Sunday, February 6, 2011

IRS Portal Provides Help to Small Business Owners

Did you know that the IRS offers free online presentations and webinars? Check out the IRS Video Portal for
  • Archived versions of live panel discussions
  • Archived webinars
  • Video clips
  • Audio archives of tax practitioner phone forums
The portal offers a wealth of material for individuals, small businesses and tax practitioners.
Click on the Small Business tab, and you will find a list of topics. The list below describes some of the material available in the various areas.
  • Business Expenses: Includes a summary of the 2009 law change affecting net operating losses and a video on home office deductions.
  • Business Income
  • Changing Your Business
  • Disaster Information
  • Employers: Information about payroll, hiring family members, required taxes, and similar topics.
  • Filing/Paying Taxes
  • Forms:
  • Post-Filing Issues: If you have questions after filing, this is a place to learn about letters and notices, examinations, collections, offers in compromise, and other topics.
  • Resources
  • Retirement Plans: This section contains information about retirement plans for small businesses. The topics include funding and benefit restrictions, SEPS, and more.
  • Scams & Fraud: This includes several overviews that can help keep you from being a victim of a scam or a fraud.
  • Small Biz Workshop: "The Virtual Small Business Tax Workshop is composed of nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities."
  • Starting a Business: Includes a variety of videos on topics such as record keeping and Schedule C requirements.

Monday, December 20, 2010

The first Form 1040 in 1913

Take a look at the first 1040. The form and instructions are only four pages long.
The first Form 1040 was produced in 1913 after the 16th Amendment was ratified. The amendment said,
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The 1913 Form 1040 was three pages long, and it was accompanied by one page of instructions. The normal tax rate was one percent.
The normal tax of 1 per cent shall be assessed on the total net income less the specific exemption of $3,000 or $4,000 as the case may be. (For the year 1913, the specific exemption allowable is $2,500 or $3,333.33, as the case may be.)
There was also an additional or super tax on taxable income above $20,000 as shown below.

on the
and not

Friday, December 17, 2010

Tax bill passes. President Obama expected to sign.

The Tax Relief Act was passed by the house with a vote of 277-148. The bill contains provisions addressing the estate tax, expiring tax cuts, expired tax provisions and the AMT.

For more information, check out this article on the TSCPA's Federal Tax Policy Blog or this article in the Journal of Accountancy.

Friday, December 10, 2010

Organize to save money on accounting fees

Many people are surprised at how much it costs for their CPA to prepare their returns. Hiring an expert to do your taxes is a good idea, and most of the fees are money well spent. However, some habits may be costing you a lot of money, and they could lead to errors. What are these habits?
  • Disorganization
  • Sloppy bookkeeping
  • Unresponsiveness
This is how those habits cost you and what you can do about them.
It is amazing how many people simply gather up any documents that they think might somehow be related to their income tax, stuff them in folders or large envelopes, and send them to their CPA. The CPA will review and make copies of everything. Many of the documents will turn out to be unnecessary. Even so, once their CPAs start going through the files, they find that many important items are not included. The CPA will then have to contact the client and ask for the missing documents. This adds to the expense of preparing the return because the accountant spends additional time and expense on the unnecessary items and them spends extra time tracking down the missing items. 
A few common examples are listed below.
Housing related items
Taxpayers that own homes may be eligible to deduct mortgage interest, PMI, and property taxes. The only documents that the accountant needs are the mortgage interest statements from the holder of the mortgage and property tax receipts. It is generally not necessary to provide monthly statements for the mortgage or tax notices. Taxpayers should be sure to let their accountants know what they paid, and in instances where they may not have paid an item (such as delaying a property tax payment) what they have not paid.
Taxpayers that sold or purchased a home should generally provide the settlement statements to their accountants. This will help the accountant evaluate whether there are deductible expenses related to the transaction, and it will help confirm whether the taxpayer qualifies for gain exclusions. If the home was converted to or from rental use or vacation property, then it is especially important to provide this information.
Clients with home offices should keep additional records.
Bank and brokerage accounts
Clients with bank and brokerage accounts will often provide monthly, quarterly, and annual reports. Clients may, or may not, provide the relevant 1099s. The CPA will review all of the documents. If the 1099's are not provided, the CPA will contact the client and ask for them. It is especially important for clients that receive stock based compensation and clients that do a lot of trading to review their documents and make sure that the CPA has what he or she needs to complete the return, and that unnecessary information is not included in the file.
Business expenses
Unless your accountant set up and maintains your bookkeeping, he or she has no way of knowing the details of your expenses. Clients frequently bring folders and envelopes full of receipts to their CPA. All that is really necessary is a set of financial statements and a summary of expenses. The reason that this increases the cost of the return is that the accountant will have to organize the receipts, and this takes time. It is much less expensive to organize expenses than it is to pay the accountant to organize them for you.
Clients who use automobiles for business should keep records and provide them to their accountant.
Childcare expenses
Clients with children who pay for childcare should provide information about the care provider including the address, tax ID number and the amount paid. If the client used a flexible spending account, or if the employer provided a childcare benefit, then the client should provide that information as well.
Sloppy (or no) bookkeeping 
Many business owners try to save money by limiting their record keeping. When the do decide to keep detailed records, they often consist of spreadsheets. Once the records get to complex for spreadsheets then business owners will buy a bookkeeping program. In the long run, none of this saves money. If the books are not well organized then the accountant may have to virtually redo them in order to prepare the tax return. This adds to the cost of the return, and it is more expensive than it would have been to have had the books properly prepared before bringing them to the CPA for tax filing.
Another thing that adds to the cost of preparing tax returns is when accounts are set up incorrectly. When accounts are set up correctly, then they can be configured in a way that makes it simple to produce reports in standard formats. These formats include tax reporting formats as well as formats designed to help manage a business. 
A final problem for many taxpayers is failing to separate personal and business expenses. Ideally, business owners will have different bank accounts for business and personal use. If that is not possible, then at the very least, they should keep personal items out of their business records by flagging them appropriately so that they can be identified and excluded from reports.
Many clients do not respond when their accountant tries to contact them. The reason the accountant is calling is either to find missing information or to clarify something that is not clear. When clients do not respond, their returns remain unfinished. Tax preparers have to set the return aside and wait for the additional information. When the client does respond, sometimes weeks later after several emails or telephone calls, the preparer will reopen the file and begin working on the return. Unfortunately, it will probably not be fresh in the preparer's mind, and it will take longer to complete than if the missing information had been available sooner. Unresponsiveness increases the cost of preparing your return because it is difficult to work with missing information and it takes longer to prepare the return. In addition, every one of those phone calls and emails take time.
Changing your habits
Now that you know about these three money saving bad habits, you can start changing your behavior.
Get organized!
Talk to your CPA or the professional that prepares your filing. He or she can tell you exactly what you need to do in order to simplify your tax filing and to make it less expensive to prepare your return. Take advantage of the checklists and organizers your accountant provides. Spend a little time reviewing your documents before you take them to your accountant. 
Keep records throughout the year, and organize them so that they will be ready for your accountant. If you drive an automobile for work, get one of those auto record books and keep it. Keep your business and personal records separate.
Get help with your records.
It is worth your time to talk to your CPA or to a bookkeeper to learn how to set up your records. If you have a small business, seriously consider purchasing bookkeeping software such as QuickBooks or Peachtree. If you do, it is worth your while to ask your accountant or bookkeeper to help you set up your books. If you simply don't want to organize your own records, or if they are too complex, then hire a bookkeeper. The cost of paying a bookkeeper to do your books throughout the year will be less than the cost of asking your accountant to do it a month before your taxes are due.
Return your calls! Respond to email!
When the CPA calls or emails, assume it is important and respond! If you do not return your calls or answer your email, then one contact becomes two or three or more. Your CPA will be able to complete your return faster and for less cost if you respond when he or she tries to contact you.

Wednesday, December 8, 2010

Waiting until the last minute is good drama but lousy tax policy

Year End Tax Dramas and the State of Tax Policy, a recent post by Professor Annette Nellen on her blog, 21st Century Taxation describes the recent flurry of letters between IRS Commissioner Shulman and the various tax-writing committees. It is not pretty, and it probably is not good policy.

Professor Nellen quotes Commissioner Shulman who has some strong opinions about putting off policy decisions.
I want to stress that it would be extremely detrimental to the entire tax filing season and to tens of millions of taxpayers if tax law changes affecting 2010 are deferred and then retroactively enacted in 2011. … it would be an unprecedented and daunting operational challenge to open the tax filing season under one set of tax laws with respect to AMT and extenders, begin accepting tax returns, and then have the law change.
The post then goes on to ask a few very pertinent questions about when tax rules should be set. Many people are dismayed at how Congress functions, and the annual ambiguity about taxes and regulations compounds the problem. This year, in addition to the usual uncertainty about the AMT, taxpayers also have no way to anticipate future tax rates and do not know the likely status of a long list of exemptions, deductions, and credits.

Check out Professor Nellen's blog post for a thoughtful treatment of the issue.