11-01-12 End of the year tax planning client newsletter

When you read this our long national nightmare....the presidential election... will be nearly or finally over.   Depending on whoever wins the newly elected or re-elected president will have a very full plate.  Especially in our imaginary tax world.  As you are probably aware December 31, 2012 is the date many tax cuts and deductions are scheduled to expire. Some call it Taxmageddon.  Federal Reserve Chairman Bernanke labeled it the financial cliff.   I just published on our blog a long discussion about what is happening.  Unless Congress and our president do something.  Just something. It is worth taking a look at.  

Meanwhile time to get back to business.  With October 15 behind us and April 15 still comfortably far away, it’s a good time to start boning up on ways to save money since things are starting to get serious.  The end of the year is less than two months away.  

Version 31 of the same story.

Sally Smith, was a smart businessperson, she knew the basics of year-end tax planning.

1.  Postpone income to next year.
2.  Pay as many expenses as possible this year.
3.  Keep inventory level low.
4.  If you are going to make a capital investment, do so before the end of the year.
5.  Double check for missing deductions.
6.  Invest in an IRA for similar type account.

Sally owns a retail store and faced the year end with her eyes wide open.  Sally knew that a few strategies would pay big dividends on April 15.  Here is what she did to reduce her tax liability:

Since Sally was operating her business on a cash basis and relied upon cash sales through her cash register, she did not have the opportunity to postpone much income.  She has established a policy for many years to close her books on December 28, which gave her opportunity to defer three days of sales to next year.

Sally then reviewed her bills.  She started to write out checks for her expenses. She wrote checks for all expenses due, even if some expenses were due in January.  She dated her checks for December 28, 2012 to be sure that the expenses were recorded for this year on December's bookkeeping.  Her checks written totaled to almost $10,000.  Her one simple strategy, accelerating expenses meant that Sally saved over $4,000.00 in income tax this year.

Since you pay tax on your inventory at the end of the year, Sally knew that reducing her inventory to the lowest amount possible was important for her. First, she decided to review her inventory to see if she had things that have been gathering dust.  She found items that in fact had been sitting around for more than three years.  She decided to mark those items down and immediately started an inventory reduction sale for those items.  She knew that the value of  her inventory was based upon her costs of the items, not the selling price.  She also knew that items that were partially used or supplies not for resale did not count as part of her inventory.

Sally had been debating whether to purchase a new computer for her business. The local computer store was offering a "six-months same as cash" financing offer for the purchase of new computers.  Sally decided to purchase the computer now, electing to take advantage of the special financing offer.  She knew that she could deduct the full purchase price of the computer on her tax return, even though she did not pay for it right away.  When you purchase something using a credit card or borrow the money, as Sally did, you get to deduct the amount when you purchase the item.  The $3,000 computer saved Sally $1,200 in income tax.

As part of her year-end review Sally took a minute to see if perhaps she has recorded all her business expenses as part of her monthly record keeping.  She knew that the credit card that she had been using exclusively for business had some interest payments that were not included. She made a note to record her year-end statement from her credit card company to make sure that it was included as interest paid on her year-end documents to her accountant.  In addition, she decided to review her automobile mileage and other receipts for expenses that she might not have had for her business and had a chance to record in her monthly record keeping.

Surprisingly Sally read last month’s newsletter to all corporate clients and decided to go online. She took our advice and subscribed to Wave accounting.  She took advantage of downloading her bank account and discovered how easy it was to enter her data.  She really liked it and is recommending it to other small business owners she knows.

Sally also knew that she had time to make her annual IRA contribution until April 15 of next year.  She decided not to make it till next April.  She also made a note to talk to us about Roth IRA accounts and analyze the different options available to her.  One of her options was a self-employed Pension Plan commonly called a SEP. IRA's.  SEP. IRA's do not have to be opened or funded until the due date of your return.  That means that Sally doesn't have to open or make a contribution to a SEP. IRA for the 2011 tax year until April 15, 2013.  She can also contribute a larger amount to her SEP. IRA than she could to her regular IRA.  However, she was reluctant to open one because she also knew that she would have to contribute an amount to her full time employees.  She made a note to ask her accountant what that contribution would be and what her resultant tax savings would equal.  She also thought her accountant might have ideas on how to "cushion" the employee's contribution issue.

Sally knew that her year end review of her tax situation saved her almost $7,000 this year.  She made a note to review her year end information before we prepared her tax return in 2013.




SAVE TAXES...REMEMBER BEFORE JANUARY 1, 2013

1) Postpone income to next year.
2) Pay as many expenses as possible this year, even if you do not send the checks off till January, be sure to write the checks for the expenses.
3)  Keep inventory at a low level.
4)  If you are going to make a capital investment, do so before the end of the year.
5)  Double check for missing deductions.
6)  Invest in an IRA or similar type account.

The upcoming "Taxmageddon" and three simple ideas to help with this years taxes

October 15 is the official end of the tax filing season for 2011 income tax returns. We made it almost. Can’t stop thinking here did 2012 go?  I starting writing this email to you last week while the presidential debate was on the television in the background.  Of course there was much discussion, about what is going to happen to tax rates and who was lying about it.  What I found striking was no mention of the coming “Taxmageddon” – the date the largest tax hikes in the history of America will take effect.  I don’t recall it if there was.  This impending tax increase is mostly the result of the expiration of many long-standing policies that all expire at the end of 2012.

It is estimated the the combined effect of these apparently unprecedented tax hikes will be $494 billion in one year.  They will affect families and small businesses in several waves on January 1, 2013.

I have summarized the first wave below my source being the Americans for Tax Reform website:

    First Wave: Expiration of 2001 and 2003 Tax Relief

    In 2001 and 2003, the GOP Congress enacted several tax cuts for small business owners, families, and investors (later re-upped by President Obama and  in 2010).  The following tax hikes will occur on January 1, 2013:

    Personal income tax rates will rise on January 1, 2013.  The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which the majority of small business profits are taxed).  The lowest rate will rise from 10 to 15 percent.  All the rates in between will also rise.  Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.  The full list of marginal rate hikes is below:

    -The 10% bracket rises to a new and expanded 15%
    -The 25% bracket rises to 28%
    -The 28% bracket rises to 31%
    -The 33% bracket rises to 36%
    -The 35% bracket rises to 39.6%

    Higher taxes on marriage and family coming on January 1, 2013.  The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of taxable income.  The child tax credit will be cut in half from $1000 to $500 per child.  The standard deduction will no longer be doubled for married couples relative to the single level.

    Middle Class Death Tax returns on January 1, 2013.  The death tax is currently 35% with an exemption of $5 million ($10 million for married couples).  For those dying on or after January 1 2013, there is a 55 percent top death tax rate on estates over $1 million.  A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

    Higher tax rates on savers and investors on January 1, 2013.  The capital gains tax will rise from 15 percent this year to 23.8 percent in 2013.  The top dividends tax will rise from 15 percent this year to 43.4 percent in 2013.  This is because of scheduled rate hikes plus Obamacare’s investment surtax.


Mark Steber writes in the Huffington Post:

Taxmageddon means different things to different people, and it's potentially not good for anybody. For some it may mean lower paychecks starting the first of the year. For others it may be a smaller tax refund when they file tax returns in 2013. Finally, it may mean a delay to filing tax returns this year if new legislation is passed late.

Congress and the president have developed a habit of waiting until the very last minute to act on pressing tax legislation.  I don’t think there is a chance that 2012 will be any different.  We are crossing our fingers that something is going to be done before as Federal Reserve chairman Ben Bernanke called it a “massive fiscal cliff” takes effect.

Turning to this year are some ideas to help with your current taxes.


Adjust your tax withholding

Did you get a big refund this year? Or did you owe the IRS a lot? Either way, adjust your payroll withholding. Your goal is to get the Goldilocks "just right" amount of income taxes taken out of your paychecks so that it's as close as possible to your eventual tax bill.


Make a charitable deduction now.

Instead of waiting until December 31 to donate to your favorite nonprofit organization, give now. Your charity will be thrilled to get your money or unwanted household items now. And if you itemize, you've got an entry on the charities section of Schedule A. Just remember to get a receipt!

Contribute to your retirement plan now.

Don't forget to give to yourself! The sooner you put money into your retirement plans, the longer it has to grow to the amount that will ensure the type of post-work lifestyle you want. Put the maximum into your IRA, Roth or traditional. Don't forget your company's 401(k) plan.


Thanks for your trust and being a client.  

Don’t forget to use your $50.00 vacation gift certificate from our sister company Planet Travel.  You can use it to book your next cruise or vacation package.  Lost it?  Just tell us to make sure you apply your client gift certificate when you call 217-241-0180. 

October 1, 2012 Client Newsletter

This is probably the most important letter I will write to you this year.  There is no doubt that you, as an S Corporation owner, have made very good tax move.  The popularity of S Corporations is growing each year.  More than six million S Corporation returns will be filed this year.  They offer more advantages than any other choice of business entity today.  You have chosen wisely.

However, there is one rather large S Corporation pitfall that I am required by IRS Circular 230 to warn you about.  

The number one IRS audit risk for S Corporations is salary and wages paid to officers of the corporation.

Here is what the IRS says about wages and salary paid to officers of Subchapter S Corporations:

Corporate officers are specifically included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code. When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages.  Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.  Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes.  S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

Although this IRS interpretation of reasonable salary was updated in October 2011,  it is somewhat arbitrary, it is extremely important not to overlook paying yourself a salary before the end of the year.  

The IRS can collect payroll taxes on officer compensation, and the penalty for failing to pay payroll taxes is 100% of the taxes owed. S-Corporations will avoid this payroll tax penalty by paying shareholder-employees a reasonable compensation.

What should you do? Don’t panic. Call us.  We can help. There is still time to fix any oversights.

Remember what Ben Franklin said an ounce of prevention is worth a pound of cure.  He also said that there are only two certain things in life:  death and taxes.

Start keeping records now not next September.

Corporate extensions ended last month and I spent the last few weeks preparing and filing returns for the remaining stragglers.  I have to tell you how amazed I was to find people starting to organize last years’ figures, some that were incurred more than 19 months ago.  I don’t think I can remember what I spent last week let alone more than a whole year and an half ago.  In the old days we built our business on bookkeeping....an era before desktop computers and the internet.  Nowadays the computer has revolutionized your small business recordkeeping.  Here are three options, all involving computers, you can try to make things a little easier.  Don’t struggle.  Don’t miss out valuable deductions.  Make record keeping part of your daily routine.


1.  Go online. Free advertiser supported online accounting software is available.  Probably the most popular software online is Wave.  Here is a link to there website http://waveaccounting.com/.  It is easy. Fairly comprehensive. Working with your tax guy is easy, too. Just invite us as a Guest Collaborator and we can both see your data, securely, in real time.  Perhaps the best part is the automatic download your bank account into your accounting records limiting the amount of data input you have to do. Advantages? Iit is free.  It is intuitive.  No need to change the way you are doing business today.  We like wave accounting so much we became a Wave accounting pro advisor.

2.  Consider a stand alone accounting software.  We recommend the Quickbooks clone Avanquest Bookkeeper 2012.  This program offers more bang for the bucks than the 800 pound elephant Quickbooks.  It is $39.95.  What do you get for your money?  A fully functioning accounting software that includes credit card processing for no additional charge.  

3.  The ubiquitous Quickbooks.  It is expensive.  Requires yearly updates.  And it seems that you are constantly bombarded with additional add-ons to buy.  However, the accounting community has embraced it as the defacto standard that our client’s are using to keep track of their records. We work every day with Quickbooks.

I know that there are other methods and systems.  I have always taken the position that what works for you works for me.  However, I suggest that you give the Wave accounting folks a try first and help you not miss all those deductions next year.  

One of the most puzzling aspects of S corporation taxation is how 2% shareholders, that’s you, treat their health insurance on their tax return.

The general rule is that the health insurance of a greater than 2 percent S corporation shareholder is a taxable fringe benefit. In other words, you can claim health insurance deductions for all your employees but not for your own family at the corporate level. While this sounds unfair, it all washes out on your individual tax return.


Now is the time to make sure that you have reported your health insurance correctly in order to get the best deduction. Even though the law was enacted and clarified late in 2007 (IRS Notice 2008-1), we are still seeing errors on Forms K-1 and W-2s coming from payroll companies and our fellow accountants – and those errors are expensive to fix after December 31. Please note - if you have been purchasing health insurance coverage for your employees, the expense is deductible as health insurance and is generally not taxable to your employees.

The problem addressed by IRS Notice 2008-1 is the “more-than-2%-shareholder-employee’s” expense. Here are the steps to ensure deductibility at both the corporation and personal levels:

1. Shareholder-Employee. If your company is profitable, you should be paying yourself “reasonable” compensation – that is the law as we discussed earlier. Compensation is payroll, complete with payroll taxation. In order for health insurance premium expense to be deductible at the company level, it must not exceed your personal earned income. Thus, you must have wages from your company in order to be eligible to have health insurance paid by the company. If your wages are $10,000, then you could have health insurance of $10,000. That makes sense, doesn’t it? If you are not an employee of a company or a dependent of an employee, why on earth would the company pay your insurance for you? If your company is not profitable, you are not required to take payroll, but then your health insurance is not deductible at the company level (you can still take it as a distribution and deduct it on Schedule A Itemized Deductions).
2. Who Owns the Accident and Health Plan? Much confusion here was explained in Notice 2008-1. The company can own a group plan or you can own an individual plan. Important: the company must pay for the premiums either directly or as a reimbursement to you, the shareholder, for your personally owned policy. Do not fail to have the company reimburse you if you buy an individual policy. If the company does not reimburse you, the company cannot take the deduction – and you lose. You can, however, still take Schedule A Itemized Deduction.
3. Bookkeeping. On your corporation books, you will have expense for health insurance whether you pay it directly or you reimburse yourself. It is a company level expense/deduction. It is NOT a distribution to you. Ultimately, it becomes a payroll expense, deductible ONLY at the corporation level.
4. Payroll Reporting. During the year, when you file your payroll quarterly reports (Form 941 and your state unemployment reports), you will report your health insurance premiums as PAYROLL that is NOT subject to Social Security or Medicare. You will also not be subject to federal and generally state withholding ).
5. W-2 Year End. Your W-2 will include health insurance premiums in your gross Box 1 wages, but will NOT include the premiums in Box 3 or Box 5 (Social Security and Medicare). You should also see your health insurance premiums in Box 14 as S Corp Health/Medical Insurance. We will not report your health insurance premiums as a K-1 distribution item, because if we do you may ONLY take a Schedule A Itemized Deduction and NOT a page one deduction. It is imperative that your health insurance premium be reported on your W-2 to assure the best tax treatment.
6. Your 1040. You will report your total Box 1 wages on your personal tax return. And then you will take a Page One deduction for the health insurance premiums. The result is a wash. This is correct. Bizarre, but correct. It’s not the way we would have done it. But it is what it is. Read on.

THE ACTUAL DEDUCTION IS TAKEN AT THE COMPANY LEVEL ONLY, so your total ordinary income reportable on your K-1 will be reduced by the health insurance deduction. If this seems like a complicated way to take a deduction, we agree with you! We have no idea why Congress and the IRS  made this so difficult, but we do know that if you follow these procedures, your health insurance payments receive a good deduction and if you DO NOT follow these procedures, you are limited to a Schedule A Itemized Deduction—generally not a good deduction.


We all know that car and truck expenses for trips on behalf of your trade or business are a deductible business expense.  Since I am in the mood this month to cover the three toughest tax topics that small business corporation owners face let’s explore the crazy tax world of correctly deducting your vehicle expenses. This discussion is courtesy of our Tax Coach software system.

Your first step involves calculating your Business Use Percentage (BUP) for your vehicle. The IRS divides mileage into three categories: 1) business; 2) commuting; and 3) personal. Ordinary commuting and personal trips are nondeductible. Trips from home to your first business stop and trips from your last business stop to home are personal. (Daily trips to the bank, post office, and similar stops where you perform no service don’t qualify.)

Travel between temporary business stops is deductible. So, for example, if you leave home, make six business stops, meet a prospect for dinner, then drive home, your mileage between your first stop and the restaurant is deductible. However, if you have a regular business stop (one that you make at least 8 to 10 times in a six-month period) that you expect to last less than a year, you can count those as business miles, too. If home is your principal place of business, then all business trips are deductible.

Once you’ve calculated your BUP, you have two ways to calculate your deduction:

1. The mileage allowance is 55.5 cents/mile (2012) plus parking, tolls, and your BUP of interest on your car loan and state and local personal property tax on the vehicle. The allowance for charitable use of the vehicle is capped at just 14 cents/mile, and for medical and moving use, 19 cents/mile.

2. With “actual expenses,” deduct your BUP of all expenses:
• Depreciation and interest (purchased vehicles)
• Lease payments (leased vehicles)
• Insurance
• Gasoline, oil, and car washes
• Tires, maintenance, repairs
• Licenses, tags, and personal property tax
• Parking and tolls

Don’t assume that easier record keeping justifies settling for the “one size fits all” allowance. It’s the same for every vehicle, no matter how big or expensive. And the wrong choice can cost you thousands. The American Automobile Association ("AAA") estimates that in 2010 actual costs per mile exceed the IRS flat rate in almost all categories of vehicles and driving habits, at a gasoline cost of $2.88/gallon remember those days.

If you own rather than lease your car, you can switch from the allowance to actual expenses. You'll have to use straight-line, rather than accelerated depreciation. You can’t go the other direction, switching from actual expenses to the allowance, if you’ve claimed any first-year expensing or accelerated depreciation.

The IRS approves four methods to track business miles. All of them require “adequate records or other sufficient evidence” to support business use. This means logging mileage at least weekly and keeping receipts for all expenses over $75.

1. “Brute Force.” Record every business mile for the year. Divide by the year’s total miles to calculate BUP. (If you use more than one car for business, this is the method you have to use.)
2. “90 days.” Record business miles for a “typical” 90-day period. Calculate BUP for that period, and use it for the entire year.
3. “First Week.” Record business miles for the first week of each month. Calculate BUP and use it for the entire year.
4. “Simplified.” Record starting and ending mileage for a 90-day period. Record personal and commuting miles for that period, and assume all the rest are for business. Calculate BUP and use it for the entire year.

Clear as mud.  We advocate a third system that seems to work for most clients.  Actual expenses with a clear policy that states that personal use of the vehicle is not allowed with the exception of commuting to and from your place of business.  You will have to pay taxes on the “implied income” derived for the commuting portion of the vehicle. This system only works if you have another vehicle for personal use.  

I strongly encourage you to contact me to discuss your current situation one on one. In fact I will buy you lunch if you want.