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Taxes & Accounting

Sara Wright

2008-04-01 11:22:00

Question: How long is it necessary to keep records for the IRS?

Answer: Keeping business records is not only necessary, but, in some cases, mandatory. The questions many business owners ask is, “What records do I keep and how long should I keep them? Most owners don’t worry about record keeping because they are so involved with the operation of their business that the paperwork becomes secondary. Secondary, that is, until that paperwork is needed by the bank for a loan or by the government to ensure you are complying with their regulations. The following is a suggested, general record keeping guide. Only the most used records are listed. If you have questions on how long to keep specific records, consult an attorney or accountant. However, when in doubt, keep them. TIME RECORD • 2 Years General business correspondence • 7 Years Bank Deposits and Withdrawals Payroll Time Sheets Invoices, Work Orders, Permits and Licenses Budgets, Expense Reports Travel and Entertainment Records Gift and Gratuity Records Office Equipment Records Sales Records, Personal Records Form 8300’s, Tax Reports and Records, Sales and Excise Tax Computations Old Insurance Policies and Records, Accident Reports and Claims • 8 Years Disability Insurance Records, Insurance Safety Reports Employee Pension and Benefit Records •10 Years Cancelled Checks, Bank Statements and Reconciliations, All Settled Insurance Claims • Permanently Audit Reports, Tax Returns, Contracts, Trademark and Copyright material Corporate Reports, Bylaws, Minutes of Meetings, Stock Reports and Dividend Payments, Partnership Investments, Buy-Sell Agreements, Property Records, Contributions, Distributions Non-financial records (maintenance records, vendor lists, customer lists, etc.) will vary by business, but they should be maintained separately from your financial records and kept for as long as you need them.

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Taxes & Accounting

Sara Wright

2008-03-01 09:38:00

Question: How do I know if an employee qualifies as an independent contractor or is he an actually an employee?

Answer: One of the hottest tax issues in recent years has been whether certain workers qualify as independent contractors or employees. Because of the abuses by some business owners, the IRS very carefully scrutinizes independent contractor claims. There are three common misconceptions about independent contractors: (1) MYTH: They are part time or temporary. FACT: Part time or temporary workers can still be employees. (2) MYTH: They earn less than $600 in a calender year. FACT: It doesn’t matter how much money an individual makes, they can still be an employee. (3) MYTH: They make quarterly estimated payments to the IRS. FACT: Even employees can make quarterly estimated payments to the IRS. To determine if you can hire a person as an independent contractor and not withhold employee payroll taxes, answer the following questions. If the answer to the first, and most important, question is “NO,” the worker is definitely an employee and you won’t need to answer the remaining questions. (1) Employer controls only the final result and not how the work is accomplished. (2) Worker doesn’t receive extensive training from employer. (3) Works as professional or skilled technician. (4) Worker sets own time schedule or assignment is not performed at employer’s site. (5) Provides own tools, equipment and/or supplies. Has other customers/clients. (6) Has business card/stationery and paid advertising. (7) Employer doesn’t have other employees doing similar work. (8) Has written contract for a specific job or set time frame. (9) Sends a bill for services performed. Total number of “YES” answers. If your “YES” score was between: 7-10, The worker will probably qualify as an independent contractor. 4-6, The worker may qualify as an independent contractor. 0-3, Practice writing zeros - you’ll need lots of practice to pay the penalties and back taxes when you’re audited. The check to the IRS, for back taxes, penalties and interest for incorrectly classifying an employee as an independent contractor, can be more than 50% of the total wages paid to the worker. Change the status of the independent contractor to employee and save yourself worry (and ultimately money). This test is only a guideline and doesn’t guarantee IRS agreement. Only by completing the 4 page SS-8 Form and receiving an official IRS ruling can you be sure your person qualifies as an Independent Contractor.

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Taxes & Accounting

Larry Sell

2003-11-01 08:49:00

: It's the time of year that more giving to charities normally occurs.  What are the rules on tax-deductibility of charitable contributions or cash, items or services made by a business?  What are the rules for personal giving of the same?

ANSWER:  I think it is important to distinguish business entities that pay income tax from business entities that are pass through forms of business, such as partnerships, sole proprietors and Subchapter S corporations.  These pass through business entities will report payments made to charities as a separate item for the individual owners to report on their individual income tax returns.  So there is generally no distinction between payments made by these types of business and a personal contribution.  However, Kansas does have a program that provides for business entitles to qualify for a Kansas income tax 'credit' for payments made to certain pre-qualified charitable organizations.QUESTION: If the business is operated within a taxable corporate entity (a 'C' corporation), what are the rules for deductibility?ANSWER: The deduction of a corporation for a contribution to a qualifying organization is generally limited to 10% of its taxable income before the contribution deduction.  Contributions are valued at fair market value with several exceptions.  Ordinary income property (property that if sold would generate ordinary income to the corporation) is limited to the tax basis of the property.  There are of course exceptions to this exception. These exceptions are very specific and need to be reviewed with a qualified advisor, but they relate to inventory type property, scientific research property and computer equipment. Other types of contributions generally follow the rules for individuals.QUESTION: What are the individual rules?ANSWER: Charitable contribution deductions are itemized deductions.  As such, an individual will only receive income tax benefit if they itemize their deductions.  The Kansas tax credit program is an exception.  Deductions of contributions of cash are limited to 50% of an individual's contribution base, which is normally their adjusted gross income.  These payments must be made to a qualifying charity.  These charities normally fall within the following tax exempt groups:  1-churches, 2-educational institutions, 3-hospitals or medical research organizations, 4-endowment foundations, 5-governmental units if payments made for exclusively public purposes, 6-organizations receiving substantial support from the public or a governmental unit, 7-private operating foundations, 8-private non operating foundations, 9-private foundations that pool contributions into a common fund.  Additionally, the contribution is only deductible if made to or for the use of: 1-The United States, a state or local government for exclusively public purposes, 2-A corporation, trust, fund or foundation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals, no part of the net earnings of which inure to the benefit of any individual, 3-a few other specific types of organizations.

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Taxes & Accounting

Chris Merchant

2003-08-01 13:57:00

QUESTION:  What constitutes a business versus a hobby for tax purposes?

ANSWER:  When a business involves personal pleasure or recreation, the IRS may take notice. Although certain activities are more susceptible to the hobby loss taint, (e.g., auto racing; gentleman farmer or rancher; horse or dog racing, breeding, or showing), no activities are immune. If the business generates losses that offset income from other sources, a taxpayer should consider all the facts and circumstances before deciding to deduct the losses. The IRS will consider nine factors to determine whether the activity is a hobby. The nine factors to be considered are:

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Taxes & Accounting

Chris Merchant

2002-12-01 09:12:00

QUESTION:  What are the things one can do now... before the endo the year... to lessen one’s taxes?

ANSWER:  Taxpayers who take the time to explore strategic year-end tactics to help reduce their income taxes both next spring and in future years should be applauded.   There are some things that taxpayers can do that might save them tax dollars.  Now is the time to project what your tax situation will look like for the year.  It is good financial management to know where you stand in relation to your income and deductions.  This allows you to take advantage of opportunities for tax saving that require action before the end of December.  For 2002, the following is what I recommend insofar as tax planning strategies that should be considered:1. Review your stock portfolio to determine if you should sell stocks to recognize capital losses to offset capital gains.  Remember that you can use losses to offset gains plus $3,000 of ordinary income.2. Make it a habit at the end of each year to evaluate your overall retirement plan.  If you can afford to do so, pump up your 401(K) deduction before your year-end bonus is paid.  If you can't contribute to your IRA account now, then start budgeting for your 2002 contribution, which can be made until April 15, 2003.3. If you are self-employed, then start a retirement plan by December 31, 2002. You have until the time you file your tax return to make your contribution but only until year-end to adopt the plan.4. With interest rates low, now is the time to convert nondeductible credit card interest into deductible home equity interest by paying off personal debt with a home equity loan.5. If you itemize your deductions, then you need to clean out your closet and donate your old clothing and household items to a charitable organization.  Be sure to keep a detailed list with the value of the items.  If you have an unfulfilled charitable pledge, then consider donating appreciated stock instead of cash.  If you have owned the securities for more than a year, you can deduct the full value of your gift and avoid paying taxes on the appreciation.6. Another year-end opportunity if you itemize your deductions is to accelerate deduction into this year.  If you are going to owe state income taxes or have a January estimate due, then consider paying it this year.  If it seems likely that you will be close to exceeding the 7.5% limit on medical expense, then you should consider accelerating elective treatment and paying for it before December 31st.7. For high net worth individuals, consider establishing a gift-giving program to utilize the $11,000 or $22,000 (if married) annual gift exclusion.  The transfer of income producing assets to family members now will lower your taxes in future years as well as benefit your estate plan.8. If you are receiving Social Security Benefits then you should determine if any of those benefits are taxable. Depending on your other income and your filing status, benefits may be tax-free or up to 85 percent of the benefits may have to be included as income. For example, if you file as a married couple some percentage of the benefits is taxable if your total income plus one half of your net benefits exceed a base of $32,000. Therefore you would benefit by eliminating income in excess of the base amount. This might be done by, selling stocks at a loss to offset gains or, postponing distributions from IRA's.             9. Any year-end planning should be done with the dreaded alternative minimum tax (AMT) in mind.  This tax covers more kinds of income and allows fewer deductions and credits than ordinary income tax.  For example, one earlier idea was for taxpayers who pay state income taxes quarterly was to make the January payment by December 31st.  That lets you claim the deduction for 2002 and earns you the tax savings a year ahead of time. But that can be disastrous if you face the AMT because deductions for state and local income taxes aren't allowed.  Now is the time for you to figure out if you face an AMT problem and, if so, plan to minimize the consequences.Remember after you have done your planning be sure to check your estimated tax situation. The IRS charges a penalty if you haven't paid enough on your 2002 tax through withholding and estimated tax payments. As always if you are unsure of the tax consequences of any tax situation seek the advice of a tax professional.

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Taxes & Accounting

Larry Sell

2002-08-01 11:55:00

:  What are the current depreciation schedules for purchase of equipment for a business, over the $17,000 that can be expensed?

Larry Sell Question:  What are the current depreciation schedules for purchase of equipment for a business, over the $17,000 that can be expensed?Answer:  Taxpayers may deduct a reasonable allowance for the exhaustion, wear and tear of property used in a trade or business, or of property held for the production of income. The methods of depreciation are dependent on when the property was placed in service. The Modified Accelerated System (MACRS) applies to tangible property generally placed in service after 1986 and the Accelerated System (ACRS) applies to property placed in service after 1980 and before 1987. Under MACRS, the cost of property is recovered using (1) the applicable depreciation method, (2) the applicable recovery period, and (3) the applicable conventionApplicable depreciation methods include straight line, 150% declining balance and 200% declining balance. Applicable recovery periods include 3, 5, 7, 10, 15, 20, 27.5, 31.5 or 39 years.  Applicable conventions include mid-month, mid-quarter and mid-year.  The particular asset that is purchased will determine the available methods and the appropriate recovery period.  The date the asset is purchased and the type of asset purchased will determine the applicable conventions.  An expense deduction is provided for qualifying taxpayers who elect to treat the cost of qualifying property, called Sec. 179  property, as an expense rather than a capital expenditure.  The maximum Code Sec. 179 deduction is $24,000 for tax years beginning in 2001 and 2002. Thereafter, the maximum deduction is $25,000 per year.  There are of course limitations and special rules that apply. The Job Creation and Worker Assistance Act of 2002 (signed by President Bush on March 11, 2002) created a 30 percent additional first-year allowance for qualifying MACRS property.  The property must be acquired after September 10, 2001 and before September 11, 2004, and placed in service before January 1, 2005.Within each of the preceding paragraphs there are special rules, limitations and terms one should be familiar with to determine the actual depreciation deduction available. As an example assume the following facts:  Asset placed in service July 1, 2002Description: Computer Equipment         (New), MACRS recovery period 5 years; Convention Half Year Method 200DB, Cost $50,000.The maximum depreciation deduction for calendar 2002 would be $35,440.  This is made up of $24,000 section 179, $7,800 30% bonus and $3,640 in regular MACRS deduction.  The year 2003 depreciation amount would be $5,824 on this asset.  The new 30% bonus depreciation is mandatory unless you elect out of the provision.  What that means is that if you do not take the deduction for assets placed in service after September 10, 2001 and you do not elect out of the provision, you must reduce your tax basis by the amount of depreciation you should have taken which includes the 30% bonus.  Many affected taxpayers filed their income tax returns before this new law was passed.  These taxpayers should determine whether amended returns are appropriate. The election to "opt out" of the bonus depreciation is assumed to have been made for returns filed before May 31, 2002 if certain conditions are met.  For all returns filed after May 31, 2002 an affirmative election must be included in the income tax return.  Additionally, many states will not allow this additional deprecation for state income tax purposes.  Kansas is still debating this issue. In summary, calculating depreciation is not difficult.  However, the limitations, terminology and special rules make it a somewhat complicated area of the tax law.  Unless you have a good understanding of these rules, I suggest you seek the counsel of a competent individual that does. 

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Taxes & Accounting

Larry Sell

2002-07-01 12:16:00

Question:  How long does one need to keep records?

Answer:  This is a very common question that arises throughout the year, and especially as the spring house cleaning and organization gets into full swing.  Below are general guides to follow:IndividualsHow long to keep records is a combination of judgment and state and federal statutes of limitations. Since federal tax returns can generally be audited for up to three years after filing and up to six years if the IRS suspects underreported income, it's wise to keep tax records at least seven years after a return is filed. Requirements for records kept electronically are the same as for paper records.Generally, follow these recommended retention periods for various documents:Tax returns (uncomplicated) - 7 years; Tax returns (all others) -Permanently; W-2s - 7 years; 1099s - 7 years; Cancelled checks supporting tax deductions - 7 years; Bank deposit slips - 7 years; Bank statements - 7 years; Charitable contribution documentation - 7 years; Credit card statements - 7 years; Receipts, diaries, logs pertaining to tax return - 7 years; Investment purchase and sales slips - Ownership period + 7 years; Dividend reinvestment records -  Ownership period + 7 years; Year-end brokerage statements - Ownership period + 7 years; Mutual fund annual statements - Ownership period + 7 years; Investment property purchase documents - Ownership period + 7 years; Home purchase documents - Ownership period + 7 years; Home improvement receipts and cancelled checks - Ownership period + 7 years; Home repair receipts and cancelled checks - Warranty period for all items; Retirement plan annual reports - Permanently; IRA annual reports - Permanently; IRA nondeductible contributions (Form 8606) - Permanently; Insurance policies - Life of policy + 3 years (Check with your agent. Liability for prior years can vary.); Divorce documents - Permanently; Loans - Term of loan + 7 years; Estate planning documents  - Permanently.BusinessesIn business, good recordkeeping is essential not only for tax reporting purposes but also for the success of the company. The guidelines below give retention periods for the most common business records. Accounts payable - 7 years; Accounts receivable - 7 years; Audit reports - Permanently; Chart of accounts - Permanently; Depreciation schedules - Permanently; Expense records - 7 years; Financial statements (annual) - Permanently; Fixed asset purchases - Permanently; General ledger - Permanently; Inventory records - 7 years (Permanent for LIFO system); Loan payment schedules -  7 years; Purchase orders (1 copy) - 7 years; Sales records -  7 years; Tax returns - Permanently; Bank reconciliations - 2 years; Bank statements - 7 years; Cancelled checks - 7 years (Permanent for real estate purchases); Electronic payment records - 7 years; Board minutes - Permanently; Bylaws - Permanently; Business licenses - Permanently; Contracts (major) - Permanently; Contracts (minor) - Life + 4 years; Insurance policies - Life + 3 years  (Check with your agent. Liability for prior years can vary); Leases/mortgages - Permanently; Patents/trademarks - Permanently; Shareholder records - Permanently; Stock registers - Permanently; Stock transactions - Permanently; Benefit plans - Permanently; Employee files (ex-employees) - 7 years (Or statute of limitations for employee lawsuits); Employment applications - 3 years; Employment taxes - 7 years; Payroll records - 7 years; Pension/profit sharing plans - Permanently; Construction records - Permanently; Leasehold improvements - Permanently; Lease payment records - Life + 4 years.

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Taxes & Accounting

Chris Merchant

2002-03-01 16:18:00

Question: I am starting a retirement savings account this year and would like to know if I should put money into an IRA. If so how much can I put in and  is a Roth account better than a regular IRA?

Answer:  The Individual Retirement Account (IRA) benefits are bigger and better than in past years. For those investors who have fallen behind in providing for their retirement goals they can use these improvements to get started or catch up.  For those whose retirement plans are already underway these changes can help them get even further ahead.  Regardless of where you stand now, you should use the IRA to the fullest extent possible. Through the years, it remains one of the best investment vehicles around.  There are two basic types of IRAs, the Traditional and the Roth. Both allow money to grow tax-free until withdrawn (generally, after age 59 1/2). With either IRA, there is a 10 percent penalty, in addition to the tax liability, for withdrawing money before age 59 1/2, although the penalty can be avoided under some circumstances.For the tax year 2001 and before contributions to IRAs could not exceed $2,000 in any year. Under new laws, contributions are increased to a maximum $3,000 a year in 2002-2004. The limits are increased to $4,000 in 2005-2007 and $5,000 in 2008.  Furthermore, taxpayers age 50 and older will be able to make additional "catch-up" contributions to their IRAs beginning in tax year 2002. In years 2002-2005, they will be able to contribute another $500 annually. In year 2006, they will be able to contribute an additional $1,000 annually. Thus, for 2002, individuals age 50 or older or who will turn 50 during the calendar year may contribute a total of $3,500 to IRAs. Those younger than 50 may contribute up to $3,000.Traditional IRAs were designed to encourage taxpayers to increase their retirement savings by making deductible contributions to what is effectively a government-authorized savings account. The Traditional IRA allows the investor to deduct his contribution from his taxable income. This tax deduction is available to anyone who cannot participate in a company-sponsored retirement plan.  Those individual that can participate in a company provided retirement plan can take a partial deduction if their income is between $34,000-$44,000. For married couples the income limitation for a partial deduction is $54,000-$64,000.  Those over the income guidelines who can participate in a company retirement plan get no deduction. The Traditional IRA is fully taxable when withdrawn.The tax benefits of a Roth IRA are "back loaded" rather than "frontloaded" as with deductible IRAs. Contributions to Roth IRAs are nondeductible, but earnings build up tax-free and taxpayers can eventually withdraw funds, including earnings, tax free if the funds are withdrawn after age 591/2 and five years after opening the Roth account.Individuals earning less than $95,000 may fully participate in a Roth.  Individuals earning $95,000-$110,000 and couples earning $150,000-$160,000 may put in part of the full amount.  Those earning over those guidelines may not contribute.Now to answer your question, which is best? If you can't claim the full deduction for a traditional IRA then the Roth is usually best. In addition, if you expect to be in the same or higher tax bracket at retirement, then the Roth is best. If you expect to be taxed at a lower rate during retirement or if you can benefit from the deduction now, then the Traditional IRA is probably the best. 

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Taxes & Accounting

Larry Sell

2002-02-01 16:35:00

Question: When establishing a new business, what are the legal implications for the different entities such as, a Class C Corp, Sub Chapter S, Sole Proprietorship, or LLC?  What are the tax implications?  Why would you select one over the other?

Answer: Larry Sell, Accountant: Each new business situation is different, and each must be individually analyzed to determine the most appropriate business entity structure.  It is not an easy choice to make. John Gibson, Attorney: A few of the issues to be resolved are: is this a brand new business or a restructuring?  Is it a manufacturing business, retail sales, or a service business?  Will there be employees?  Larry Sell: How many owners will there be initially and in the future?  Is it anticipated to be profitable in the early years?  What are the working capital needs of the business and where are the funds coming from to start the business?John Gibson: Since the question is very general, and we don't have a specific situation to address about the above specific issues, we'll just discuss the various available business entities.  The most common business entity is the Sole Proprietorship.  As its name implies, this is simply one person going into business for him or herself.  No special filings with the Secretary of State or any other governmental regulator are needed nor are any agreements or incorporation papers required.  The individual bears all liability associated with the business.Larry Sell: This is the simplest form of entity.  The net income or loss is reflected on schedule C of the taxpayer's individual return, thus no other business income tax return is required.  Absent liability concerns, this type of entity is usually recommended for an individual business owner when profits are estimated to be below $100,000 and the working capital is relatively small.  A separate federal identification number is not required unless the business will have employees. John Gibson: A second common entity is the Partnership.  This is an association of two or more persons pursuing a business.  Kansas has adopted a Uniform Partnership Act which provides the rules for operation of the Partnership as well as the rights and duties of the partners.  A written partnership agreement, however, can provide all of these rights and duties, so long as they do not violate the law.  Since an association of people would typically like to provide many of its own rules, a written partnership agreement would be advisable.  In a general Partnership each partner is liable for all of the partnership debts and liabilities, and has equal rights in the management of the partnership.  The partners also share equally in the profits and losses, unless otherwise provided in the partnership agreement.Larry Sell: The Partnership is a fairly flexible entity format.  The net income is passed through to the partners based on their ownership percentages.  The partners pay the income tax on their share of income.  There are methods available to provide for special allocations or guaranteed payments to partners.  The partnership does not pay income tax but a return is normally required.  The partners are treated as self-employed individuals unless the business is a rental business.  Losses may be limited due to the passive activity rules, which are too extensive to discuss here.   John Gibson: A third entity, Limited Partnership, is a "hybrid" form of organization having some characteristics of a general partnership and some of a corporation.  In Kansas the Revised Uniform Limited Partnership Act covers the formation and operation of a Limited Partnership.  A Limited Partnership has both at least one general partner and at least one limited partner.  With respect to the general partner or partners, a Limited Partnership is very similar to that of a general partnership in that each general partner is liable for all of the partnership debts and liabilities, and has equal rights in the management of the limited partnership.  With respect to the limited partners, a Limited Partnership is more similar to a corporation in that each limited partner is typically at risk only to the extent of that limited partner's contribution to the Limited Partnership, the same as a stock holder in a corporation.  Larry Sell: We see this type of entity more often in a family situation or where the business needs capital infusion and does not want to share the control of the business.  The limited partner is typically not involved in the business and as such would not be subject to self-employment tax. In the family setting, this form of entity may allow parents to transfer the business to the children while maintaining control. John Gibson: Another very common form of organization is the Corporation.  Kansas has a very modern and up-to-date corporate law which sets forth the requirements with respect to the formation and operation of a for-profit Corporation.  One of the main reasons for forming a Corporation is that the stockholders of a Corporation generally will not be liable for the debts and liabilities of the Corporation.  Therefore, stockholders' losses will generally be limited to his or her individual investment in the corporation stock.Larry Sell: The corporation is a tax paying entity unless an S election is made.  The S election must be made timely or the corporation will be taxed as a C corporation until the following year.  There are limitations on who may own stock in an S corporation as well as the number of stockholders. The C corporation may elect a fiscal year end in most cases while an S corporation is generally limited to a calendar year. The C corporation pays income tax on the net income of the business.  The federal tax rates of the C corporation are generally lower than individual rates unless the corporation business involves personal service, in which case the corporate rate may be higher than individual tax rate.  Double taxation can occur in the C corporation that pays income tax and distributes dividends that are not deductible by the corporation, but are taxed again by the shareholder.  The C corporation generally provides for more liberal rules in deducting fringe benefits than an S corporation, sole proprietor or partnership.  The S corporation operates much like a partnership with stricter rules on distributions and limitations on loss deductibility.  John Gibson: A couple of fairly new business entities are the Limited Liability Company and the Limited Liability Partnership.  A Limited Liability Company (LLC) is an entity that can have the tax and management characteristics of a general partnership as well as the limited liability advantage of a corporation.  Kansas has provided for LLCs in the Kansas Limited Liability Company Act.  In order to set up a Limited Liability Company, Articles of Organization must be filed with the Secretary of State.  These are similar to the Articles of Incorporation for a corporation.  These are very simple organizational documents setting forth who the members of the LLC are, its business purpose, and who the registered agent will be. An operating agreement, which is in certain respects like the by-laws of a corporation, is required.  An operating agreement is like a partnership agreement in that it sets forth the duties and rights of the members of the LLC and also can be used to set forth allocation of profits and losses.Larry Sell: The LLC is taxed like a partnership unless the members elect to be treated like a corporation.  As in the partnership, the LLC pays no income tax and the income is passed through to the members.  When comparing pass through entities, we find the LLC to be favored over the S corporation because of the flexibility of the partnership rules over the corporate rules.  The advantage of the S corporation is the ability to limit the self-employment tax in the appropriate circumstances.  The member of an LLC in most cases will be subject to self-employment tax on their entire share of earnings from the LLC.  Like the S corporation but unlike the partnership, the LLC may be formed with one member. A single member LLC will generally report the income as a sole proprietor on schedule C of their individual income tax return and a separate partnership return will not be required.  John Gibson: Generally, a Limited Liability Partnership (LLP) is a modification of a general partnership in that it limits the liability of each of its partners arising from the negligence, malpractice, wrongful acts and omissions or misconduct of other partners or any person not under the direct supervision and control of the partner.  Unlike an LLC, an LLP does not limit the liability of its partners for other debts and liabilities of the LLP or for the acts and omissions of a partner.  The business people most likely to use an LLP are professionals, usually attorneys, doctors, and accountants.Larry Sell:  The major accounting firms were primarily responsible for pushing this legislation through state by state.  Many states did not have LLC legislation or were not appropriate for personal service organizations.  Today you will note that most large accounting and law firms operate as a Limited Liability Partnership.  The income tax treatment is the same as a general partnership. John Gibson:  That pretty well covers the waterfront on business entities that are usually used for a new business.Larry Sell: As an overview, the determination of the most appropriate entity for a new business to form will be unique to that business.   The advantages and disadvantages should be explored and an informed decision be made with the assistance of qualified advisors from both the legal and accounting professions. 

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Taxes & Accounting

Larry Sell

2002-02-01 15:35:00

:  My wife is a commissioned salesperson who will be going on maternity leave in March. If we install a desk system, a modem link to her company's computer, call forward her work phone line to the house, and add a fax-she can work out of our home on a limited basis and not lose clients. This home office equipment is not just a convenience, but is essential to competing in the world of sales with a babe in arms. Without trying to write off the space in our home, can we deduct these expenses from our taxes?

Larry Sell Question:  My wife is a commissioned salesperson who will be going on maternity leave in March. If we install a desk system, a modem link to her company's computer, call forward her work phone line to the house, and add a fax-she can work out of our home on a limited basis and not lose clients. This home office equipment is not just a convenience, but is essential to competing in the world of sales with a babe in arms. Without trying to write off the space in our home, can we deduct these expenses from our taxes?Answer:  Generally, the use of a home computer by an employee is not deductible unless it can be shown that the computer is both for the convenience of the employer and is a condition of employment. In the fact pattern above, it appears that although the employer may allow the employee to work out of the home, it is the personal decision of the employee, not the employer that will limit the employee's ability to work at the convenience of the employer. These limitations apply to assets that are defined as listed property and would include the computer, computer peripherals, and communication equipment.  An exception to these listed property rules exists if the home office rules are satisfied. In other words, the question asks if the expenses can be written off without trying to write off the space in the home.  The answer is, the computer deduction may be easier to sustain if home office deductions were allowed.  Home office rules require that the home office be for the convenience of the employer and must be a specific area of the dwelling unit that is 1)used regularly and exclusively as the taxpayer's principal place of business or 2)is a place where clients regularly meet with the taxpayer in the normal course of business.      I would strongly recommend reading 'IRS Publication 587 Business Use of Your Home', for more detailed information.       Another factor affecting employee expenses is the 2% of Adjusted Gross Income (AGI) limitation.  Non-reimbursed employee business expenses are treated as miscellaneous itemized deductions.  The total of these miscellaneous itemized deductions are allowed to reduce taxable income only to the extent they exceed 2% of Adjusted Gross Income.        For example, if the AGI reflected on the return is $100,000, the first $2,000 of miscellaneous itemized deductions do not reduce taxable income. I discussed automobile expenses, deductible travel expenses, and entertainment expenses in the January, 2002, The Q and A Times, in response to a related question.     I recommend you review 'IRS Publication 463, Travel, Entertainment, Gift and Car expenses' for more detailed information.       The deductibility of home office expenses, business expenses and employee business expenses, both reimbursed and non-reimbursed, are areas of the tax law that are applied to specific facts and circumstances and the rules in these areas are complex.  I have mentioned two of the available publications that address these topics more thoroughly.  I also recommend you consult with a qualified individual to advise you based on your unique set of facts and circumstances.

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Taxes & Accounting

Larry Sell

2002-01-01 13:32:00

Question:  I have a business and operate it from my home. I am wondering about deductions.  How much of my mortgage payment can I write off?  What auto expenses can I deduct? What is considered business travel? How about entertainment expenses and my country club dues?

Answer:  As in any business you are allowed to deduct ordinary and necessary business expenses.  However, when you operate a business from the home you must allocate appropriate household expenses between your personal residence and your "business office".   The business office must be a specific area of your home that is used regularly and exclusively for your business.  In addition, the office in your home must be your principal place of business.  By dividing your home's total square feet by the business office square feet you will determine a percentage of the home that is used for business.  That percentage will be applied to utilities, insurance, real estate tax, mortgage interest, PMI insurance, security costs, etc., and your home's tax basis for calculation of depreciation.  There are special rules that apply to day care providers.  The IRS requires that Form 8829 be completed for home office expenses and this form will walk you through the calculations. A couple of words of caution are in order.  First, you will note that the net home office expense will be limited to your net income of the business.   In other words, your home office will not produce or increase a net operating loss.  Secondly, once you have converted a portion of your home to a business office, you may incur a taxable gain when you sell your home. I recommend you review 'IRS Publication 587 Business Use of Your Home' for more detailed information.  Automobile expenses are generally deductible based on the percentage of business use.  That percentage is determined by dividing your total miles by your business miles.  Business miles are miles driven exclusively for business.  You can elect to use actual expenses or a standard mileage rate.  The standard mileage rate for year 2001 is 34.5 cents per mile and increases to 36.5 cents per mile for year 2002.  Using the actual expenses would include costs of gasoline, oil, repairs, insurance, license plates, property tax, interest expense and depreciation expense.  Deductible travel expenses include those ordinary and necessary expenses you have when you travel away from home on business. The type of expense you can deduct depends on the facts and your circumstances. When you travel away from home on business, you should keep records of all the expenses you have. You can use a log, diary, notebook, or any other written record to keep track of your expenses.  You must be able to substantiate the following travel and entertainment expenses for them to be deductible:  amount, time and place, and business purpose.You can deduct entertainment expenses only if they are both ordinary and necessary and meet either a directly related test or an associated test. To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:1) The main purpose of the combined business and entertainment was the active conduct of business, 2) You did engage in business with the person during the entertainment period, and3) You had more than a general expectation of getting income or some other specific business benefit at some future time. To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment:1) Is associated with your trade or business, and 2) Directly precedes or follows a substantial business discussion. The amount you can deduct for entertainment expenses may be limited. Generally, you can deduct only 50% of your entertainment expensesEntertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips.Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. A meal expense includes the cost of food, beverages, taxes, and tips for the meal. To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided.You cannot deduct dues (including initiation fees) for membership in any club organized for business, pleasure, recreation, or other social purpose. This rule applies to any membership organization if one of its principal purposes is to conduct entertainment activities for members or their guests, or to provide members or their guests with access to entertainment facilities.I recommend you review 'IRS Publication 463, Travel, Entertainment, Gift and Car expenses' for more detailed information. I also recommend you consult with a qualified individual to advise you based on your unique set of facts and circumstances. 

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Taxes & Accounting

Chris Merchant

2002-01-01 12:24:00

Question:  Why should I file a tax return electronically? Is it safe? Do I get my refund more quickly? Is there a higher chance of being audited if you file electronically?

Answer:  To answer your questions, we first need to look at the history of electronic filing and what it is.  Electronic filing was developed by the IRS in the 1980's as a way to automate the processing of individual income tax returns. Over the years, the IRS e-file program has grown in both size and functionality, making e-file the fastest most accurate way to file your return.  Electronic tax filing is the process of translating a completed tax return into a computer-readable format for automatic processing. In performing this translation the return is cross-checked for accuracy. After the return is completed it is securely transmitted to the IRS filing center where the IRS processes the return, usually within 48 hours, and provides a response back to the transmitter whether the return was accepted or rejected.  If the return is rejected, the IRS will give the reason the return could not be accepted. The preparer will then correct the error and resubmit the return to the IRS for processing.It is estimated for the tax year 2001,  over 40 million people will use IRS e-file for faster refunds and accurate, secure filing. Taxpayers filing a Balance Due return will also benefit from e-filing and  e-paying in a single step by direct debit (automatic withdrawal) or credit card.Speed of the refund is the primary reason most taxpayers e-file their returns. Taxpayers can expect to receive their refund via direct deposit in only 10-14 days, compared to 8-12 weeks for mailed returns. Even taxpayers who request to have their refund check mailed receive their checks faster by mail.  A second reason people e-file is that it eliminates any problems with mail hold-ups, like what happened to mail delivery during the heights of the recent anthrax scare.  More accurate filing reduces the chances that a return will be selected for audit since 99.5% of all e-filed returns are filed accurately, compared to 82% of all mailed returns.  The 18% error rate for mailed returns is due primarily to manual data entry errors by either tax prepares or IRS employees. Acknowledgement that your return was received assures the taxpayer that the IRS receives the return.  Mailed returns receive no acknowledgement at all. The Kansas Department of Revenue has joined with the IRS to provide for the electronic filing of Kansas tax returns. The Federal/State e-file program provides a "one-stop-shop" for tax preparation and filing. It allows taxpayers to file their federal and state returns through their tax preparer in one electronic transmission.Electronic tax preparation and filing is not for every taxpayer. If a single form has to be done in pencil, then the entire return has to be submitted by mail. So be sure to check that your return does not include any forms that would preclude it from being filed electronically.

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Taxes & Accounting

Larry Sell

2001-12-01 14:33:00

Question: Is there a list somewhere available that reminds people of the things they can do prior to December 31st to minimize income tax liabilities?

Answer:  The simple answer is yes and no.   There are indeed hundreds, maybe thousands of lists available.  Using the internet, you can find them on virtually every accounting firm's web site, many tax attorney web sites and other business web sites professing to have the answer to avoiding income taxes.  You can find them in publications at the public library, bookstores, garage sales and within articles that will be printed in almost every newspaper and magazine that has a business or money section.   This provides for the simple answer "yes".Often the items on a list raise new questions that did not exist before the list was read.  Since the list cannot answer a question, you are left to interpret what the item means or how to apply it.  Nearly every list will advise you that any one item may not be appropriate for your circumstances.  With this dilemma, many of us either give up trying to understand the list or choose to follow the recommendation without really understanding it only to find later that it really did not help us and many times actually cost us more.  So to the question of the existence of a unique list to your specific circumstance, the simple answer must be "no". In a more general sense, let’s take a look at some of the things that should be done before December 31 to minimize  income taxes. Like a road map that guides you to a destination, you need to know the beginning point.  This article may be too late, but I have always advised our clients to use the Thanksgiving holiday as a planning weekend for their year-end tax strategies.  Commit to 2 or 3 hours to sketch out the details of your current year's taxable income.  If you prepare your own return you should have an understanding of "gross income", "adjusted gross income", "itemized deductions", "standard deduction", and "taxable income".   If someone else prepares your return, your knowledge may be limited to understanding "gross income" and "deductions".   Another key element of tax planning is to understand that saving taxes is a part of a whole.  What I think most of us are interested in is preserving wealth.  In other words, to spend money just to save taxes may result in spending a dollar to save 30 cents.  You may feel better at saving 30 cents in taxes, but you lost a dollar in doing it.   Realizing that, at the end of November, over 90% of the year is complete, you can easily estimate the rest of the year.  If you prepare your own return, you can compute your 2001 income tax liability with reasonable accuracy.  You may have to use last year's tax tables, but they will be fairly close.  If someone else prepares your return, you should call your advisor for a tax estimate and recommendations on minimizing taxes and preserving wealth.  In either event, you are now in a position to know whether you (1) will itemize your deductions, (2) will not itemize your deductions or (3) you might itemize your deductions.  This determination is critical to selecting the strategies you attempt.   Common tax planning strategies:1. For itemizers (those taxpayers whose itemized deductions exceed the standard deduction before implementing the strategy):a. Consider pre-paying your state income tax liability before December 31.  Exercise caution, as taxpayers subject to alternative minimum tax will not benefit from this strategy.b. Consider paying 100% (rather than just 50%) of your real estate tax prior to December 31.  Exercise caution, as taxpayers subject to alternative minimum tax will not benefit from this strategy.c. Remember to deduct your personal property tax on automobiles, boats, and trailers.   If you bought a new car during the year, you may have paid these amounts at two different dates.d. Clean out the closet.  This simple strategy requires a little bit of time but saves income taxes as you clean your house.  There are several charitable organizations that accept contributions of used articles of clothing and household goods.  Make and keep an accurate list of the items you donate and determine a fair value of the items given.  These values would be comparable to what a thrift store would receive for them.  Do not attempt to use this strategy to clean out items of no real value or inflate the value of the item.  e. Consider paying your January mortgage payment by December 26.  The payment should post before year-end and your mortgage interest deduction will include December interest.f. Consider paying your January charitable pledge in December.g. If you refinanced your mortgage that had been previously refinanced, remember to deduct your unamortized loan interest from the previous refinancing. h. Remember to deduct the interest element of special assessments on your personal residence.  The principal portion is not deductible. i. Remember to deduct the balance due on your 2000 state income tax return if you paid this amount in the current year.2. For those who will not itemize or those that may itemize (those taxpayers whose itemized deductions do not exceed the standard deduction):a.  The year 2001 standard deduction is $7,600 for married couples filing a joint return, $4,550 for single taxpayers.   That means you get a free (doesn't cost you anything) deduction.   In evaluating whether you should pay out funds to be able to itemize, you need to determine your real benefit.  For example, assume you are filing a joint return as married couple and you have determined that you currently have $7,000 in itemized deductions and you are considering a deductible expense of $1,000.  If you pay this item, you will exceed the standard deduction by $400.  (7,000+1000-7600).  If your tax rate is 27.5%, the tax reduction on your additional expense is $110 ($400 x 27.5%), or 11%.  You may want to do this, but there may be a way to achieve higher tax reduction.b. If your normal itemized deductions consistently amount to a total just under the standard deduction, you have the opportunity to use the free deductions one year and double up your itemized deductions the next year. This common strategy is referred to as bunching your deductions, but it does require you to plan and plan for more than one year. c. To follow our example, let us assume our itemized deductions of $7,000 is made up of $3,000 in mortgage interest,  $2,000 in state income taxes, $1,200 in real estate tax, $300 in personal property tax, and $500 in charitable contributions.   For this example our two-year total of these amounts would be $14,000 and our two-year total of standard deductions would be $15,200.  If we take the standard in 2001, then we will delay paying our charities, delay our real estate tax and not prepay our January 1st mortgage payment.  We will also limit our state income tax payments to an amount sufficient to avoid penalties.  d. In year 2002 we will plan to pay all of our real estate tax, our current and pledged contributions, 13 months of mortgage interest and as much state income tax as possible. Our year 2002 itemized deductions could easily look like $1,800 in real estate tax, $800 in charities, $3,300 in mortgage interest and $2,500 in state income tax.  These amounts total $8,400.  When added to our year 2001 standard deduction, our two-year total deduction equals $16,000.  Our two-year total expenditures equal $14,000.  We just saved $220 in ($16,000-$15,200 @ 27.5%) by simply planning what we had to spend anyway.   And, if we spend that extra $1,000 anticipated above, our tax reduction is 27.5% rather than 11%, an extra $165. e. The example shown is a simplified presentation and may not work for you.  What it should show you is that with a little planning, you can save taxes without looking for the newest "hot tip".3. For all taxpayers:a. Review your gains and losses on investments, both realized and unrealized.  It is possible that you have some investments that have gone down in value.  You are allowed to deduct up to $3,000 in capital losses in excess of your capital gains.  Be wary of wash sale rules and mutual fund distributions.b. Avoid buying mutual fund investments late in the year or before the ex dividend date.  You could wind up converting your after tax investment dollar to a taxable dividend amount. c. If you sold any dividend reinvestment securities, remember to include those dividend re-investments as part of your tax basis. d. If you are currently over 70 and half and are in pay status on tax deferred retirement accounts, be aware that there are new rules on required minimum distributions.  These rules reduce the amounts you must receive in most cases.  Review these rules and the strategies available to you in reducing your 2001 taxable income. e. For business owners there is the ability to expense equipment purchases up to $24,000 for equipment placed in service before year-end.  For 2001, there is an election available to relax mid quarter convention rules for other purchases. f. Review available cafeteria plan elections prior to year-end.  This item will effect next year's taxable income. Some or all of these items may be inappropriate for your particular circumstance and I have only scratched the surface of minimizing taxes and preserving wealth.  Relying on these strategies without proper knowledge or advice is not recommended.   We are currently in the first year of a scheduled ten-year tax law change.  This law anticipates a gradual reduction in tax rates and when that is the case, the general rule is to accelerate deductions and delay income.  These laws have a way of changing overnight and you must continually monitor these changes to ensure your strategies are sound.  I strongly advise you to review your tax and financial planning with a qualified individual.