How much sales tax should your company be paying?

Is your business paying too much in sales tax?  In many venues, products and services purchased as part of a manufacturing or production process aren’t subject to sales tax. 

For example, one company found that its propane purchases should have been tax exempt.  The correction saved about $5,000 per year. 

Tips:

• Get an opinion. Talk to your trusted tax advisor if the law isn’t clear.
• Contact suppliers. They may offer advice or knowledge and may be able to credit your account.  Issue resale certificates to suppliers if neccessary.

For more information about sales tax for your business, please contact us.

IRS Expands Use of Correspondence Examinations

The IRS has expanded the use of correspondence examinations of individual income tax returns. The IRS initiates a correspondence examination by mailing either Letter 566 (CG), often termed an initial contact letter, advising the taxpayer that a return has been selected and listing the items to be verified, or a CP 2000 notice, which contains proposed adjustments based on information documents issued by third parties, such as Forms W-2, Wage and Tax Statement; 1099-MISC, Miscellaneous Income; and 1098, Mortgage Interest Statement. The examinations are handled at an IRS Service Center or campus.

Please notify us if you receive correspondence from the IRS. Do not assume the change(s) proposed in any IRS correspondence is correct. Often, it is not! Let us review the correspondence and respond on your behalf.

When the IRS receives returns, it compares them against norms for similar types of returns. The IRS develops the norms from audits of statistical random samples of returns that are selected as part of the National Research Program, which the IRS conducts to update return selection information.
The IRS typically selects returns for correspondence examinations based on data indicating that the taxpayer has not reported income, claimed improper deductions, or claimed erroneous tax credits. Some typical items for which the IRS requests verification include alimony, moving expenses, various itemized deductions, casualty losses, employee expenses, Schedule C receipts and expenses, foreign tax credits, earned income credits and education credits.

Unlike a field examination, a correspondence audit is not assigned to a specific examiner. When the IRS receives correspondence, the file is assigned to an auditor. If there is no response from the taxpayer, the process moves through an automated system. After a certain period of time, the IRS issues a second notice, and if there is no reply, it will issue a statutory notice of deficiency or a 90-day letter.

The IRS has been having workload problems in timely responding to taxpayer or practitioner letters that provide the requested information or express disagreement with proposed adjustments. Often correspondence is not assigned to the auditor who reviewed earlier documents. Correspondence tends to not be reviewed for several months, resulting in the IRS sending letters advising the taxpayer that it needs additional time to review the correspondence. When the IRS finally issues reports, in some cases the proposed adjustments are not correct because proper consideration and evaluation have not been given to the documents and substantiation furnished by the taxpayer or his or her representatives.

If you have any questions, please call your contact at BiggsKofford at (719) 579-9090.

Surprises Are for Birthdays – Not Taxes

Don’t Be Surprised on April 15

How many of you met with your accountant this year on or before April 15th and were shocked by the amount due? How many of you did not plan for this in advance and had no idea what number you would end up with?

This is not a good feeling for anyone, and rest assured, there are ways to avoid this guessing game. Furthermore, in today’s challenging economic climate, cash flow planning is imperative. This includes planning for income tax payments (or refunds).

We have all heard of the under-payment penalties and interest that the IRS tacks on to your tax bill if you underpaid your taxes or did not pay enough early on in the year. You want to make sure that you have paid in enough in advance to avoid any of these penalties.

While these penalties and interest can add to your tax burden, nobody wants to overpay the IRS either. While the government charges penalties and interest if you underpay them, they don’t pay you any interest if you overpay them. So, good cash flow management will mean that you pay just enough to avoid penalties, but not too much to create an interest-free loan to the government.

To find the right balance, you need to understand the estimated tax and withholding rules. This starts with making sure estimated tax payments and withholding combined meet the safe harbor amount as determined by the IRS. There are two options for paying in your safe harbor amounts. The first option is to pay 100 percent or 110 percent (if your Adjusted Gross Income is above $150,000) of your prior year tax liability. This is usually done by making even estimated tax payments and withholding consistently throughout the year.

Now, since most accountants are not fortune tellers, your tax accountant has likely provided you with a schedule of estimated tax payments on the first safe harbor mentioned above to keep you protected from underpayment penalties.

However, throughout the year, if it looks like things are not going as well as the prior year with your business, you can choose the second option, which is to pay in 90 percent of your current year tax liability.

You are probably wondering how on Earth you are possibly going to know what 90 percent of your current year tax liability will be if you are only one quarter of the way through the year.

The great thing about this option is that you can annualize your payments. This means that you can look at the income that you earned each period and pay in your taxes accordingly. This option allows for you to plan for your taxes in a dynamic fashion, adjusting throughout the year, which optimizes your cash flow. Hence, you will not be giving Uncle Sam an interest-free loan throughout the year and you will be able to better manage your cash flow related to income taxes.

Of course to do this requires that you talk to your tax preparer/advisor throughout the year. There is no way to plan for the future if you do not have open communication with your accountant. Hopefully you still like that person after April 15.

Having these discussions frequently will allow you to discuss if business up or down this year, should you adjust your estimates, did you make any large purchases, are you planning to make large purchases, do you want to put a retirement plan in place, etc.?

All of these things have the potential to greatly impact your tax liability, and the sooner you discuss these with your accountant, the sooner you can start planning for your income taxes. This should also help you sleep better the first two weeks of April.

If you have any questions about how your business needs to prepare for this, please feel free to e-mail Deborah Helton, CPA, or call her at (719) 579-9090.

2010 Tax Relief Act

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010″ is a sweeping tax package that includes an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment and a host of retroactively resuscitated and extended tax breaks for individuals and businesses.

Here’s a look at the key elements of the package:

• The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
• Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
• A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
• Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
• Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
• Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.
• After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010’s or 2011’s rules.
• Omitted from the new law: Repeal of a controversial expansion of Form 1099 reporting requirements.
• Also not included: Extension of the Build America Bonds program, which permits state and localities to issue federally-subsidized municipal bonds.

If you have questions about this tax law, please contact Greg Gandy or Mike McDevitt.

Payroll Updates

As the end of the year approaches, it is important to update your payroll systems for new payroll requirements.

Beginning 2011:

• EFTPS Mandate

Virtually all businesses will have to switch to the Electronic Federal Tax Payment System (EFTPS) for all federal tax payments starting in 2011. The familiar paper voucher deposit system is going away for any company with quarterly employment tax liability of $2,500 or more. The IRS penalties for non-compliance are 10 percent for taxes paid by check.

Beginning 2012:

• Expanded 1099 Reporting

Under a mandate of the Health Care Reform and Small Jobs Act, businesses will be required to report all payments made in 2012 in excess of $600 for services or merchandise to the IRS on Form 1099. Under current law, businesses send Form 1099 for payments in excess of $600 for rent, interest, dividends and non-employee services when these payments are made to entities other than corporations. The reporting expansion now includes corporations and payments for services, including services performed on rental properties owned by an individual. The expanded reporting requirements begin with payments made in 2012.

In order to file the required Form 1099, a business would have a vendor complete Form W-9. Business owners may chose to gather need information and update accounting systems now in preparation of these changes.

• W-2 Reporting of Health Care Coverage Costs

The health care reform legislation requires employers to include the aggregate cost of employer sponsored health care coverage on employees’ W-2s for tax years starting on or after January 1, 2012. The original deadline was pushed back a year from 2011 to allow employers to make changes to their payroll systems and procedures to comply with this rule. A penalty will be imposed for non compliance beginning with 2012 W-2s. The amount reported is informational only and will not be includable in employee earnings.

If you have any questions about how your business needs to prepare for this, please feel free to e-mail Deborah Helton, CPA, or call her at (719) 579-9090.

The Wrong Way to Choose a Small Business Accountant

To the outside world, accountants can seem like a strange breed. Spending most of our days buried under forms, spreadsheets and receipts, we can help make or break your business – not to mention your payroll and Schedule C.

Choosing the right accountant for your small business isn’t always as easy as it should be. There are a lot of us out there, and the right professional for one company can be a poor fit for another. With that in mind, here are the three worst ways to choose a small business accountant:

Waiting until the last minute.

It’s amazing how many people will show up at an accountant’s office with a stack of receipts in late March or early April and hope to get some top-shelf tax advice. It’s not that we can’t or won’t help them, but they’re making it difficult for us to do our jobs properly.

A good CPA will take an in depth look through your company’s finances, finding out where it’s healthy and which areas could use some improvement. Based on that info, we can not only help you run your small business more smoothly, but also make sure you’re getting every tax credit and deduction that’s coming to you.

The less time we have to do this, however, the more likely we are to miss something that could help, so try to see an accountant before it becomes an urgent issue.

Picking the first name out of the phone book.

There are hundreds of accountants in your local directory for a reason – some are better than others, and most of us have certain specialties and areas of expertise where we can be particularly helpful. Trusting part of your financial future to the first person who answers their phone isn’t likely to help you find the professional you’re looking for.

A better strategy is to narrow it down to two or three candidates based on their respective backgrounds. Ideally, you’ll want an accountant who is familiar with the kind of work you do, and has been recommended by a couple of your more successful peers. But speaking of recommendations…

Following referrals blindly.

It’s great that you’re golfing buddy has a good accountant that he or she trusts, but does that mean you should use them, too? Unless you’re in the same business (and maybe not even then), the answer could be a strong “no”.

Why? Because, even though it’s a good sign that someone you know and trust is recommending them, you don’t know enough about their background and skills to tell whether they’re a good fit for your business.

So how should you find an accountant? Visiting sites like this one is a good first step. Take a look through some similar articles and notice which professionals have clients with businesses like yours. Once you’ve identified a few that look like a good fit, schedule a meeting and find out more.

It might be tempting to take one of the quick ways to find an accountant, but you’ll only be shorting your own business in the long run.

Feel free to contact me if you have any questions about BiggsKofford and if we could be the right firm to serve you and your business.