Floods can be a good thing. The IRS and Massachusetts have extended the deadline to file and pay your 2009 income taxes to May 11. They also have extended the time to pay some of your payroll taxes. Here is a link to get all the details. That is still due on April 15th. However, they may change this as well. I will keep you posted.
Correction 9:30Am 4-2-10 Estimates also are extended
Click on the title to see the IRS notice.
Friday, April 2, 2010
Thursday, January 28, 2010
Whistle Blower Policy
We had some big business scandals in the early part of the new millennium. Accounting fraud at companies like Enron and Worldcom, and theft from companies like Tyco were in the headlines almost daily. Business executives were treated to the “perp walk” on a regular basis, partly to prove that the government was doing something about them. The end result was a lot of people lost a lot of money because of a few arrogant #$%^&*.
Non-profits were directly affected by these scandals. There is now more scrutiny of how non-profits do their work, and concern when any individual at the non-profit gets a salary over $150,000. (Maybe the big banks should get some of this scrutiny. But that’s off topic.) There has always been a concern when a non-profit spends more than 20% of its revenue on administration and fund raising.
The law passed to deal with business ethics, Sarbanes-Oxley, now requires that non-profits have a Whistle Blower Policy. A Whistle Blower Policy details the organization’s response to someone who reports alleged inappropriate activity within the organization. It protects the Whistle Blower from retaliation and gives a process for reporting the questionable activity. Many organizations do not know that this requirement exists, but the new IRS Form 990 now has a question about this.
What’s a non-profit to do? They can spend thousands of dollars with an attorney to create a customized policy. This is appropriate for large organizations like colleges and the United Way. There even are companies that enable an organization to outsource their response to people who report inappropriate activity.
Smaller organizations have an alternative. They can use a template to establish a policy. Here is a good site where you can get such a template.
http://www.blueavocado.org/content/model-whistleblower-policy-nonprofits
Take a look and try it out.
Non-profits were directly affected by these scandals. There is now more scrutiny of how non-profits do their work, and concern when any individual at the non-profit gets a salary over $150,000. (Maybe the big banks should get some of this scrutiny. But that’s off topic.) There has always been a concern when a non-profit spends more than 20% of its revenue on administration and fund raising.
The law passed to deal with business ethics, Sarbanes-Oxley, now requires that non-profits have a Whistle Blower Policy. A Whistle Blower Policy details the organization’s response to someone who reports alleged inappropriate activity within the organization. It protects the Whistle Blower from retaliation and gives a process for reporting the questionable activity. Many organizations do not know that this requirement exists, but the new IRS Form 990 now has a question about this.
What’s a non-profit to do? They can spend thousands of dollars with an attorney to create a customized policy. This is appropriate for large organizations like colleges and the United Way. There even are companies that enable an organization to outsource their response to people who report inappropriate activity.
Smaller organizations have an alternative. They can use a template to establish a policy. Here is a good site where you can get such a template.
http://www.blueavocado.org/content/model-whistleblower-policy-nonprofits
Take a look and try it out.
Tuesday, January 26, 2010
Charity for Haiti
Who says the government cannot move quickly?
Congress passed a new law that allows you to deduct the charitable contributions you make to Haiti relief in 2010 on your 2009 tax return. President Obama has signed the bill into law.
This means write the check now and get the tax benefit on the return you will file shortly.
Congress passed a new law that allows you to deduct the charitable contributions you make to Haiti relief in 2010 on your 2009 tax return. President Obama has signed the bill into law.
This means write the check now and get the tax benefit on the return you will file shortly.
Wednesday, January 20, 2010
File Free With the IRS
This is a repeat blog from a year ago. The only thing that changed was the dollar limitation.
Do you have a simple federal tax return to file? You can do it on-line free through the IRS. You qualify if you receive a W-2 from your employer, and have some interest and dividend income. You even can own a home and qualify. The major restriction is that all of your income must be below $57,000.
You can file your return through an IRS partner, or you can complete the tax forms found on the IRS Web site at http://www.irs.gov/app/picklist/list/formsInstructions.html This is a fast, easy, and free way to file your return. Would you like to have your refund in less than 3 weeks? You can have it deposited directly into your checking account. Have a personal check in front of you when you file your return so you have the numbers they require to take advantage of direct deposit. This system is appropriate only for uncomplicated returns.
This link to the IRS Web site can help you file your return.
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=4
Massachusetts also offers a webfile alternative. Access it here
https://wfb.dor.state.ma.us/income/Default.aspx
If the link does not work. Please copy and paste it into your browser
Do you have a simple federal tax return to file? You can do it on-line free through the IRS. You qualify if you receive a W-2 from your employer, and have some interest and dividend income. You even can own a home and qualify. The major restriction is that all of your income must be below $57,000.
You can file your return through an IRS partner, or you can complete the tax forms found on the IRS Web site at http://www.irs.gov/app/picklist/list/formsInstructions.html This is a fast, easy, and free way to file your return. Would you like to have your refund in less than 3 weeks? You can have it deposited directly into your checking account. Have a personal check in front of you when you file your return so you have the numbers they require to take advantage of direct deposit. This system is appropriate only for uncomplicated returns.
This link to the IRS Web site can help you file your return.
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=4
Massachusetts also offers a webfile alternative. Access it here
https://wfb.dor.state.ma.us/income/Default.aspx
If the link does not work. Please copy and paste it into your browser
Sunday, January 10, 2010
The Estate Tax
2010 is a great year to die.
One of the Bush administration tax cuts enacted early in his presidency was a phase out of the Estate Tax. Each year the taxes collected by the estate tax was reduced as larger and larger estates were protected by a rising exemption. Well, this is the year of the final phase out.
What is the estate tax? It is a tax on the value of all your assets less any liabilities, such as your home mortgage, when you die. So if you have a house worth $400,000 and a mortgage of $100,000 (you wish), plus some investments worth $500,000, you have an estate worth $800,000. Check my math if you wish.
Once you figure out the value of your estate, you go to a chart and calculate what your estate tax will be. Someone dying in 2009 would need a net estate of $3,500,000 before they would pay any estate tax. (Don’t you wish you had an estate that large?)
2010 is the year that the estate tax goes completely away. So no matter what the size of your estate, there will be no estate tax on it. For anyone with a taxable estate, that is good news. For someone with an estate less than $3,500,000, it is bad news.
Let me explain. Up until 12/31/09, assets you inherited got a step up in tax basis. Supposed your grandfather paid $1 per share for 1000 shares of IBM stock back in 1955. It now sells for about $130 per share. So the stock that your grandfather bought for $1000 is worth $130,000. If your grandfather died on 12/31/09and you inherited his stock, your tax basis would be stepped up from $1 per share to $130 per share. So if you sold it for $140 per share you would only pay tax on $10,000 ($140 per share minus the ‘cost” of $130 per share times 1000 shares). Under current tax law your tax would be about $2000.
If he died on 1/1/10 your tax cost would be what he paid for it or $1 per share. So you would pay tax on a $139,000 gain if you sold it for $140 per share. The tax would be about $28,000. This is quite a difference.
Back in the middle of the Great Health Care Debate, Congress considered changing the law to freeze the Estate Tax at the 2009 level. The change got lost in the GHCD. I expect some sort of change to occur this year but who knows what form it will take. Watch this blog for updates.
One of the Bush administration tax cuts enacted early in his presidency was a phase out of the Estate Tax. Each year the taxes collected by the estate tax was reduced as larger and larger estates were protected by a rising exemption. Well, this is the year of the final phase out.
What is the estate tax? It is a tax on the value of all your assets less any liabilities, such as your home mortgage, when you die. So if you have a house worth $400,000 and a mortgage of $100,000 (you wish), plus some investments worth $500,000, you have an estate worth $800,000. Check my math if you wish.
Once you figure out the value of your estate, you go to a chart and calculate what your estate tax will be. Someone dying in 2009 would need a net estate of $3,500,000 before they would pay any estate tax. (Don’t you wish you had an estate that large?)
2010 is the year that the estate tax goes completely away. So no matter what the size of your estate, there will be no estate tax on it. For anyone with a taxable estate, that is good news. For someone with an estate less than $3,500,000, it is bad news.
Let me explain. Up until 12/31/09, assets you inherited got a step up in tax basis. Supposed your grandfather paid $1 per share for 1000 shares of IBM stock back in 1955. It now sells for about $130 per share. So the stock that your grandfather bought for $1000 is worth $130,000. If your grandfather died on 12/31/09and you inherited his stock, your tax basis would be stepped up from $1 per share to $130 per share. So if you sold it for $140 per share you would only pay tax on $10,000 ($140 per share minus the ‘cost” of $130 per share times 1000 shares). Under current tax law your tax would be about $2000.
If he died on 1/1/10 your tax cost would be what he paid for it or $1 per share. So you would pay tax on a $139,000 gain if you sold it for $140 per share. The tax would be about $28,000. This is quite a difference.
Back in the middle of the Great Health Care Debate, Congress considered changing the law to freeze the Estate Tax at the 2009 level. The change got lost in the GHCD. I expect some sort of change to occur this year but who knows what form it will take. Watch this blog for updates.
Wednesday, December 23, 2009
Year End Tax Planning
The best motivation for planning your taxes is to legally minimize how much of your money goes to the IRS. Many years ago, Judge Landis of the U.S. Supreme Court declared that everyone has the right to legally minimize his or her taxes. To do this, you need to have an idea of what your income and deductions are now, and what you expect them to be next year. You must then move income and deductions in a way that minimizes what you pay in taxes this year. Sometimes it is worth paying taxes now in order to save even more in taxes next year.
However, ” take the money and run” is a valid alternative. In this case you worry about tomorrow tomorrow. You delay as much income as possible to next year and accelerate as many of your deductions as you can to this year. This way, you pay the least taxes possible.
Step One: Analyze your situation. Will you be paying taxes this year? If so what is your tax bracket? Are you in the 15% bracket or the 35% bracket? If you are in the lower tax bracket you will only get back $15 for every $100 you lay out for a deductible expense. If you are in the 35% bracket then the deduction gets more attractive.
Step Two: Determine where you think you will stand next year. Will you be in a higher or lower tax bracket? With the way the economy went in 2009, many people will have a better year in 2010.
Step Three: Set your goal. Do you want money now or later?
Delaying income is tough when you have a job, a house, and no other tax complications. You get your salary each week and it is hard to push it off to next year. It might happen if you get a year-end bonus that might get paid in 2010. Your interest income or dividends is paid on a set schedule, so you cannot postpone them to next year.
Here are some ways to legally delay income to next year:
· Weigh your options if you are thinking of selling some common stocks. If you have gains, you may want to wait until January to realize them. That way you are not liable for the taxes for a year. If you have losses, then take them this year. However, always make a good investment decision first. If it’s time to sell then don’t worry about the tax consequences.
· If you are self-employed you can delay billing your customers so that you receive the income next year rather than this year. Please note, if you receive the money this year, you are legally required to report it this year. Keeping a drawer full of checks that you get in December and then deposit in January is illegal. You should report all your income in the year you receive it.
Here are some ways to accelerate your expenses
· Pay your mortgage before Christmas. That way the bank will include the interest you normally would pay in January on their annual statement for this year, making it easier to deduct it.
· If you are making donations to your favorite charity, make them by the end of December, rather than in January. If you mail the check on December 31st, you can deduct it on your 2009 tax return.
· If you have a lot of junk, (oops, I mean valuable furniture and other items), you can consider donating them to charity and getting a tax deduction for it. You must get a receipt if it is worth more than $250, and you must provide additional information on your return if it is over $500. Really valuable items might require an appraisal. Be careful, the appraisal might cost more than the tax benefit of making the donation. Generally charities will not value the items for you. They will just say that you gave them seven bags of clothing.
· If you were looking for a job in 2009, keep track of your job search expenses. They can be used as itemized deductions to reduce your taxes. Some examples of these expenses would be the cost of printing your résumé, fees for help in your job search, or hiring a career coach to help your efforts. However, the total must be above 2% of your income to reduce your taxes.
· Often the biggest job search expense is the use of your automobile for your search. Keep track of the mileage for getting to the printer, going to various employment agencies or job fairs, and traveling to interviews. Write it all down to make sure you get the benefit of all the mileage.
· If you pay your real estate taxes yourself rather than through a bank’s escrow account, you can pay them in December rather than January. That way you can deduct them this year.
· Medical expenses must be more than 7.5% of your total income to be deductible. Look at your income and medical expenses and pay any outstanding medical bills this year if you are over this limit. If you are paying for your own health insurance, you should not have a problem exceeding this limit.
Here are some suggestions for the Self-Employed: (These only should be used if you have a good business purpose in spending the money. New “toys” like the newest fanciest computer, don’t make good financial sense.)
· You can write and mail the checks for your business expenses on December 31st and deduct them on your 2009 return. This includes expenses like rent or office supplies.
· Items you charge on a bank credit card can be deducted when they are purchased rather than when you pay the charge card bill. So those office supplies you bought in late December on your Visa card are deductible in 2009. If you charged it on your Staples card, then they are not deductible until you pay Staples. The theory is that Staples has not gotten their money yet so you cannot deduct it.
· Upgrade your equipment. This is only a good idea if it will help you run your business better, lower your future costs, or increase your revenue. Again, fancy toys don’t make financial sense.
Careful tax planning can help you keep some of your money at a time when every dollar counts.
If you pay the dreaded Alternative Minimum Tax (AMT), then you have to be careful what you move deductions from year to year. Generally it does not help you to pay your real estate or other deductible taxes or things like job search expenses in December if you are subject to the AMT. The AMT would take a several blogs to explain. I might tackle it in a future blog.
These are general ideas that can help reduce your taxes. If you plan to implement any of these suggestions, it is well worth it to consult a tax professional.
However, ” take the money and run” is a valid alternative. In this case you worry about tomorrow tomorrow. You delay as much income as possible to next year and accelerate as many of your deductions as you can to this year. This way, you pay the least taxes possible.
Step One: Analyze your situation. Will you be paying taxes this year? If so what is your tax bracket? Are you in the 15% bracket or the 35% bracket? If you are in the lower tax bracket you will only get back $15 for every $100 you lay out for a deductible expense. If you are in the 35% bracket then the deduction gets more attractive.
Step Two: Determine where you think you will stand next year. Will you be in a higher or lower tax bracket? With the way the economy went in 2009, many people will have a better year in 2010.
Step Three: Set your goal. Do you want money now or later?
Delaying income is tough when you have a job, a house, and no other tax complications. You get your salary each week and it is hard to push it off to next year. It might happen if you get a year-end bonus that might get paid in 2010. Your interest income or dividends is paid on a set schedule, so you cannot postpone them to next year.
Here are some ways to legally delay income to next year:
· Weigh your options if you are thinking of selling some common stocks. If you have gains, you may want to wait until January to realize them. That way you are not liable for the taxes for a year. If you have losses, then take them this year. However, always make a good investment decision first. If it’s time to sell then don’t worry about the tax consequences.
· If you are self-employed you can delay billing your customers so that you receive the income next year rather than this year. Please note, if you receive the money this year, you are legally required to report it this year. Keeping a drawer full of checks that you get in December and then deposit in January is illegal. You should report all your income in the year you receive it.
Here are some ways to accelerate your expenses
· Pay your mortgage before Christmas. That way the bank will include the interest you normally would pay in January on their annual statement for this year, making it easier to deduct it.
· If you are making donations to your favorite charity, make them by the end of December, rather than in January. If you mail the check on December 31st, you can deduct it on your 2009 tax return.
· If you have a lot of junk, (oops, I mean valuable furniture and other items), you can consider donating them to charity and getting a tax deduction for it. You must get a receipt if it is worth more than $250, and you must provide additional information on your return if it is over $500. Really valuable items might require an appraisal. Be careful, the appraisal might cost more than the tax benefit of making the donation. Generally charities will not value the items for you. They will just say that you gave them seven bags of clothing.
· If you were looking for a job in 2009, keep track of your job search expenses. They can be used as itemized deductions to reduce your taxes. Some examples of these expenses would be the cost of printing your résumé, fees for help in your job search, or hiring a career coach to help your efforts. However, the total must be above 2% of your income to reduce your taxes.
· Often the biggest job search expense is the use of your automobile for your search. Keep track of the mileage for getting to the printer, going to various employment agencies or job fairs, and traveling to interviews. Write it all down to make sure you get the benefit of all the mileage.
· If you pay your real estate taxes yourself rather than through a bank’s escrow account, you can pay them in December rather than January. That way you can deduct them this year.
· Medical expenses must be more than 7.5% of your total income to be deductible. Look at your income and medical expenses and pay any outstanding medical bills this year if you are over this limit. If you are paying for your own health insurance, you should not have a problem exceeding this limit.
Here are some suggestions for the Self-Employed: (These only should be used if you have a good business purpose in spending the money. New “toys” like the newest fanciest computer, don’t make good financial sense.)
· You can write and mail the checks for your business expenses on December 31st and deduct them on your 2009 return. This includes expenses like rent or office supplies.
· Items you charge on a bank credit card can be deducted when they are purchased rather than when you pay the charge card bill. So those office supplies you bought in late December on your Visa card are deductible in 2009. If you charged it on your Staples card, then they are not deductible until you pay Staples. The theory is that Staples has not gotten their money yet so you cannot deduct it.
· Upgrade your equipment. This is only a good idea if it will help you run your business better, lower your future costs, or increase your revenue. Again, fancy toys don’t make financial sense.
Careful tax planning can help you keep some of your money at a time when every dollar counts.
If you pay the dreaded Alternative Minimum Tax (AMT), then you have to be careful what you move deductions from year to year. Generally it does not help you to pay your real estate or other deductible taxes or things like job search expenses in December if you are subject to the AMT. The AMT would take a several blogs to explain. I might tackle it in a future blog.
These are general ideas that can help reduce your taxes. If you plan to implement any of these suggestions, it is well worth it to consult a tax professional.
Monday, December 14, 2009
Final Tips
Self Employment Blog #7
Quick Hitters
Tax Professionals
Owning your own business can be confusing and lonely. Legal and tax obligations appear at any time. If you hire a tax professional, they can help with your tax return and estimates. A good tax professional will also advise you on running your business and work with you to make it more profitable. They also can advise you on legal ways to reduce your taxes. Don’t depend on your friends and family when you are self-employed.
Checking Accounts
It is best to set up a separate business checking account for your business. Pay all your business bills from the business account and all your personal bills from your personal account. Transfer money from the business account to your personal account so your checks won’t bounce
Health Insurance
You can get health insurance from several sources. Chambers of Commerce offer health insurance options and there are various other organizations that offer this benefit. Your payments for health insurance are not deductible on Schedule C as a business expense, but could be deductible on the first page of your Form 1040.
Massachusetts requires that you offer health insurance to your employees if you have more than 10 employees. Most group health plans state that anyone working more than 20 hours a week must be covered under your plan unless they are covered under a spouse’s plan. The expense for covering your employees is deductible on your business tax return.
Employees
At some point you may need help in running your business. Often the first person hired is an administrative person to do all the things that keep you away from your clients and customers. You should talk with your tax preparer before you hire someone so that you understand your obligations. I’d recommend a payroll service to take care of all the myriad of details that go along with paying an employee.
Employees are expensive. You must have worker’s compensation insurance, match their taxes, and may even need to cover them with health insurance. Be careful who you hire and that you really need the person to help your business progress.
A quick bit of advice. If you view your employee as an expense rather than an asset, get rid of them and hire someone else.
Sales taxes
Be aware that if you sell a product you must collect and pay sales taxes in most states. Some states, such as Connecticut, have a sales tax on services.
Partnerships
Talk with your CPA before starting a partnership. They are harder to keep together than marriages. Generally partnerships break up because the various partners do not agree on the direction they are going in and how to get there.
Registrations
In Massachusetts you are required to register with the town or city clerk where you live if you use a fictitious business name. That would be any name other than your own. If you are an LLC or corporation you are required to register. If you do register, you can expect that the city or town will eventually show up at your door and want to tax your business assets. Other states probably have similar requirements.
Pensions
There are many different pension plans available to business. There is no perfect type for all business. A sole proprietor often wants to use a SEP plan because it is simple and inexpensive. Large companies use the 401(K) plan because it shifts the burden of funding the plan to the employee. There are many alternatives in between. You should discuss the options with your CPA as well as your financial advisor.
Management
There is an old Vermont saying, “The eye of the farmer fattens the stock.” Of course, now there are very few farmers. What this means is that the business will run better when you are there. Too many things can go wrong when you are not there. To minimize this problem, you need to have procedures in place that help your employees understand what is expected of them.
Customer Service
The measure of customer service is not what happens when things go right. It what happens when things go wrong. It is critically important to deal with complaints and problems quickly and effectively. The proper handling of a complaint can turn a problem into an asset. If someone is happy with your service they will tell one person— if they are unhappy they will tell ten.
S Corporations
This is a special tax designation for corporations. A regular corporation pays taxes on its net income.
An S corporation does not pay taxes on its income. It transfers the income to the personal tax returns of the owners. This prevents the double taxation of the income and provides some tax-reducing benefits to corporate owners. You need to make a special election to be allowed this privilege. Check with your CPA as soon as you set up the corporation to see if this is an appropriate thing to do.
Quick Hitters
Tax Professionals
Owning your own business can be confusing and lonely. Legal and tax obligations appear at any time. If you hire a tax professional, they can help with your tax return and estimates. A good tax professional will also advise you on running your business and work with you to make it more profitable. They also can advise you on legal ways to reduce your taxes. Don’t depend on your friends and family when you are self-employed.
Checking Accounts
It is best to set up a separate business checking account for your business. Pay all your business bills from the business account and all your personal bills from your personal account. Transfer money from the business account to your personal account so your checks won’t bounce
Health Insurance
You can get health insurance from several sources. Chambers of Commerce offer health insurance options and there are various other organizations that offer this benefit. Your payments for health insurance are not deductible on Schedule C as a business expense, but could be deductible on the first page of your Form 1040.
Massachusetts requires that you offer health insurance to your employees if you have more than 10 employees. Most group health plans state that anyone working more than 20 hours a week must be covered under your plan unless they are covered under a spouse’s plan. The expense for covering your employees is deductible on your business tax return.
Employees
At some point you may need help in running your business. Often the first person hired is an administrative person to do all the things that keep you away from your clients and customers. You should talk with your tax preparer before you hire someone so that you understand your obligations. I’d recommend a payroll service to take care of all the myriad of details that go along with paying an employee.
Employees are expensive. You must have worker’s compensation insurance, match their taxes, and may even need to cover them with health insurance. Be careful who you hire and that you really need the person to help your business progress.
A quick bit of advice. If you view your employee as an expense rather than an asset, get rid of them and hire someone else.
Sales taxes
Be aware that if you sell a product you must collect and pay sales taxes in most states. Some states, such as Connecticut, have a sales tax on services.
Partnerships
Talk with your CPA before starting a partnership. They are harder to keep together than marriages. Generally partnerships break up because the various partners do not agree on the direction they are going in and how to get there.
Registrations
In Massachusetts you are required to register with the town or city clerk where you live if you use a fictitious business name. That would be any name other than your own. If you are an LLC or corporation you are required to register. If you do register, you can expect that the city or town will eventually show up at your door and want to tax your business assets. Other states probably have similar requirements.
Pensions
There are many different pension plans available to business. There is no perfect type for all business. A sole proprietor often wants to use a SEP plan because it is simple and inexpensive. Large companies use the 401(K) plan because it shifts the burden of funding the plan to the employee. There are many alternatives in between. You should discuss the options with your CPA as well as your financial advisor.
Management
There is an old Vermont saying, “The eye of the farmer fattens the stock.” Of course, now there are very few farmers. What this means is that the business will run better when you are there. Too many things can go wrong when you are not there. To minimize this problem, you need to have procedures in place that help your employees understand what is expected of them.
Customer Service
The measure of customer service is not what happens when things go right. It what happens when things go wrong. It is critically important to deal with complaints and problems quickly and effectively. The proper handling of a complaint can turn a problem into an asset. If someone is happy with your service they will tell one person— if they are unhappy they will tell ten.
S Corporations
This is a special tax designation for corporations. A regular corporation pays taxes on its net income.
An S corporation does not pay taxes on its income. It transfers the income to the personal tax returns of the owners. This prevents the double taxation of the income and provides some tax-reducing benefits to corporate owners. You need to make a special election to be allowed this privilege. Check with your CPA as soon as you set up the corporation to see if this is an appropriate thing to do.
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