and health insurance issuers who provide dependent coverage of children to continue to make such coverage available for an adult child through age 26. If your business has a group health plan that covers your employees’ children, the health plan must now cover children until they turn age 27. Until this change was made, many health plans applied lower age limits and also required that the child qualify as a dependent of the parent for tax purposes. Under the new Act, a child is any son, daughter, stepchild, adopted child, or eligible foster child.

This expanded benefit also applies to retiree health plans and to self-employed business owners who take the self-employed health insurance deduction on their tax return. Unlike some of the health care measures that don’t take effect right away, this provision is effective beginning March 30, 2010.

The IRS recently stated that employers with cafeteria plans may permit employees to immediately make pre-tax contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. So if your business has a cafeteria plan, this option is available right away. Keep in mind that the IRS also stated that businesses have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

Employer-Provided Adoption Benefits
New changes in 2010

Recent revisions to the law have changed the incentives available in the tax code for taxpayers who adopt. This may be a good time for your business to offer adoption assistance benefits to your employees. Due to the law change, the tax-free amount you can provide to an employee has been increased by $1,000, for a maximum of $13,170 in 2010.

Accountable Plans
Do you qualify for this money-saving vehicle?

Payroll taxes are a big cost of doing business, and any way you can save money is always worth looking into. One way to save on payroll taxes is to use an accountable plan. Under this plan, you save money on payments you make to employees for reimbursements of expenses or advances made in anticipation of such expenses.

The great advantage of an accountable plan is that it saves the employer money because reimbursements made to the employee do not have to be counted as wages to that employee. For this reason, the employer does not have to pay any of the related payroll taxes on those amounts, nor is the employee’s reimbursement reduced by FICA taxes. It’s a win-win situation.

In order to have an accountable plan, you must have a written document that meets the following three requirements: 

• Business Connection. The plan pays reimbursements and allowances only for deductible business expenses. This might sound obvious, but it needs to be included in the document. The business must observe this requirement at all times. 
• Adequate Substantiation. The plan requires substantiation of the expenses being reimbursed. The employee accounts for the expenses by submitting a written report to the company that details and substantiates the time, place, amount, and business purpose for every expense.
• Employees Must Return Any Extra Advances. The plan must require the employee to pay back any advances that exceed the business expenses he or she incurred. If extra amounts are not paid back to the employer, they are treated as wages to the employee, subject to payroll tax withholding. This would defeat the entire purpose of having an accountable plan in the first place.

It’s never too late to set up an accountable plan and begin enjoying the tax savings right away.

Starting a New Business?
Know what expenses to deduct

If you started a new business this year, chances are you have incurred certain costs that may require special treatment on your tax return. These expenses, appropriately called start-up costs, may include fees you paid for professional and consulting services. They also include money you spent on advertising or lining up suppliers and distributors.

If the total amount of these expenses does not exceed $50,000, you can deduct up to $5,000 in the year you start the business. Any amount over $5,000 is amortized (similar to depreciation) over 15 years. If the expenses are more than $50,000, you generally are not allowed this option and will have to amortize the total costs over a 15-year period. For businesses that qualify, the ability to expense $5,000 of start-up costs is a great option.

Employee Theft
Claiming the loss

With the current economic downturn, some experts suggest that employee theft will increase. So, what can business owners do if they become a victim?

Normally the loss will be in the form of embezzlement or result from the theft of a company’s inventory. Both situations involve an employee’s unauthorized taking of assets that belong to the company with no intent of returning them.

If your company is underinsured or not insured at all for these types of losses, there is relief available for you in the tax code. A deduction for a theft loss can be taken in the year of discovery. In other words, if an employee embezzled funds from you several years ago and you did not discover the scheme until now, you are still able to deduct the loss in the current year. 
 
Before taking the deduction, you’ll need to prove that the loss happened and when it happened. However, if you take the time to meet these requirements, you can at least make the most out of a bad situation. Keep in mind that the loss deduction you receive is reduced by any insurance reimbursement you are entitled to receive.

Flexible Spending Arrangements
A low-cost benefit for your employees

Are you looking for a way to help employees pay for unreimbursed out-of-pocket medical or dependent care expenses? A flexible spending arrangement (FSA) could help employees pay for these expenses with pre-tax dollars.

An FSA is typically funded through employee voluntary salary reduction contributions. The employee chooses how much money to have withheld from his or her paycheck during the year to be used for FSA purposes. As the employer, the business is permitted (but not required) to make contributions to the FSAs for each employee. One drawback is that this is a use-it-or-lose-it benefit, so the employee would generally have to forfeit any amounts not used by the end of the plan year. 

One advantage for the business owner is that this type of employee benefit is generally very affordable to offer. The only expense you would have is the cost of administering the plan. However, this cost can be minimized by outsourcing this function to a third-party administrator, which is what many businesses do.

Like-Kind Exchanges Provide Tax Deferral
Could it work for your business?

Are you planning to sell business property that has appreciated in value and then purchase like-kind property a short time later? The tax code provides special rules that allow you to defer the tax on the gain you realized as long as you meet certain requirements set forth in the rules for like-kind exchanges. These transactions are sometimes called tax-free transactions, but that term is inaccurate because you’re really deferring the gain on the sale of the first property into the property you acquired in the like-kind exchange. By deferring the gain, you don’t have to pay tax on the gain until you sell the new property.

For example, assume you own a building and sell it for a $1 million gain, and then buy another building for $3 million 60 days later. If you follow the rules for like-kind exchanges, you can defer the gain when you sell the first building by reducing your basis in the second building by $1 million, creating a $2 million basis in the newly acquired building.

The code allows for this tax deferral based on the position that by changing from one property to another, you are still in the same economic position. Basically you defer the tax until you sell the second property.

However, there are still some formalities that need to be met, so it’s important to meet with your tax professional to be certain that the transaction is set up properly.

Simplified Employee Pensions
The easiest retirement plans to set up and administer

Despite the many advantages of qualified retirement plans, many small business owners don’t take the time to sit down with their tax preparer and discuss the options that are available to them. If you are a small business owner, a Simplified Employee Pension (SEP) may be a good option to explore.

A SEP is a form of IRA arrangement with you, as employer, making contributions to your own SEP IRA. The amount that can be contributed and deducted to your SEP account is based on the income from your business.

Start-up costs for a SEP generally are low because you can use a prototype plan instead of creating a plan of your own. Reporting requirements also are minimal when there is a single participant in the plan.

If your tax return is on extension, you might even be able to set up a SEP in time to get some deductions for the 2009 tax year. The deadline for establishing a SEP and making the contribution for the year is the income tax return due date for the year, plus filing extensions. A SEP is the only type of plan that you can set up after the year has ended.

Quick Tips

1. The standard mileage rate for business travel in 2010 is 50¢ per mile.
2. The maximum amount of wages subject to social security tax is $106,800 in 2010. There is no limit on wages subject to Medicare tax.
3. For 2010, the maximum expensing amount under §179 is $250,000, which is reduced dollar-for-dollar by the amount of §179 property placed in service during the year that exceeds $800,000.
4. Up to $230 per month in employer-provided transit and vanpooling benefits can be provided as a tax-free fringe benefit to employees in 2010.
5. Maximum employee elective deferrals to 401(k) or 403(b) plans are $16,500 for 2010.
6. The maximum amount your business can contribute to your employees’ health savings accounts in 2010 is $3,050 for employees with self-only coverage and $6,150 for employees with family coverage.
7. The depreciation limit for a truck or van used in business and placed in service in 2010 is $3,160.
8. Employer-provided dependent-care assistance benefits of up to $5,000 are excludable from employee wages.
   

Tax Tips for Small Business
Winter 2009/2010

Employee or Independent Contractor?
Determining the proper worker status

When you hire someone to work in your business, that individual will either be an employee or independent contractor for tax purposes. Failure to properly classify the worker can subject you to an IRS audit and possibly interest and penalties for failing to withhold and deposit payroll taxes. Under common-law rules, if you have control over what work is being done and how it will be done, you are generally regarded as an employer and the worker is considered your employee.

The IRS uses three factors to determine the proper worker classification. Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. Behavioral control looks at the type of instruction given, the degree of instruction, an evaluation system, and training.

The second factor is financial control. Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job. Financial control factors consist of significant investment, unreimbursed expenses, opportunity for profit or loss, services available to the market, and method of payment. If you provide the tools and supplies to do the job, set the work hours, provide the location where the work is performed, and can hire or fire the worker, chances are this worker is classified as an employee. However, if the worker provides his own tools and supplies, performs services for an agreed price, performs these same services to others, and maintains control over how the work is completed, the worker is more likely an independent contractor.

The third factor is the type of relationship between you and the worker. Under type of relationship, take into consideration any written contracts, employee benefits, permanency of the relationship, and services provided as the key activity of the business. An employee will be hired for a long-term relationship and employee benefits will generally be provided.

You must weigh all of these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate an independent contractor. The key is to look at the entire relationship you have with the worker, consider the degree or extent of the right to direct or control, and finally document each of the factors used in arriving at a determination.

If you are unsure whether your newly hired worker is an employee or independent contractor, you may file Form SS-8 with the IRS. They will assist you in making a proper determination, thus avoiding mistakes, audits, and additional taxes and penalties.

New Forms to Correct Employment Returns
Do you need to make an adjustment?

The IRS has released the following new forms:

• Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, used to correct errors on Forms 941 and 941-SS. Form 941c can no longer be used.
• Form 943-X, Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim for Refund, used to correct errors on Form 943.
• Form 944-X, Adjusted Employer’s Annual Federal Tax Return or Claim for Refund, used to correct errors on Forms 944 and 944-SS.
• Form 945-X, Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund, used for adjusting prior filed employment forms and to fix errors on Form 945.

Qualified Transportation Fringe Benefits
New bicycle commuting reimbursement for 2009

The value of qualified transportation fringe benefits you pay to your employee is generally excluded from the employee’s wages for 2009 up to certain limits. For commuter highway vehicle transportation and transit passes paid during January and February 2009, the limit is $120 per month. The amount increased to $230 a month on March 1, 2009. Qualified parking is $230 per month. For each calendar year, $20 multiplied by the number of qualified bicycle commuting months during the year is the qualified bicycling commuting reimbursement.

A qualified bicycle commuting month is defined as any month the employee regularly uses a bicycle for a substantial portion of the travel between the employee’s residence and their work place. The employee cannot receive any other transportation fringe benefits during these months.

The employee can be reimbursed for the purchase of the bicycle and bicycle improvements, repairs, and storage. These expenses are considered reasonable as long as the bicycle is regularly used as transportation between the employee’s residence and work place. 

Employer-Provided Educational Assistance
Giving back to your employees

You can provide your employees with tax-free education assistance by offering an educational assistance program. This allows you to provide up to $5,250 for tuition, fees, books, and supplies for classes without having to include the amount in an employee’s wages. Both undergraduate and graduate level courses qualify for the assistance. The classes need not be job-related to qualify.

Choosing the §179 Expense Deduction
Take advantage of year-end equipment purchases

Each year, the IRS allows a business to write off the cost of purchased equipment. For 2009, the maximum amount allowed is $250,000. The equipment can be purchased and placed in service at any time during the tax year. Even if you wait until the last day of the year to purchase and place in service a piece of equipment, you are allowed the full $250,000 deduction.

The $250,000 maximum is reduced dollar-for-dollar if your asset purchases exceed $800,000. This means that if you purchase $1,050,000 of eligible §179 properties during 2009, no deduction is allowed. Another limitation is that the §179 deduction cannot exceed your taxable business income. Business income includes the income from your trade or business plus wages received by you or your spouse, if married filing jointly.

Going Out of Business?
Know the tax consequences before closing your doors

You can close your business by selling all of the assets or converting the assets to personal use. The tax consequences of selling your business depend on whether you are operating a sole proprietorship or corporation. As a sole proprietor, if you sell all the assets of your business, you report the sale of each asset separately to determine the gain or loss. If you close your sole proprietorship business and keep all the assets to use personally, there may be some tax on recapture of depreciation.

When you want to end your corporate business, you can either sell the stock or the assets. If the assets are sold, the corporation pays the tax on any gain. As the shareholder, you don’t  have any tax consequences unless the corporation liquidates and distributes the proceeds to you in exchange for your stock. If the stock is sold, you report the sale of your corporate stock on your personal tax return.

If you take the assets out of the corporation, gain or loss is recognized on the liquidating distribution of assets as if the corporation sold the assets to you at fair market value. You, as the shareholder, do not have any tax consequences unless the fair market value of the assets distributed exceeds your stock basis.

As with any sales contract, it’s important to determine the tax consequences before signing on the dotted line.

Health Savings Accounts (HSAs)
What are the employer contribution limits for 2009?

An HSA is a tax-exempt custodial account set up to pay or reimburse your medical expenses incurred during the year. The HSA is set up with a qualified HSA trustee. Eligible individuals must: (1) be covered under a high deductible health plan (HDHP) on the first day of the month, (2) have no other health coverage, (3) not be enrolled in Medicare, and (4) not be claimed as a dependent on someone else’s tax return.

The amount that you can contribute to an HSA depends on your type of HDHP, age, and date of eligibility. The date you are no longer eligible must also be considered if applicable. Employers can contribute up to a specified dollar limit, which is exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2009, the employer can contribute up to $3,000 ($4,000 if age 55 or older) if you have self-only coverage under a HDHP or up to $5,905 ($6,950 if age 55 or older) if you have family coverage under an HDHP.

Business Credits
You could be eligible

Business owners are eligible for a variety of tax credits. Here are a few credits you may qualify for:

• Alcohol Cellulosic Biofuel Fuels Credit. This credit varies depending on the alcohol proof percentage and the type of alcohol.
• Alternative Motor Vehicle Credit. This credit is available for certain new vehicles purchased and placed in service for business use during the tax year. There are five components to this credit.
    (1) Qualified fuel cell motor vehicle credit;
    (2) Advanced lean burn technology motor vehicle credit;
    (3) Qualified hybrid motor vehicle credit;
    (4) Qualified alternative fuel motor vehicle credit; and
    (5) Plug-in conversion credit.
• Alternative Fuel Vehicle Refueling Property Credit. This credit has been increased to 50 percent of the cost of qualifying property up to $50,000 per location ($200,000 for hydrogen).
• Disabled Access Credit. This credit amount equals 50 percent of the eligible access expenditures for the tax year between $250 and $10,250, with a maximum credit of $5,000.
• Employer Provided Child Care Credit. Employers who provide in-house child care for their employees’ children qualify for this credit. The credit cannot exceed $150,000 for the year.
• Small Employer Pension Plan Start-Up Cost Credit. This 50-percent credit applies to the first $1,000 in administrative expenses over the first three years to set up an employer pension plan and is limited to $500 per year.
• Tip Credit. This credit is determined based on the federal minimum wage per hour rate. It is equal to 7.65 percent of the tips in excess of the amount needed to make up the minimum wage rate level. If the tip credit is claimed, the related social security taxes cannot be deducted.

Compensating an S Corporation Shareholder
What is considered reasonable?

If you are a corporate officer of an S corporation performing services for the corporation, you must pay yourself a reasonable salary. The IRS has not defined reasonable compensation in the code or regulations. However various courts have ruled on this issue based on the facts and circumstances of each case. Some of the factors the courts look at to determine reasonable compensation include training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, payments to non-shareholder employees, timing and manner of paying bonuses to key people, what comparable businesses pay for similar services, compensation agreements, and the use of a formula to determine reasonable compensation. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. The IRS could reclassify these amounts as compensation to the shareholder/employee resulting in additional taxes and penalties for the S corporation. 

Keeping Good Records
Why it’s important for your business

A business owner who keeps good records is able to easily monitor the progress of his or her business. Records can show whether the business is improving, what items are selling, or what changes may be necessary to make it more profitable. Keeping good records can increase any business owner’s chances of success.

Records are needed to prepare your financial statements. Income statements and balance sheets are used to prepare your income tax returns. Saving your receipts makes it easy to keep track of which expenses are business-related and which ones are not. Keeping good records also helps you to distinguish between taxable and nontaxable income.

Keeping track of expenses lessens the chance that you’ll forget which expenses need to be deducted when it comes time to prepare your tax return. Any record that supports the information reported on your tax return is a record worth saving. If the IRS audits your tax return, having a complete set of records for the year in question will speed up the examination process.

Quick Tips

1. The maximum depreciation deduction you can take for a truck or van used in business and first placed in service in 2009 is $3,060 ($11,060 for trucks and vans for which the special depreciation allowance applies).
2. Your employer contributions to a profit-sharing, SEP, or a SIMPLE plan are due by the time you file your tax return unless you have a valid extension. If your tax return is on extension, you have until the extended due date to make the contribution.
3. The maximum employee elective deferral amount for a §401(k) or §403(b) plan is $16,500 for 2009.
4. Employers are required to issue W-2s to employees by January 31 of each year.
5. The standard mileage rate for business travel in 2009 is 55 cents per mile.
6. Are you giving gifts to your clients this holiday season? You are allowed a deduction for up to $25 for each business-related gift.
7. The maximum amount of wages subject to social security for 2009 is $106,800. There is no limit on the amount of wages subject to Medicare tax. 
8. The 10-year rule for built-in gains tax on S corporations has been reduced to 7 years for tax years beginning in 2009 or 2010. This tax only applies to S corporations that used to be prior C corporations.
9. The exclusion for gain on the sale of qualified small business stock has increased to 75 percent for stock acquired after February 17, 2009, and before 2011.