Here are 7 of them:

• Receipts:

You are required to have a receipt for every expense over $75. It must be readable. It can be the original or a copy of the original. A copy of a credit card statement with the expense listed is NOT acceptable.

• Auto Use:

The IRS allows you to take the higher of two deductions when it comes to your auto. You can deduct the business miles driven at the IRS rate for that year OR you can deduct actual costs, like gas, repairs, insurance, and the amount allowed for depreciation. What most business owners miss is the percentage of business use. Usually the percentage is less than 100%. Each owner needs to determine the business percentage for the year.

You are required to keep a mileage log. This includes the date, starting odometer reading, ending odometer reading and business purpose. You are allowed to recreate the log using your calendar and receipts.  There are a lot of apps that can help with this.

•  Handling of Petty Cash:

Every company has a need to have petty cash on hand. This is where a lot of theft occurs within companies – small amounts over long periods can really add up.  Make sure you are reconciling the petty cash, at least on a monthly basis.

•  Meals and Entertainment:

These two categories are highly scrutinized. You need to track who you had the meal with/entertainment with and the business purpose. You are required to have a quiet business conversation before, during, or after the event.

On the receipt mark the 5 Ws: “Who, What, Where, When and Why”

• 1099’s:

You are required to send out 1099-MISC forms to any contractor you paid more than $600 in a calendar year for services. If you do not, you can be penalized for each 1099 not completed.

The IRS has 20 factors to determine if a worker is an independent contractor or an employee. You need to know these factors and make sure if you are paying someone a straight check that, if audited, the IRS will not deem them as an employee. If they feel the person hired is an employee, there are high penalties and interest.

When you receive your 1099s, you need to make sure to reconcile them to your records, and if they are wrong have a new one issued immediately.

•  Checking and Bank Controls:

Every check that leaves the office should have back-up documentation for what it is for and be signed by one of the owners.

When bank statements come in they should be opened by one of the owners and the checks should be reviewed for the payees and the endorsements.

Make sure you reconcile the entire year for every bank and credit card account you have for business. Then, once you reconcile, make sure there are not any un-cleared transactions. If you do have these un-cleared transactions, you will be either overstating your income (and paying higher taxes) or overstating your expenses (and underpaying taxes).

Double and triple check this!

Credit Cards: Make sure you enter ALL expenses thru the end of the year. Most credit card statements cut off in the middle of the month and many people forget to enter expenses the last few weeks of December.

Have in place a policy for use – Personal use? Client use?

• Loans to Owners:

If you loan money to your business, you are required to have a promissory note, schedule of repaying and if the loan is over $10,000, the business must pay interest on the loan.

If you need any help implementing these safe guards, please contact us, we can help!

The credit ranges from 20% to 35% (the IRS provides a table) of non-reimbursed expenses based upon your income, with the higher percentages applying to lower income taxpayers and the lower percentages applying to higher income taxpayers. As an example, if your income (AGI) is below $15,000, the credit percentage is 35% and gradually reduces as your income increases, until it caps out at 20% for incomes above $43,000. The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more. The credit is non-refundable, which means it can only reduce your tax to zero and the excess is lost.

The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent to qualify to claim the credit (but there’s an exception for divorced or separated parents). Here are some additional details:

1. Day Camps - The costs of day camp generally count as expenses towards the child and dependent care credit. A day camp or similar program may qualify, even though the camp specializes in a particular activity, such as soccer or computers.
2. Overnight Camp or Tutoring - No portion of the cost of an overnight camp or a tutoring program is a qualified expense.
3. School Expenses - Only school expenses for a child below the level of kindergarten will qualify for the credit.
4. Day Care Facility - The expenses paid the day care center qualify. If the day care center cares for more than six persons, it must comply with applicable state and local laws.
5. In Home Care - If your childcare provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns.
6. Maximum Qualifying Expenses - You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit. This will provide a tax credit of between $600 and $1,050 for one child and $1,200 and $2,100 for two or more depending upon your income. If the expenses exceed your work earnings, use the earnings to figure the credit. Dependent care benefits received through your employer will also affect the computation of the credit, and could result in no credit being allowed.
7. Records Required - To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number. No credit is allowed without that information. Where you have more than one child you must also show the expenses paid for each child, up to the $3,000 maximum per child. If your state allows a child care credit, additional information, such as the care provider’s phone number, may be required.

For more information about how this credit will affect your particular circumstances, or for information about claiming this credit for your spouse or a dependent age 13 or over who is not able to care for himself or herself, please call 888-564-5777.

The government uses this reporting mechanism as a means to uncover hidden foreign accounts and ensure that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether they have a reporting requirement.

Reporting is accomplished by filing a Report of Foreign Bank and Financial Accounts form—more commonly referred to as the FBAR—which must be received by the IRS at its Detroit office on or before June 30 of the succeeding year. Thus, the FBAR filing for the 2011 year must be received by the IRS no later than June 30, 2012. This report is filed separately from the taxpayer’s income tax return, and no extensions of time are available for filing this form. In addition, taxpayers generally are required to answer “yes” or “no” to questions related to foreign bank and financial accounts on their tax returns.

Penalties for failing to comply can be draconian. For non-willful violations, civil penalties of up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations.

Overlooked Accounts – Many taxpayers overlook the fact that they have a reporting requirement in situations such as the following:
•Family Accounts – Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in the foreign country. This is common practice for some ethnic groups. The taxpayer does not really consider the account his or hers, but it falls under the reporting requirement if he or she has signature or other authority over the account and the value exceeds $10,000.

•Inherited Accounts – Inherited accounts in a foreign country fall under the FBAR reporting requirement even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.

•Business Accounts – An officer or board member may have signature authority over a business account held in a foreign country and overlook the need to meet the FBAR reporting requirements.
In addition to including any reportable foreign income on his or her tax return, the taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR is filed when required.

QuickBooks handles billable expenses capably, but it’s critical that you understand the process thoroughly before proceeding.

Billing for inventory parts is easy. Pick the items from a list and specify a quantity. Poof. Done.

Billing for costs, time or mileage is a little more complex. QuickBooks has built-in tools to help you do this, but it’s a bit of a process.

To simplify your workflow, do this groundwork first:

• Go to Edit | Preferences | Time & Expenses | Company Preferences. Click the Yes button under Time tracking and indicate your choices under Invoicing options. If you plan to mark up some costs and want a default number, enter a percentage and account (these can be changed on individual invoices).

Figure 1: As you do with other QuickBooks processes, make sure that your Preferences are set correctly.

• Add any billing items necessary by clicking Lists | Item List and then Item | New in the lower left corner.
• If you plan to bill for mileage, go to Lists | Customer & Vendor Profile List | Vehicle List and enter information about every business vehicle.

Invoicing for Services

If you’re a service-oriented company, you bill for time frequently. This is easy. You’re probably already familiar with the Enter Time entry in the Employees menu. Whether you make individual time entries or complete a timesheet, it’s critical that you make the correct selections for each Customer: Job, Service Item and Payroll Item field, and check the Billable box.

When you create invoices, this box will open after you select a customer:

Figure 2: QuickBooks lets you know when there are time and costs to be billed for each customer.

You can let QuickBooks enter the time totals now, or add them later by clicking the Add Time/Costs button. Either way, the Choose Billable Time and Costs window opens. Add a checkmark next to each entry that should be billed, and click Options… to indicate whether you want one line for each time entry or would rather combine all similar service item types.

Figure 3: QuickBooks wants to know which entries should be invoiced.

More Complexity

If you’re done with billable expenses for this invoice, click OK. If there are other costs that you covered, click the Expenses tab to see all transactions that you earmarked for this client on a bill, check or credit card. You have the option here to mark up the cost by a percentage or amount (even if you established this in Preferences), and to specify an account.

Do the same for Mileage, which you would have entered previously – when it was incurred — at Company | Enter Vehicle Mileage. Then select any Items that you purchased for the customer. Your records should be correct – assuming that you were conscientious about assigning expenses to customers and jobs.

Figure 4: It’s easy to pull billable expenses into invoices if they’re documented carefully.

Turning expenses into invoices and then into income can be complicated. Call us if you need help! We are your partner in building a successful business.

Back to School Tips for College Students and Parents

Whether you’re a recent high school graduate going to college for the first time or a returning college student, payment deadlines for tuition and other fees are rapidly approaching.  Students or parents paying such expenses should keep receipts and be aware of some tax benefits that can help offset college costs.

Typically, these benefits apply to you, your spouse, or a dependent you claim as an exemption on your tax return.

1. American Opportunity Credit – This credit has been extended for an additional two years: 2011 and 2012. The credit is valued at up to $2,500 per eligible student and is available for the first four years of post-secondary education. Forty percent of this credit is refundable in most cases, which means that you may be able to receive a tax refund from the government of up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies, and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).
2. Lifetime Learning Credit – In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled at an eligible educational institution. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, so graduate-level and professional degree courses qualify, but to claim the credit, your modified adjusted gross income must be below $61,000 ($122,000 if married filing jointly). The $2,000 cap applies per return, not per student.
3. Tuition and Fees Deduction – This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim a tuition and fees deduction of up to $2,000 for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly). The deduction can be as much as $4,000 if your modified AGI is under $65,000 ($80,000 if married filing jointly).
4. Student loan interest deduction – Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if married filing jointly), you may be able to deduct interest paid during the year on a qualified student loan used for higher education regardless of when you obtained the loan. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to claim credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Remember that the education credits are claimed by the individual who claims the exemption for the student, not necessarily the person who pays the tuition. Also, the tuition expenses qualifying for the education credits can be pre-paid for the first three months of the subsequent year if you have not paid enough to take advantage of the full credit in 2011.

You cannot claim the tuition and fees deduction in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit for the same student. You must choose to take either the credit or the deduction and should consider which is more beneficial for you.

If you have questions or would like to schedule an appointment to discuss how best to finance and pay for education expenses and maximize tax benefits, please give this office a call.

Topics: 1040 & Personal Finance

Can You Write Off a Bad Debt?

Most small businesses have receivables that cannot be collected.  These receivables can be from the sale of products, providing services to customers, or a combination of the two.

Whether or not a bad debt deduction will apply generally depends upon which accounting method is used (either the cash or accrual method).  Why does this make a difference?  Let’s look at what happens under both methods of accounting.

• Accrual – If the accrual method is used, all of your billings must be treated as income whether or not they have been collected.  This means that the taxable income already includes the income from your deadbeat customers.  Therefore, these items are considered a bad debt when those receivables become uncollectible and can be deducted.  If the accrual method of accounting is used, bad debts are deductible.
• Cash – On the other hand, if the cash method of accounting is used, income is not reported until it is received (unlike the accrual method).  Since the income was never reported in the first place, a deduction cannot be taken if payment was never made for the goods or services that were provided.  However, if you made a loan to a customer or supplier and there is a business reason for the loan, you may have a business bad debt.

Proof of Worthlessness – Proving a debt (or receivable) is worthless requires the taxpayer or business to show that the debt has become worthless and that reasonable steps were taken to collect the debt.   

Non-Business Bad Debts – Some bad debts may actually be personal debts, such as personal loans to individuals.  In those cases, the bad debt is not deducted as a business expense but is treated as a short-term capital loss on Schedule D subject to the $3,000 annual loss limit.

If you still have questions, please give this office a call for additional information.

• Eligible small employers – Eligible small employers may receive the credit if they had fewer than 25 full-time equivalent employees (FTEs) for the taxable year; paid average annual wages to employees of less than $50,000 per FTE; and offered employer-paid health insurance premiums for each employee enrolled in health insurance coverage under a qualifying arrangement. The employer must pay at least 50 percent of the premium for an employee-only plan.
• Figuring the number of FTEs – The number of an employer’s FTEs is determined by dividing the total hours the employer pays wages during the year (but not more than 2,080 hours per employee) by 2,080. The result, if not a whole number, is then rounded down to the next lowest whole number if any.
• Credit Amount – For taxable years beginning in 2010 and through 2013, the maximum credit for small employers is 35 percent of premiums paid and 25 percent for tax-exempt small employers. The credit also offsets the alternative minimum tax.
• Credit Phase-out – The full credit is only available to eligible small employers with 10 or fewer full-time equivalent employees (FTEs) with an average annual full-time equivalent wage (AAEW) of $25,000 or less. If either or both of these thresholds are exceeded, then the credit is reduced. In addition, the employer’s deduction for health insurance premiums must be reduced by the credit claimed.
• Excluded Individuals – The following individuals are excluded from the credit: business owners, including sole proprietors; LLC members; partners in a partnership; 2 percent or greater shareholders in an S corporation; 5 percent or greater owners in a C corporation; family members of the individuals listed above; and seasonal employees.

The credit can be taken every year through 2013. Beginning in 2014 the credit amount increases to 50 percent for eligible small employers and 35% for tax-exempt small employers. However, the post-2013 credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.

If you have any questions regarding this credit, please give this office a call

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2011, the annual exclusion is $13,000.
2. Gift tax returns do not need to be filed unless you give someone other than your spouse money or property worth more than the annual exclusion for that year.
3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:
   • gifts that are not more than the annual exclusion for the calendar year,
   • tuition or medical expenses you pay directly to a medical or educational institution for someone,
   • gifts to your spouse,
   • gifts to a political organization for its use, and
   • gifts to charities.
6. Gift Splitting – You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.
7. Gift Tax Returns – You must file a gift tax return on Form 709 if any of the following apply:
   • you gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year;
   • you and your spouse are splitting a gift;
   • you gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until at some time in the future; or
   • you gave your spouse an interest in property that will terminate due to a future event.
8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

Tax time does not have to be a four-letter word! With a little planning, the right information and help from us, you can navigate those pesky tax write-off quandries. What are some of your questions regarding deductions?

• 2.5% of household income over the threshold amount of income required for income tax filing, or
• $695 (indexed for inflation after 2016) per uninsured adult in the household ($348 if under age 18).

Maximum Penalty – The total household penalty cannot exceed 300% of the per-adult penalty ($2,085) or national annual premium for the “bronze level” health plan offered through the Insurance Exchange that year for the household size.  Penalties are based upon the months that the required insurance is not in force.

Penalty Phase-In – The maximum penalty will not be imposed until 2016.  The phase-in rates are:

2014           2015
Per-adult annual penalty                  $95            $325
% of income penalty                           1%               2%
Family maximum                              $285           $975

Taxpayers Exempt from the Penalty – Individuals are exempt from the penalty if either their employer’s sponsored coverage or the lowest cost “bronze” coverage exceeds 8% of household income.  Also exempt are individuals residing outside of the U.S., those exempted for religious purposes, and those whose income is below the threshold for having to file a return.

• Low-Income Health Exchange Participation Credits – Beginning in 2014, tax credits will be available for low-income individuals and families with incomes up to 400% of the federal poverty level that are not available for Medicaid, employer-sponsored insurance, or other acceptable coverage.  To qualify for the credits, these individuals and families would have to obtain coverage in the newly-established insurance exchange.  Based upon the current poverty levels, the credit would phase-out at $42,420 for individuals and $88,200 for a family of four.  Additionally, a cost-sharing subsidy will be provided for low-income individuals to help pay for their coverage.

• Large Employer Responsibilities – Beginning in 2014, large employers, generally those with 50 or more full-time employees in the prior calendar year, that:

• Do not offer coverage for all its full-time employees,
• Offer minimum essential coverage that is unaffordable, or
• Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60%,

Would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy discussed previously.

Penalty – The excise tax penalty for any month would be $167 times the number of full-time employees in excess of 30.

• Free Choice Vouchers – Beginning in 2014, employers who offer minimum essential coverage through an eligible employer-sponsored plan and pay a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the Insurance Exchange.  An employee qualified to make this choice is an individual with a required contribution to the employer plan that exceeds 8%, but does not exceed 9.5% of the household income and has income that does not exceed 400% of the poverty line for the family.

• Tax Credits for Small Employers Offering Health Coverage – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of non-elective contributions to purchase health insurance for its employees.  The maximum credit is available to employers with no more than 10 full-time equivalent employees with an annual full-time equivalent wage from the employer of less than $25,000.

2014 and Later – In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

• Dependent Coverage – Effective March 23, 2010, the exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee is extended to children who have not attained age 27 as of the end of the tax year, provided the child also is eligible to be claimed as a dependent for tax purposes.

• Excise Tax on High-Cost Employer-Sponsored Health Coverage – Beginning in tax year 2018, there will be a 40% non-deductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed the following amounts:

Single Coverage:                                                                                             $10,200
Single Coverage, high-risk employment or retired age 55 and older:  $11,850
Family Coverage:                                                                                             $27,500
Family Coverage, high-risk employment or retired age 55 and older:  $30,950

The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals).  Stand-alone dental and vision plans would be disregarded in applying the tax.  The dollar amount thresholds may be later adjusted for inflation.

• Employer W-2 Reporting Responsibilities – Beginning in tax year 2011, employers will be required to disclose the value of the benefit provided by them for each employee’s health insurance coverage on the employee’s annual Form W-2.

• Taxpayers Earning Over $200,000 – Beginning in 2013, higher-income taxpayers will be subject to the following additional taxes:

• Additional Hospital Insurance Tax – The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly).
• Surtax on Unearned Income – A 3.8% surtax, called the Unearned Income Medicare Contribution, would be placed on the net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return).  Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).  “Net” investment income is investment income reduced by allowable investment expenses. Distributions from qualified retirement plans and IRAs will not be subject to the surtax.

• Employer Flexible Health Spending Plan Contributions Limited – Beginning in 2013, the maximum that can be contributed to an employer’s health flexible spending accounts (FSAs) would be limited to $2,500 per year.  The amount will be indexed for inflation after 2013.

• Over-the-Counter Medication Restriction for Employer-Provided Plans – Beginning in 2011, over-the-counter medications, except for doctor prescribed over-the-counter medication and insulin will no longer qualify for reimbursement.  This restriction applies to health reimbursement accounts (HRAs), health flexible savings accounts (FSAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs).

• Increased Tax on Nonqualifying HSA or Archer MSA Distributions – Beginning in 2011, the additional tax for HSA withdrawals for other than qualified medical expenses before age 65 are increased from 10% to 20%, and the additional tax for Archer MSA withdrawals for other than qualified medical expenses is increased from 15% to 20%.

• Medical Itemized Deductions Limited – Beginning in 2013, the itemized deduction for medical expenses will be limited in the following manner:

o AGI Threshold – The AGI threshold for claiming medical expenses on a taxpayer’s Schedule A is increased from 7.5% to 10%, which is the same as the current alternative minimum tax (AMT) rate.  Individuals (and their spouses) age 65 and older will continue to use the 7.5% rate through 2016.

o Deduction for Employer Part D would be Eliminated – The deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees is eliminated.

• Expansion of Information Return Reporting – Currently a business paying more than $600 per year to a noncorporate service provider who isn’t an employee is required to file an information return (Form 1099-MISC). The new law expands the return filing requirement to include both corporate and noncorporate providers of property and services, beginning with tax years beginning in 2011.

• Adoption Credit Limit Raised, Made Refundable and Extended – One of the non-health care related items included in the new law is an increase in the dollar limitation for the adoption credit to $13,170 (adjusted for inflation after 2010) and an extension of the credit through 2011. The credit also is changed from being nonrefundable to a refundable credit.

If you have questions related to taxes associated with the new health care bill, please give this office a call at 888-564-5777.