Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
One provision offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. There are also rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.
Special Charitable Contributions for Certain IRA Owners
An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.
To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:
Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Also, checks count for 2008 as long as they are mailed this year.
Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions.
Churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.
For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceeds the standard deduction. Use the 2008 Form 1040 Schedule A, available now on IRS.gov, to determine whether itemizing is better than claiming the standard deduction.
For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.Additional rules apply for a contribution of $250 or more.
The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
Friday, December 12, 2008
IRS Plans Crackdown on Withholding Taxes
In a recent article by WebCPA, the IRS Commissioner Douglas Shulman said the agency would begin ramping up enforcement against tax abuses such as the avoidance of withholding taxes, especially on dividends.
In a speech at a Washington, D.C., tax conference, Shulman said that withholding taxes is one of the areas in which the IRS plans to concentrate its enforcement efforts.
"Today, the IRS will add withholding taxes to the Tier I list of issues," he said. "The tier issue process will provide the needed organizational priority and coordination to ensure taxpayer compliance with the U.S. withholding tax provisions. Our compliance efforts will span efforts to ensure individual, business and corporate taxpayers understand and fulfill their withholding tax filing obligations, to addressing transactions that attempt to circumvent withholding taxes or claiming improper tax treaty withholding rates."
The Senate Permanent Subcommittee on Investigations held a hearing in September on how investment banks were helping clients, mainly hedge funds, avoid dividend withholding taxes. Shulman said the IRS was carefully examining transactions whose primary purpose is to avoid dividend withholding tax.
Other areas in which the IRS has recently ramped up scrutiny include transfer pricing, contract manufacturing arrangements designed to avoid Subpart F income in foreign locations that do not have sufficient manufacturing activity, and hybrid structures, such as hybrid entities and hybrid instruments that either exclude income from taxation or obtain double deductions and credits in various jurisdictions.
Among these are foreign tax credit generators. "In my opinion, FTC generator transactions are examples of situations where certain taxpayers may be trending toward the 'bad actor' end of the spectrum," said Shulman.
On the individual tax side, the IRS commissioner also emphasized the agency's efforts to crack down on tax shelters with the help of whistleblowers, informants and John Doe summonses.
"Using informants is another part of our toolkit," said Shulman. "Since the inception of the Whistleblower Office in 2007, the IRS has received hundreds of tips on financial institutions and individuals with foreign accounts and international compliance issues. Some of these have become big money cases."
In a speech at a Washington, D.C., tax conference, Shulman said that withholding taxes is one of the areas in which the IRS plans to concentrate its enforcement efforts.
"Today, the IRS will add withholding taxes to the Tier I list of issues," he said. "The tier issue process will provide the needed organizational priority and coordination to ensure taxpayer compliance with the U.S. withholding tax provisions. Our compliance efforts will span efforts to ensure individual, business and corporate taxpayers understand and fulfill their withholding tax filing obligations, to addressing transactions that attempt to circumvent withholding taxes or claiming improper tax treaty withholding rates."
The Senate Permanent Subcommittee on Investigations held a hearing in September on how investment banks were helping clients, mainly hedge funds, avoid dividend withholding taxes. Shulman said the IRS was carefully examining transactions whose primary purpose is to avoid dividend withholding tax.
Other areas in which the IRS has recently ramped up scrutiny include transfer pricing, contract manufacturing arrangements designed to avoid Subpart F income in foreign locations that do not have sufficient manufacturing activity, and hybrid structures, such as hybrid entities and hybrid instruments that either exclude income from taxation or obtain double deductions and credits in various jurisdictions.
Among these are foreign tax credit generators. "In my opinion, FTC generator transactions are examples of situations where certain taxpayers may be trending toward the 'bad actor' end of the spectrum," said Shulman.
On the individual tax side, the IRS commissioner also emphasized the agency's efforts to crack down on tax shelters with the help of whistleblowers, informants and John Doe summonses.
"Using informants is another part of our toolkit," said Shulman. "Since the inception of the Whistleblower Office in 2007, the IRS has received hundreds of tips on financial institutions and individuals with foreign accounts and international compliance issues. Some of these have become big money cases."
Thursday, December 4, 2008
Tax Break Helps Low- and Moderate-Income Workers Save for Retirement
Plan Now to Get Full Benefit of Saver’s Credit; Tax Break Helps Low- and Moderate-Income Workers Save for Retirement
Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2008 and the years ahead, according to the Internal Revenue Service.
The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements (IRAs) and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.
Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2008 tax return. People have until April 15, 2009, to set up a new IRA or add money to an existing IRA and still get credit for 2008. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2009 contributions soon so their employer can begin withholding them in January.
The saver’s credit can be claimed by:
Married couples filing jointly with incomes up to $53,000 in 2008 or $55,500 in 2009;
Heads of Household with incomes up to $39,750 in 2008 or $41,625 in 2009; and
Married individuals filing separately and singles with incomes up to $26,500 in 2008 or $27,750 in 2009.
Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.
In tax-year 2006, the most recent year for which complete figures are available, saver’s credits totaling almost $900 million were claimed on nearly 5.2 million individual income tax returns. Saver’s credits claimed on these returns averaged $213 for joint filers, $149 for heads of household and $128 for single filers.
The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.
Other special rules that apply to the saver’s credit include the following:
Eligible taxpayers must be at least 18 years of age.
Anyone claimed as a dependent on someone else’s return cannot take the credit.
A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
Certain retirement plan distributions reduce the contribution amount used to figure the credit.
For 2008, this rule applies to distributions received after 2005 and before the due date (including extensions) of the 2008 return. Form 8880 and its instructions have details on making this computation.
Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.
Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2008 and the years ahead, according to the Internal Revenue Service.
The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements (IRAs) and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.
Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2008 tax return. People have until April 15, 2009, to set up a new IRA or add money to an existing IRA and still get credit for 2008. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2009 contributions soon so their employer can begin withholding them in January.
The saver’s credit can be claimed by:
Married couples filing jointly with incomes up to $53,000 in 2008 or $55,500 in 2009;
Heads of Household with incomes up to $39,750 in 2008 or $41,625 in 2009; and
Married individuals filing separately and singles with incomes up to $26,500 in 2008 or $27,750 in 2009.
Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.
In tax-year 2006, the most recent year for which complete figures are available, saver’s credits totaling almost $900 million were claimed on nearly 5.2 million individual income tax returns. Saver’s credits claimed on these returns averaged $213 for joint filers, $149 for heads of household and $128 for single filers.
The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.
Other special rules that apply to the saver’s credit include the following:
Eligible taxpayers must be at least 18 years of age.
Anyone claimed as a dependent on someone else’s return cannot take the credit.
A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
Certain retirement plan distributions reduce the contribution amount used to figure the credit.
For 2008, this rule applies to distributions received after 2005 and before the due date (including extensions) of the 2008 return. Form 8880 and its instructions have details on making this computation.
Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.
IRS Announces Two New Appeals Programs
The Internal Revenue Service today announced a two-year test of two programs: the post-Appeals mediation and arbitration procedures for Offer in Compromise (OIC) and Trust Fund Recovery Penalty (TFRP).
Beginning Dec. 1, 2008. for a two-year test period, Appeals will offer post-Appeals mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at the Appeals office in Atlanta, Ga.; Chicago, Ill.; Cincinnati, Ohio; Houston, Texas; Indianapolis, Ind.; Louisville, Ky.; Phoenix, Ariz.; and San Francisco, Calif.
Under these two alternative dispute resolution programs, the taxpayer or Appeals may request nonbinding mediation. The taxpayer may decline Appeals’ request for mediation. Appeals will evaluate a taxpayer’s request for mediation based on the criteria detailed in Revenue Procedure 2002-44 and Announcement 2008-111. A request for binding arbitration must be made jointly by the taxpayer and Appeals. The mediation and arbitration procedures do not create any additional authority for settlement by Appeals.
During the test period, Appeals employees will advise the taxpayer of the availability of these alternative dispute strategies and the deadline for timely requesting such strategies when a rejection of an OIC is sustained or a proposed TFRP assessment is sustained. An OIC submitted during Collection Due Process (CDP) as an alternative to a Collection action is not eligible for these alternative dispute resolution strategies during the test period.
The Post-Appeals mediation process is available for both legal and factual issues. The mediator’s role is to facilitate settlement negotiations so the parties can reach their own agreement. The mediator does not have settlement authority over any issue.
The Arbitration procedure is available for factual issues only. The arbitrator’s role is to hear both sides of a disputed issue and then render a decision on the specific factual issue being arbitrated. This decision is binding on both parties. However, the arbitrator does not have the authority to decide that the offer in compromise itself must be accepted or that a person is/is not liable for the TFRP under § 6672. Neither party may appeal the decision of the arbitrator or contest the decision in any judicial proceeding.
Complete procedures for initiating a request for post-Appeals mediation or arbitration are in Announcement 2008-111. The agency will seek appropriate Offer in Compromise and Trust Fund Recovery Penalty cases for both post-Appeals mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for these cases.
Get help with this and other tax problems here.
Beginning Dec. 1, 2008. for a two-year test period, Appeals will offer post-Appeals mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at the Appeals office in Atlanta, Ga.; Chicago, Ill.; Cincinnati, Ohio; Houston, Texas; Indianapolis, Ind.; Louisville, Ky.; Phoenix, Ariz.; and San Francisco, Calif.
Under these two alternative dispute resolution programs, the taxpayer or Appeals may request nonbinding mediation. The taxpayer may decline Appeals’ request for mediation. Appeals will evaluate a taxpayer’s request for mediation based on the criteria detailed in Revenue Procedure 2002-44 and Announcement 2008-111. A request for binding arbitration must be made jointly by the taxpayer and Appeals. The mediation and arbitration procedures do not create any additional authority for settlement by Appeals.
During the test period, Appeals employees will advise the taxpayer of the availability of these alternative dispute strategies and the deadline for timely requesting such strategies when a rejection of an OIC is sustained or a proposed TFRP assessment is sustained. An OIC submitted during Collection Due Process (CDP) as an alternative to a Collection action is not eligible for these alternative dispute resolution strategies during the test period.
The Post-Appeals mediation process is available for both legal and factual issues. The mediator’s role is to facilitate settlement negotiations so the parties can reach their own agreement. The mediator does not have settlement authority over any issue.
The Arbitration procedure is available for factual issues only. The arbitrator’s role is to hear both sides of a disputed issue and then render a decision on the specific factual issue being arbitrated. This decision is binding on both parties. However, the arbitrator does not have the authority to decide that the offer in compromise itself must be accepted or that a person is/is not liable for the TFRP under § 6672. Neither party may appeal the decision of the arbitrator or contest the decision in any judicial proceeding.
Complete procedures for initiating a request for post-Appeals mediation or arbitration are in Announcement 2008-111. The agency will seek appropriate Offer in Compromise and Trust Fund Recovery Penalty cases for both post-Appeals mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for these cases.
Get help with this and other tax problems here.
Wednesday, November 26, 2008
IRS Announces 2009 Standard Mileage Rates
The Internal Revenue Service today issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
55 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices.
The rate for charitable purposes is set by law and is unchanged from 2008.
The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.
The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
55 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices.
The rate for charitable purposes is set by law and is unchanged from 2008.
The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.
The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
IRS announces Disater Relief help for Midwest
New Law Encourages Cash Donations for Midwest Disaster Relief
Taxpayers who make qualifying cash contributions for disaster relief efforts in the Midwest could benefit from a recently passed law that suspends the percentage-of-income limits that would normally apply when taxpayers deduct the contributions on their 2008 federal tax returns.
Under the Heartland Disaster Tax Relief Act, an individual taxpayer who itemizes deductions may choose to deduct qualifying cash contributions up to 100 percent of his or her adjusted gross income, reduced by deductions for other charitable contributions. Similarly, an electing corporation may deduct qualifying cash contributions up to 100 percent of its taxable income, reduced by deductions for other charitable contributions.
Cash contributions qualify for this special treatment if they are made to a public charity for disaster relief efforts related to certain areas in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska or Wisconsin. The areas must have been declared federal disaster areas on or after May 20 and before Aug. 1 of this year as a result of severe storms, tornados or flooding, and the areas must have been designated to receive individual assistance from the federal government because of the damage resulting from the disasters.
The contributions must be made no later than Dec. 31, 2008. “Cash” includes payments made by check or credit card. Qualifying cash contributions do not include payments to a supporting organization as described in section 509(a)(3) or for the establishment of a new, or maintenance of an existing, donor-advised fund.
Qualifying cash contributions of more than the amount allowed as a deduction can be carried over and deducted in succeeding tax years, subject to the normal limits. To substantiate the deduction, a taxpayer must obtain from the charity a written acknowledgment that the contribution was or will be used for relief efforts related to one or more of the Midwestern disaster areas.
In addition, deductions by individuals for qualifying contributions are not treated as itemized deductions for purposes of the overall limitation on itemized deductions. This means that, for taxpayers with higher adjusted gross incomes, the deduction for these qualifying contributions is not limited the way other itemized deductions are limited.
For other tax help go here.
Taxpayers who make qualifying cash contributions for disaster relief efforts in the Midwest could benefit from a recently passed law that suspends the percentage-of-income limits that would normally apply when taxpayers deduct the contributions on their 2008 federal tax returns.
Under the Heartland Disaster Tax Relief Act, an individual taxpayer who itemizes deductions may choose to deduct qualifying cash contributions up to 100 percent of his or her adjusted gross income, reduced by deductions for other charitable contributions. Similarly, an electing corporation may deduct qualifying cash contributions up to 100 percent of its taxable income, reduced by deductions for other charitable contributions.
Cash contributions qualify for this special treatment if they are made to a public charity for disaster relief efforts related to certain areas in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska or Wisconsin. The areas must have been declared federal disaster areas on or after May 20 and before Aug. 1 of this year as a result of severe storms, tornados or flooding, and the areas must have been designated to receive individual assistance from the federal government because of the damage resulting from the disasters.
The contributions must be made no later than Dec. 31, 2008. “Cash” includes payments made by check or credit card. Qualifying cash contributions do not include payments to a supporting organization as described in section 509(a)(3) or for the establishment of a new, or maintenance of an existing, donor-advised fund.
Qualifying cash contributions of more than the amount allowed as a deduction can be carried over and deducted in succeeding tax years, subject to the normal limits. To substantiate the deduction, a taxpayer must obtain from the charity a written acknowledgment that the contribution was or will be used for relief efforts related to one or more of the Midwestern disaster areas.
In addition, deductions by individuals for qualifying contributions are not treated as itemized deductions for purposes of the overall limitation on itemized deductions. This means that, for taxpayers with higher adjusted gross incomes, the deduction for these qualifying contributions is not limited the way other itemized deductions are limited.
For other tax help go here.
Thursday, November 20, 2008
EFTPS: The Electronic Federal Tax Payment System
A Secure Way to Pay All Your Federal Taxes
EFTPS, the Electronic Federal Tax Payment System, is a tax payment system provided free by the U.S. Department of Treasury. Pay federal taxes electronically via the Internet or phone 24/7. Visit EFTPS to enroll.Businesses and Individuals can pay all their federal taxes using EFTPS. Individuals can pay their quarterly 1040ES estimated taxes electronically using EFTPS, and they can make payments weekly, monthly, or quarterly. Both business and individual payments can be scheduled in advance.
More than 8 million taxpayers are currently enrolled in the system. Since EFTPS started in 1996, there have been over 717 million electronic payments made, totaling almost $17 trillion!
EFTPS is ...
Secure
Fast
Accurate
Convenient
Easy to Use
Helps Reduce Penalties
A Secure Government Web Site EFTPS via the Internet is a secure government web site that uses the highest level of security available. Every user must have a secure Internet browser with 128-bit encryption in order to access the site. To log on to the system, an enrolled user must be authenticated with three pieces of unique information known only to the user: Taxpayer Identification Number (EIN or SSN), EFTPS Personal Identification Number (PIN) and an Internet Password. The combination of these three pieces of identification adds to the security of the site and the privacy of taxpayer data.
Convenience at Your Fingertips
EFTPS offers you the convenience and flexibility of making your tax payments via the Internet or phone. By 8:00 P.M.(ET) at least one calendar day in advance of the due date, you access EFTPS directly to report your tax information. You will instruct EFTPS to move the funds from your account to the Treasury's account for payment of your federal taxes. Funds will not move from your account until the date you indicate. You receive an immediate acknowledgement of your payment instructions, and your bank statement will confirm the payment was made.
You can initiate your tax payment 24 hours a day, seven days a week. As an added convenience, EFTPS allows taxpayers to schedule tax payments in advance. Businesses can schedule payments up to 120 days in advance of their tax due date. Individuals can schedule payments up to 365 days in advance of their tax due date. EFTPS will automatically make your payments for you on the due date you indicate. Scheduled payments can be changed or cancelled up to 2 business days in advance of the scheduled payment date.
You can use EFTPS to make all your federal tax payments, including income, employment, estimated and excise taxes.
EFTPS, the Electronic Federal Tax Payment System, is a tax payment system provided free by the U.S. Department of Treasury. Pay federal taxes electronically via the Internet or phone 24/7. Visit EFTPS to enroll.Businesses and Individuals can pay all their federal taxes using EFTPS. Individuals can pay their quarterly 1040ES estimated taxes electronically using EFTPS, and they can make payments weekly, monthly, or quarterly. Both business and individual payments can be scheduled in advance.
More than 8 million taxpayers are currently enrolled in the system. Since EFTPS started in 1996, there have been over 717 million electronic payments made, totaling almost $17 trillion!
EFTPS is ...
Secure
Fast
Accurate
Convenient
Easy to Use
Helps Reduce Penalties
A Secure Government Web Site EFTPS via the Internet is a secure government web site that uses the highest level of security available. Every user must have a secure Internet browser with 128-bit encryption in order to access the site. To log on to the system, an enrolled user must be authenticated with three pieces of unique information known only to the user: Taxpayer Identification Number (EIN or SSN), EFTPS Personal Identification Number (PIN) and an Internet Password. The combination of these three pieces of identification adds to the security of the site and the privacy of taxpayer data.
Convenience at Your Fingertips
EFTPS offers you the convenience and flexibility of making your tax payments via the Internet or phone. By 8:00 P.M.(ET) at least one calendar day in advance of the due date, you access EFTPS directly to report your tax information. You will instruct EFTPS to move the funds from your account to the Treasury's account for payment of your federal taxes. Funds will not move from your account until the date you indicate. You receive an immediate acknowledgement of your payment instructions, and your bank statement will confirm the payment was made.
You can initiate your tax payment 24 hours a day, seven days a week. As an added convenience, EFTPS allows taxpayers to schedule tax payments in advance. Businesses can schedule payments up to 120 days in advance of their tax due date. Individuals can schedule payments up to 365 days in advance of their tax due date. EFTPS will automatically make your payments for you on the due date you indicate. Scheduled payments can be changed or cancelled up to 2 business days in advance of the scheduled payment date.
You can use EFTPS to make all your federal tax payments, including income, employment, estimated and excise taxes.
Personal Exemptions and Standard Deductions to Rise in 2009
2009 Inflation Adjustments Widen Tax Brackets and Expand Tax Benefits
For 2009, personal exemptions and standard deductions will rise and tax brackets will widen because of inflation adjustments announced today by the Internal Revenue Service.
By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being adjusted for 2009. Key changes affecting 2009 returns, filed by most taxpayers in early 2010, include the following:
The value of each personal and dependency exemption, available to most taxpayers, is $3,650, up $150 from 2008.
The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.
The annual gift exclusion rises to $13,000, up from $12,000 in 2008.
For 2009, personal exemptions and standard deductions will rise and tax brackets will widen because of inflation adjustments announced today by the Internal Revenue Service.
By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being adjusted for 2009. Key changes affecting 2009 returns, filed by most taxpayers in early 2010, include the following:
The value of each personal and dependency exemption, available to most taxpayers, is $3,650, up $150 from 2008.
The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.
The annual gift exclusion rises to $13,000, up from $12,000 in 2008.
Thursday, November 13, 2008
Why Pay Taxes
Why Pay Taxes? —
The Truth about Frivolous Tax Arguments
The Truth About Frivolous Tax Arguments (PDF 405K) addresses some of the more common false "legal" arguments made by individuals and groups who oppose compliance with the federal tax laws. These arguments are grouped under six general categories, with variations within each category. Each contention is briefly explained, followed by a discussion of the legal authority that rejects the contention. The second section deals with frivolous arguments encountered in collection due process cases. The final section illustrates penalties imposed on those pursuing frivolous cases.
Many people have been lead to believe that there is not a substantial basis for the IRS to collect income taxes. Working for a tax resolution firm I have heard many of those arguments. I believe that the IRS is right in collecting taxes and if everyone paid there fair share we would all owe less than we do.
The Truth about Frivolous Tax Arguments
The Truth About Frivolous Tax Arguments (PDF 405K) addresses some of the more common false "legal" arguments made by individuals and groups who oppose compliance with the federal tax laws. These arguments are grouped under six general categories, with variations within each category. Each contention is briefly explained, followed by a discussion of the legal authority that rejects the contention. The second section deals with frivolous arguments encountered in collection due process cases. The final section illustrates penalties imposed on those pursuing frivolous cases.
Many people have been lead to believe that there is not a substantial basis for the IRS to collect income taxes. Working for a tax resolution firm I have heard many of those arguments. I believe that the IRS is right in collecting taxes and if everyone paid there fair share we would all owe less than we do.
IRS Stimulus Checks Undeliverable
IRS Seeks to Return $266 Million in Undeliverable Refunds And Economic Stimulus Payments to Taxpayers
The Internal Revenue Service is looking for taxpayers who are missing more than 279,000 economic stimulus checks totaling about $163 million and more than 104,000 regular refund checks totaling about $103 million that were returned by the U.S. Postal Service due to mailing address errors.
“People across the country are missing tax refunds and stimulus checks. We want to get this money into the hands of taxpayers where it belongs,” said IRS Commissioner Doug Shulman. “We are committed to making the process as easy as possible for taxpayers to update their addresses with the IRS and get their checks.”
All a taxpayer has to do is update his or her address once. The IRS will then send out all checks due.
Stimulus Checks
It is crucial that taxpayers who may be due a stimulus check update their addresses with the IRS by Nov. 28, 2008. By law, economic stimulus checks must be sent out by Dec. 31 of this year. The undeliverable economic stimulus checks average $583.
The “Where’s My Stimulus Payment?" tool on the IRS Web site is the quickest and easiest way for a taxpayer to check the status of a stimulus check and receive instructions on how to update his or her address. Taxpayers without Internet access should call 1-866-234-2942.
Regular Refunds
The regular refund checks that were returned to the IRS average $988. These checks are resent as soon as taxpayers update their address.
Taxpayers can update their addresses with the “Where’s My Refund?” tool on the IRS Web site. It enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2007 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems.
Taxpayers checking on a refund over the phone will be given instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.
Unsure?
Taxpayers not sure of which type of check they may be due should check on a potential economic stimulus check first because of the looming deadline. See instructions above.
For Most People
The vast majority of checks mailed out by the IRS reach their rightful owner every year. Only a very small percent are returned by the U.S. Postal Service as undeliverable.
Through September 2008, the government distributed 116 million economic stimulus payments with only about 279,000 checks being undeliverable. Meanwhile, the IRS has distributed more than 105 million regular refunds this year with only about 104,000 being undeliverable. In both cases, well under one percent of refunds or stimulus checks were undeliverable.
Avoiding Future Problems
The IRS encourages taxpayers to choose direct deposit when they file their return because it puts an end to lost, stolen or undeliverable checks. Taxpayers can receive refunds directly into personal checking or savings accounts. Direct deposit is available for filers of both paper and electronic returns.
The IRS also encourages taxpayers to file their tax returns electronically because e-file eliminates the risk of lost paper returns. E-file also reduces errors and speeds up refunds.
The Internal Revenue Service is looking for taxpayers who are missing more than 279,000 economic stimulus checks totaling about $163 million and more than 104,000 regular refund checks totaling about $103 million that were returned by the U.S. Postal Service due to mailing address errors.
“People across the country are missing tax refunds and stimulus checks. We want to get this money into the hands of taxpayers where it belongs,” said IRS Commissioner Doug Shulman. “We are committed to making the process as easy as possible for taxpayers to update their addresses with the IRS and get their checks.”
All a taxpayer has to do is update his or her address once. The IRS will then send out all checks due.
Stimulus Checks
It is crucial that taxpayers who may be due a stimulus check update their addresses with the IRS by Nov. 28, 2008. By law, economic stimulus checks must be sent out by Dec. 31 of this year. The undeliverable economic stimulus checks average $583.
The “Where’s My Stimulus Payment?" tool on the IRS Web site is the quickest and easiest way for a taxpayer to check the status of a stimulus check and receive instructions on how to update his or her address. Taxpayers without Internet access should call 1-866-234-2942.
Regular Refunds
The regular refund checks that were returned to the IRS average $988. These checks are resent as soon as taxpayers update their address.
Taxpayers can update their addresses with the “Where’s My Refund?” tool on the IRS Web site. It enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2007 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems.
Taxpayers checking on a refund over the phone will be given instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.
Unsure?
Taxpayers not sure of which type of check they may be due should check on a potential economic stimulus check first because of the looming deadline. See instructions above.
For Most People
The vast majority of checks mailed out by the IRS reach their rightful owner every year. Only a very small percent are returned by the U.S. Postal Service as undeliverable.
Through September 2008, the government distributed 116 million economic stimulus payments with only about 279,000 checks being undeliverable. Meanwhile, the IRS has distributed more than 105 million regular refunds this year with only about 104,000 being undeliverable. In both cases, well under one percent of refunds or stimulus checks were undeliverable.
Avoiding Future Problems
The IRS encourages taxpayers to choose direct deposit when they file their return because it puts an end to lost, stolen or undeliverable checks. Taxpayers can receive refunds directly into personal checking or savings accounts. Direct deposit is available for filers of both paper and electronic returns.
The IRS also encourages taxpayers to file their tax returns electronically because e-file eliminates the risk of lost paper returns. E-file also reduces errors and speeds up refunds.
Thursday, October 30, 2008
Employer's Quarterly Tax Return, 941
I answer a lot of questions surrounding the IRS form 941. This is the employer's quarterly tax return.
The 941 needs to be filed each quarter. It is due on the last day of the month following the quarter end. The due dates are April 30, July 31, October 31 and January 31.
Deposits for most companies are made each month for employees withholding and matching FICA. The 941 reconciles all deposits made during the quarter to what is owed.
Most companies fall into trouble when they stop making their deposits thinking that they can "catch up" next month. Once you fail to make one deposit, it becomes a snowball effect and you end up owing the IRS a lot more than just your regular deposits.
One way to avoid this is to hire a payroll tax company which will figure your paychecks for you, process the checks for distribution to your employees, make your deposits and file your 941. It is a good idea. It may cast you some extra coin, but it keeps you out of trouble with the IRS. Besides having them do your payroll gives you more time to spend in your business doing more important things that can move your business forward, like being able to do more sales.
If you end up owing for more than 3 quarters will land you with a Revenue Officer of the IRS. And that is a bad deal.
If you need help with resolving an IRS issue please call a firm who knows how to take care of you.
The 941 needs to be filed each quarter. It is due on the last day of the month following the quarter end. The due dates are April 30, July 31, October 31 and January 31.
Deposits for most companies are made each month for employees withholding and matching FICA. The 941 reconciles all deposits made during the quarter to what is owed.
Most companies fall into trouble when they stop making their deposits thinking that they can "catch up" next month. Once you fail to make one deposit, it becomes a snowball effect and you end up owing the IRS a lot more than just your regular deposits.
One way to avoid this is to hire a payroll tax company which will figure your paychecks for you, process the checks for distribution to your employees, make your deposits and file your 941. It is a good idea. It may cast you some extra coin, but it keeps you out of trouble with the IRS. Besides having them do your payroll gives you more time to spend in your business doing more important things that can move your business forward, like being able to do more sales.
If you end up owing for more than 3 quarters will land you with a Revenue Officer of the IRS. And that is a bad deal.
If you need help with resolving an IRS issue please call a firm who knows how to take care of you.
What is an Enrolled Agent?
As I work in my job assissting people with resolving their tax issues, I have decided to become an enrolled agent. We have several EA's in our office. Most people have no idea of the importance of an enrolled agent or what you must do to become one so I decided to shed some light on the subject.
An enrolled agent is a person who has earned the privilege of practicing, that is, representing taxpayers, before the Internal Revenue Service. Enrolled agents, like attorneys and certified public accountants (CPAs), are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can practice before.
How do you become an enrolled agent?
There are two tracks to becoming an enrolled agent.
The two tracks are:
Written examination.
You can become an enrolled agent by demonstrating special competence in tax matters by taking a written examination. This track requires that you -
Apply to take the Special Enrollment Examination (SEE); prometric.com/irs;
Achieve passing scores on all parts of the SEE;
Apply for enrollment; and
Pass a background check to ensure that you have not engaged in any conduct that would justify the suspension or disbarment of an attorney, CPA, or enrolled agent from practice before the IRS.
IRS experience.
You can become an enrolled agent by virtue of past service and technical experience with the IRS that qualifies you for enrollment.
This track requires that you -
Possess the years of past service and technical experience specified in Circular 230;
Apply for enrollment; and
Pass a background check to ensure that you have not engaged in any conduct that would justify the suspension or disbarment of an attorney, CPA, or enrolled agent from practice before the IRS.
An enrolled agent is a person who has earned the privilege of practicing, that is, representing taxpayers, before the Internal Revenue Service. Enrolled agents, like attorneys and certified public accountants (CPAs), are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can practice before.
How do you become an enrolled agent?
There are two tracks to becoming an enrolled agent.
The two tracks are:
Written examination.
You can become an enrolled agent by demonstrating special competence in tax matters by taking a written examination. This track requires that you -
Apply to take the Special Enrollment Examination (SEE); prometric.com/irs;
Achieve passing scores on all parts of the SEE;
Apply for enrollment; and
Pass a background check to ensure that you have not engaged in any conduct that would justify the suspension or disbarment of an attorney, CPA, or enrolled agent from practice before the IRS.
IRS experience.
You can become an enrolled agent by virtue of past service and technical experience with the IRS that qualifies you for enrollment.
This track requires that you -
Possess the years of past service and technical experience specified in Circular 230;
Apply for enrollment; and
Pass a background check to ensure that you have not engaged in any conduct that would justify the suspension or disbarment of an attorney, CPA, or enrolled agent from practice before the IRS.
Thursday, October 23, 2008
OIC? You have a better chance of getting a foul ball at a baseball game
I get incensed by the false advertising of companies that state that they can get you "pennies on the dollar"- as if it was dependent on the skill of that practitioner. Another false advertising claim by these companies is the statement, "it is your last chance to get rid of your tax debt." This one could not be farther from the truth. These companies are referring to the IRS Offer in Compromise program. In fact, this program has been with the IRS for about 60 years, with no end proposed by Congress, the US Treasury, or the IRS.
Now, your chances of an Offer- Doubt as to Collectibility (this is the one that they are advertising), are quite small. In fact, by conservative standards, the chances are about 1 in 714 for those who owe taxes.
Compare that with your chances of catching a foul ball at a baseball game: 563 to 1
The fact is that the Offer in Compromise is a rarely used form of resolving your debt. There are many other options you need to explore with a competent tax professional.
Now, your chances of an Offer- Doubt as to Collectibility (this is the one that they are advertising), are quite small. In fact, by conservative standards, the chances are about 1 in 714 for those who owe taxes.
Compare that with your chances of catching a foul ball at a baseball game: 563 to 1
The fact is that the Offer in Compromise is a rarely used form of resolving your debt. There are many other options you need to explore with a competent tax professional.
Paying Your Fair Share
I work for a tax resolution firm. Every day I see the hard times people have that owe the IRS money. They owe for just a few reasons.
They fail to file their tax returns and the IRS prepares returns for them, called SFRs, and they end up with a liability with huge penalties and a lot of interest. This causes a lot of hardship for the taxpayer and puts them in a hole that is VERY hard to get out of.
They fail to withhold the correct amount of taxes from their paychecks. This makes them short on their withholdings at the end of the year. When they file their return , they have not had enough taxes withheld from their paychecks to pay their tax. Therefore they can not pay what they owe and end up in a deficit. You can figure how much you need to withhold from your checks by using this withholding calculator form the IRS website.
Another reason why people owe the IRS at the end of the year is self employed people fail to make their estimated tax payments each quarter during the year. A self employed person is paid by the job and is usually issued a 1099 misc. at the end of the year. No taxes are withheld during the year and the tax payer is not only resposible for the reagular tax amount he would owe for working but also the self employment tax. The self employment tax is what an employer would pay, matching FICA, if the taxpayer was employed earning a W-2. So as you can see, a self employed person will owe more tax that a regular employee.
A taxpayer really needs to set up a budget to live by and stick to it. Make your estimated tax payments if you are self employed and make sure your withholdings are correct if you are a W-2 employee. You do not want to owe the IRS. They can make life VERY miserable for a taxpayer.
If its to late for you and you owe the IRS now, please get in touch with a reputable tax resolution firm to resolve your tax debt issue.
They fail to file their tax returns and the IRS prepares returns for them, called SFRs, and they end up with a liability with huge penalties and a lot of interest. This causes a lot of hardship for the taxpayer and puts them in a hole that is VERY hard to get out of.
They fail to withhold the correct amount of taxes from their paychecks. This makes them short on their withholdings at the end of the year. When they file their return , they have not had enough taxes withheld from their paychecks to pay their tax. Therefore they can not pay what they owe and end up in a deficit. You can figure how much you need to withhold from your checks by using this withholding calculator form the IRS website.
Another reason why people owe the IRS at the end of the year is self employed people fail to make their estimated tax payments each quarter during the year. A self employed person is paid by the job and is usually issued a 1099 misc. at the end of the year. No taxes are withheld during the year and the tax payer is not only resposible for the reagular tax amount he would owe for working but also the self employment tax. The self employment tax is what an employer would pay, matching FICA, if the taxpayer was employed earning a W-2. So as you can see, a self employed person will owe more tax that a regular employee.
A taxpayer really needs to set up a budget to live by and stick to it. Make your estimated tax payments if you are self employed and make sure your withholdings are correct if you are a W-2 employee. You do not want to owe the IRS. They can make life VERY miserable for a taxpayer.
If its to late for you and you owe the IRS now, please get in touch with a reputable tax resolution firm to resolve your tax debt issue.
Wednesday, October 22, 2008
You're Getting Married and Your New Spose Owes the IRS
How do you keep your spouses liability separate from yourself. Well you are married, aren't you supposed to share everything?
In this case it is best to keep the liability with just the spouse who owes. There are two ways to do this.
First, you can file Married Filing Separate. This will keep your liabilities separate and the IRS will not be able to come after the innocent spouse for the liability. Doing it this way you will loose your married deduction on your tax return. To get that deduction you need to do the second item.
Second you can file Married Filing Joint BUT you have to file innocent spouse with your return. This is form 8857 with your return. This will protect the "innocent spouse" from the IRS but allow you to take the married deduction on your tax return.
If you have questions about resolving your tax debt or about filing taxes please call Effctur and check out their website.
In this case it is best to keep the liability with just the spouse who owes. There are two ways to do this.
First, you can file Married Filing Separate. This will keep your liabilities separate and the IRS will not be able to come after the innocent spouse for the liability. Doing it this way you will loose your married deduction on your tax return. To get that deduction you need to do the second item.
Second you can file Married Filing Joint BUT you have to file innocent spouse with your return. This is form 8857 with your return. This will protect the "innocent spouse" from the IRS but allow you to take the married deduction on your tax return.
If you have questions about resolving your tax debt or about filing taxes please call Effctur and check out their website.
Thursday, October 16, 2008
Joe the Plumber Owes Back Taxes
The man mentioned in the debate between Obama and McCain the other night owes back taxes.
According to this report on FoxNews.com, Joe the plumber owes back taxes. He owes the state of Ohio $1182.98 in back taxes and has a lien placed on his property by the state until he pays what is owed.
This is not as unique as you might think. Millions of people owe back taxes to either the IRS or the state in which they live.
Getting out of debt with the IRS can be a very arduous task. What a tax payer needs is a resolution with the IRS or the state. Not knowing how to handle the situation can cost you time and money.
Hiring a tax resolution firm to resolve your issue can help you in many ways. Call a reputable firm and get some help today.
According to this report on FoxNews.com, Joe the plumber owes back taxes. He owes the state of Ohio $1182.98 in back taxes and has a lien placed on his property by the state until he pays what is owed.
This is not as unique as you might think. Millions of people owe back taxes to either the IRS or the state in which they live.
Getting out of debt with the IRS can be a very arduous task. What a tax payer needs is a resolution with the IRS or the state. Not knowing how to handle the situation can cost you time and money.
Hiring a tax resolution firm to resolve your issue can help you in many ways. Call a reputable firm and get some help today.
Business Use of Your Car
If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.
You can generally figure the amount of your deductible car expense using one of two methods:
the standard mileage rate method or
the actual expense method.
If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. Please refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for the current standard mileage rate. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.
To use the standard mileage rate, you must own or lease the car; the car must not be used for hire, for example as a taxi; you must not operate five or more cars at the same time, as in a fleet operation; you must not have claimed a depreciation deduction using the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year or any method other than straight-line for its estimated useful life; you must not have claimed a Section 179 deduction or the special depreciation allowance on the car; and you must not have claimed actual expenses after 1997 for a car you leased. You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement".
Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.
However, for a car you lease, you must use the standard mileage rate method for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that are after 1997.
To use the actual expense method, you must determine what it actually costs to operate the car for business purposes. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to business miles driven.
Other car expenses for parking fees, and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Generally, the Modified Accelerated Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight–line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct.
Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits, and it discusses special rules applicable to leased cars.
The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement.
If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, i.e., a plan that meets the 3 accountable plan requirements, the reimbursements should not be included in your wages on your Form W-2, and you should not deduct the expenses.
If your employer uses a non–accountable plan to reimburse you for the expenses, the reimbursements are includable in your wages. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non–accountable plan with your wages, salary, or other compensation and report the total on your Form W–2. Your employee business expenses may be deductible as an itemized deduction. For a definition of Accountable and Non–Accountable plans, refer to Publication 463 and Topic 514.
You can generally figure the amount of your deductible car expense using one of two methods:
the standard mileage rate method or
the actual expense method.
If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. Please refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for the current standard mileage rate. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.
To use the standard mileage rate, you must own or lease the car; the car must not be used for hire, for example as a taxi; you must not operate five or more cars at the same time, as in a fleet operation; you must not have claimed a depreciation deduction using the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year or any method other than straight-line for its estimated useful life; you must not have claimed a Section 179 deduction or the special depreciation allowance on the car; and you must not have claimed actual expenses after 1997 for a car you leased. You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement".
Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.
However, for a car you lease, you must use the standard mileage rate method for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that are after 1997.
To use the actual expense method, you must determine what it actually costs to operate the car for business purposes. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to business miles driven.
Other car expenses for parking fees, and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Generally, the Modified Accelerated Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight–line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct.
Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits, and it discusses special rules applicable to leased cars.
The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement.
If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, i.e., a plan that meets the 3 accountable plan requirements, the reimbursements should not be included in your wages on your Form W-2, and you should not deduct the expenses.
If your employer uses a non–accountable plan to reimburse you for the expenses, the reimbursements are includable in your wages. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non–accountable plan with your wages, salary, or other compensation and report the total on your Form W–2. Your employee business expenses may be deductible as an itemized deduction. For a definition of Accountable and Non–Accountable plans, refer to Publication 463 and Topic 514.
Business Travel Expenses
Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.
You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.
You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
In determining which is your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.
Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite.
Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time. If you are unemployed and there is a substantial break between the time of your past work and your looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.
Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
Travel by airplane, train, bus, or car between your home and your business destination
Using your car while at your business destination
Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another
Meals and lodging
Tips you pay for services related to any of these expenses
Generally, employees deduct these expenses using Form 2106 (PDF) or Form 2106-EZ (PDF) and on Form 1040, Schedule A (PDF).
Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel.
The deduction for business meals is generally limited to 50% of the unreimbursed cost.
If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106–EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106–EZ to Form l040 Schedule A, and are subject to a limit based on 2% of adjusted gross income. Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self–employed, travel expenses are deductible on Form 1040, Schedule C (PDF), Form 1040, Schedule C-EZ (PDF) or, if you are a farmer, Form 1040, Schedule F (PDF).
Good records are essential. Refer to Topic 305 for information on record keeping.
For more information on travel expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses. If you are a member of the National Guard or military reserve you may be able to claim a deduction from income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expense. To qualify the travel must be: overnight, more than 100 miles from your home, and for drill or meetings. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106/Form 2106-EZ and carried to the appropriate line on Form 1040. Expenses in excess of the limit can be claimed only as an itemized deduction on Form 1040, Schedule A.
You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.
You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
In determining which is your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.
Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite.
Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time. If you are unemployed and there is a substantial break between the time of your past work and your looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.
Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
Travel by airplane, train, bus, or car between your home and your business destination
Using your car while at your business destination
Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another
Meals and lodging
Tips you pay for services related to any of these expenses
Generally, employees deduct these expenses using Form 2106 (PDF) or Form 2106-EZ (PDF) and on Form 1040, Schedule A (PDF).
Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel.
The deduction for business meals is generally limited to 50% of the unreimbursed cost.
If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106–EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106–EZ to Form l040 Schedule A, and are subject to a limit based on 2% of adjusted gross income. Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self–employed, travel expenses are deductible on Form 1040, Schedule C (PDF), Form 1040, Schedule C-EZ (PDF) or, if you are a farmer, Form 1040, Schedule F (PDF).
Good records are essential. Refer to Topic 305 for information on record keeping.
For more information on travel expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses. If you are a member of the National Guard or military reserve you may be able to claim a deduction from income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expense. To qualify the travel must be: overnight, more than 100 miles from your home, and for drill or meetings. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106/Form 2106-EZ and carried to the appropriate line on Form 1040. Expenses in excess of the limit can be claimed only as an itemized deduction on Form 1040, Schedule A.
Tuesday, October 14, 2008
Hurricane Grant Guidelines Now Available
The Internal Revenue Service recently released a notice designed to help eligible homeowners who received federal reimbursement grants stemming from Hurricanes Katrina, Rita or Wilma take advantage of a new tax provision.
Notice 2008-95 provides guidelines to homeowners who received these grants, including the Louisiana Road Home Grants and the Mississippi Development Authority Hurricane Katrina Homeowner Grants.
The Housing and Economic Recovery Act, enacted this summer, included the new provision, aimed at helping grant recipients who previously claimed hurricane-related disaster-loss deductions on their main home. The new law gives affected homeowners the option of adjusting previously claimed deductions by treating their federal reimbursement grants as reimbursement for the losses they suffered on their main home from Hurricanes Katrina, Rita or Wilma.
Before this change, homeowners who claimed casualty loss deductions and received grants in a later tax year as reimbursement for the loss were required by law to pay tax on part or all of the grant to compensate for the tax benefit of the prior deduction. While individual circumstances varied, this meant that some taxpayers ended up paying more tax on the grant than they saved by claiming the deduction.
The notice explains how eligible taxpayers can amend prior-year returns to reduce the casualty loss deduction by the amount of the grant, and explains that taxpayers have one year to pay back any resulting tax due, penalty-free and interest-free. To qualify for this relief, these amended returns must be filed by July 30, 2009, and the entire resulting tax due paid by July 30, 2010, in most cases. The notice also provides special instructions for those taxpayers who have already filed an amended return.
Taxpayers should write the words, “Hurricane Grant Relief” in dark, bold letters at the top of their amended return, Form 1040X, and mail it to:
Internal Revenue Service Center
Austin, TX 73301-0255.
Amended returns cannot be filed electronically.
The IRS cautioned that, although filing an amended return may be a good option for many, it won’t necessarily be the right choice for everyone. The agency urges affected taxpayers and their representatives to consider carefully which option is best under their particular circumstances. Getting help with preparing and filing your amended returns is here.
Notice 2008-95 provides guidelines to homeowners who received these grants, including the Louisiana Road Home Grants and the Mississippi Development Authority Hurricane Katrina Homeowner Grants.
The Housing and Economic Recovery Act, enacted this summer, included the new provision, aimed at helping grant recipients who previously claimed hurricane-related disaster-loss deductions on their main home. The new law gives affected homeowners the option of adjusting previously claimed deductions by treating their federal reimbursement grants as reimbursement for the losses they suffered on their main home from Hurricanes Katrina, Rita or Wilma.
Before this change, homeowners who claimed casualty loss deductions and received grants in a later tax year as reimbursement for the loss were required by law to pay tax on part or all of the grant to compensate for the tax benefit of the prior deduction. While individual circumstances varied, this meant that some taxpayers ended up paying more tax on the grant than they saved by claiming the deduction.
The notice explains how eligible taxpayers can amend prior-year returns to reduce the casualty loss deduction by the amount of the grant, and explains that taxpayers have one year to pay back any resulting tax due, penalty-free and interest-free. To qualify for this relief, these amended returns must be filed by July 30, 2009, and the entire resulting tax due paid by July 30, 2010, in most cases. The notice also provides special instructions for those taxpayers who have already filed an amended return.
Taxpayers should write the words, “Hurricane Grant Relief” in dark, bold letters at the top of their amended return, Form 1040X, and mail it to:
Internal Revenue Service Center
Austin, TX 73301-0255.
Amended returns cannot be filed electronically.
The IRS cautioned that, although filing an amended return may be a good option for many, it won’t necessarily be the right choice for everyone. The agency urges affected taxpayers and their representatives to consider carefully which option is best under their particular circumstances. Getting help with preparing and filing your amended returns is here.
Tax Return Preparer Fraud
Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may manipulate income figures to fraudulently obtain tax credits, such as the Earned Income Tax Credit.
In some situations, the client, or taxpayer, may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on his or her tax return.
However, when the IRS detects the false return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.
The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution and/or asserting appropriate civil penalties against unscrupulous return preparers.
While most preparers provide excellent service to their clients, the IRS urges taxpayers to be very careful when choosing a tax preparer. Taxpayers should be as careful as they would be in choosing a doctor or a lawyer. It is important to know that even if someone else prepares a tax return, it is the taxpayer who is ultimately responsible for all the information on the tax return.
Helpful Hints When Choosing a Return Preparer
Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
Avoid preparers who base their fee on a percentage of the amount of the refund.
Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.
Review your return before you sign it and ask questions on entries you don't understand.
No matter who prepares your tax return, you, the taxpayer, are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form.
Find out the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?
Reputable preparers will ask to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so, they are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.
Further, tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.
If your in the need to talk with someone who can help yo with filing back tax returns or resolving your back taxes be sure to contact a reputable tax resolution firm.
In some situations, the client, or taxpayer, may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on his or her tax return.
However, when the IRS detects the false return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.
The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution and/or asserting appropriate civil penalties against unscrupulous return preparers.
While most preparers provide excellent service to their clients, the IRS urges taxpayers to be very careful when choosing a tax preparer. Taxpayers should be as careful as they would be in choosing a doctor or a lawyer. It is important to know that even if someone else prepares a tax return, it is the taxpayer who is ultimately responsible for all the information on the tax return.
Helpful Hints When Choosing a Return Preparer
Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
Avoid preparers who base their fee on a percentage of the amount of the refund.
Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.
Review your return before you sign it and ask questions on entries you don't understand.
No matter who prepares your tax return, you, the taxpayer, are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form.
Find out the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?
Reputable preparers will ask to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so, they are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.
Further, tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.
If your in the need to talk with someone who can help yo with filing back tax returns or resolving your back taxes be sure to contact a reputable tax resolution firm.
Sunday, October 12, 2008
Taking the Home Office Deduction
Home Office Deduction Reminders
Overstated adjustments, deductions, exemptions and credits account for up to $30 billion per year in unpaid taxes, according to IRS estimates.
Home Office Deduction: Basic Requirements
Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence may not be deducted as a business expense. However, taxpayers who use a portion of their home for business purposes may be able to take a home office deduction if they meet certain requirements. Expenses that may be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation. Note: The amount of depreciation deducted, or that could have been deducted, decreases the basis of your property.
In order to claim a deduction for that part of a home used for business, taxpayers must use that part of the home:
- Exclusively and regularly as their principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of their business, or in connection with their trade or business where there is a separate structure not attached to the home; or
- On a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.
In addition, taxpayers working as employees can claim this deduction only if the regular and exclusive business use of the home is for the convenience of their employer and the portion of the home is not rented by the employer.
“Exclusive use” means a specific area of the home is used only for trade or business.
“Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use.
Non-business profit-seeking endeavors such as investment activities do not qualify for a home office deduction, nor do not-for-profit activities such as hobbies.
Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use.
These requirements are discussed in greater detail in Publication 587, Business Use of Your Home.
Computing the Amount of Home Office Deduction
Generally, the amount of the deduction depends on the percentage of the home that is used for business. The deduction will be limited if gross income from the business is less than the total business expenses.
A taxpayer can use any reasonable method to compute business percentage, but the most common methods are to:
- Divide the area of the home used for business by the total area of the home, or
- Divide the number of rooms used for business by the total number of rooms in the home if all rooms in the home are about the same size.
Taxpayers may not deduct expenses for any portion of the year during which there was no business use of the home. If the gross income from business use of the home is less than the total business expenses, the deduction for certain expenses is limited. Publication 587 includes examples, worksheets and additional information on computing the allowable deduction.
Personal Expenses Are Not Business Expenses
It is important for taxpayers to realize that business expenses may be deducted only if they are ordinary and necessary for the particular type of business. Personal, family and living expenses are not deductible under any circumstances. A common error is to deduct expenses for a portion of the home that is not used regularly and exclusively for business.
Example: The basic local telephone service charge, including taxes, for the first telephone line into a home is a nondeductible personal expense. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into a home used exclusively for business, are deductible business expenses.
The IRS encourages taxpayers to familiarize themselves with the requirements before taking a home office deduction and to keep complete and accurate records to substantiate deductions.
According to IRS research, understated business income, including underreported receipts and overstated expenses, is an area where compliance is a concern. In addition to increasing outreach and education in these areas, the IRS will also be focusing enforcement efforts, including examinations, on these issues.
If you have fallen into a situation of examination ans now owe back taxes, call a reputable tax resolution firm to help you.
Overstated adjustments, deductions, exemptions and credits account for up to $30 billion per year in unpaid taxes, according to IRS estimates.
Home Office Deduction: Basic Requirements
Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence may not be deducted as a business expense. However, taxpayers who use a portion of their home for business purposes may be able to take a home office deduction if they meet certain requirements. Expenses that may be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation. Note: The amount of depreciation deducted, or that could have been deducted, decreases the basis of your property.
In order to claim a deduction for that part of a home used for business, taxpayers must use that part of the home:
- Exclusively and regularly as their principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of their business, or in connection with their trade or business where there is a separate structure not attached to the home; or
- On a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.
In addition, taxpayers working as employees can claim this deduction only if the regular and exclusive business use of the home is for the convenience of their employer and the portion of the home is not rented by the employer.
“Exclusive use” means a specific area of the home is used only for trade or business.
“Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use.
Non-business profit-seeking endeavors such as investment activities do not qualify for a home office deduction, nor do not-for-profit activities such as hobbies.
Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use.
These requirements are discussed in greater detail in Publication 587, Business Use of Your Home.
Computing the Amount of Home Office Deduction
Generally, the amount of the deduction depends on the percentage of the home that is used for business. The deduction will be limited if gross income from the business is less than the total business expenses.
A taxpayer can use any reasonable method to compute business percentage, but the most common methods are to:
- Divide the area of the home used for business by the total area of the home, or
- Divide the number of rooms used for business by the total number of rooms in the home if all rooms in the home are about the same size.
Taxpayers may not deduct expenses for any portion of the year during which there was no business use of the home. If the gross income from business use of the home is less than the total business expenses, the deduction for certain expenses is limited. Publication 587 includes examples, worksheets and additional information on computing the allowable deduction.
Personal Expenses Are Not Business Expenses
It is important for taxpayers to realize that business expenses may be deducted only if they are ordinary and necessary for the particular type of business. Personal, family and living expenses are not deductible under any circumstances. A common error is to deduct expenses for a portion of the home that is not used regularly and exclusively for business.
Example: The basic local telephone service charge, including taxes, for the first telephone line into a home is a nondeductible personal expense. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into a home used exclusively for business, are deductible business expenses.
The IRS encourages taxpayers to familiarize themselves with the requirements before taking a home office deduction and to keep complete and accurate records to substantiate deductions.
According to IRS research, understated business income, including underreported receipts and overstated expenses, is an area where compliance is a concern. In addition to increasing outreach and education in these areas, the IRS will also be focusing enforcement efforts, including examinations, on these issues.
If you have fallen into a situation of examination ans now owe back taxes, call a reputable tax resolution firm to help you.
NASCAR Racing At It's Best
I am a sports fan. I like all sports and generally keep up with what is going on. I have always followed NASCAR at arms length. I know the drivers, the CUP Points, and where they are racing for the week.
A good friend of mine invited me to the Bank of America 500 at Lowe's Motor Speedway on Saturday night. I was very excited about attending my first race. I had always heard about all the different kinds of fans there are and how crazy they are for their favorite drivers. Let me say that race fans are the most patriotic fans there are. They love their country just as much as they love their drivers.
What I didn't expect was how loud, fast and furious the race really is. I was totally blown away.
I was very surprised by a few things. The noise these cars give off as they pass in a pack is deafening. It was so much louder than I ever could have imagined. The smell of the rubber is very pungent. I will remember that for a long time. The track is narrower than it looks on TV and the banks are really on a steep slide.
I watched the first 50 laps from the front row on the back stretch. I could tell a distinct increase in temperature after the race stated. My respect for the drivers increased also. This was a night race and was cooler than most races. I could not imagine just how hot it gets in one of those cars during a race in the middle of the summer.
My experience was awesome! I am a bigger fan today than I was yesterday. I can't wait until my next race.
A good friend of mine invited me to the Bank of America 500 at Lowe's Motor Speedway on Saturday night. I was very excited about attending my first race. I had always heard about all the different kinds of fans there are and how crazy they are for their favorite drivers. Let me say that race fans are the most patriotic fans there are. They love their country just as much as they love their drivers.
What I didn't expect was how loud, fast and furious the race really is. I was totally blown away.
I was very surprised by a few things. The noise these cars give off as they pass in a pack is deafening. It was so much louder than I ever could have imagined. The smell of the rubber is very pungent. I will remember that for a long time. The track is narrower than it looks on TV and the banks are really on a steep slide.
I watched the first 50 laps from the front row on the back stretch. I could tell a distinct increase in temperature after the race stated. My respect for the drivers increased also. This was a night race and was cooler than most races. I could not imagine just how hot it gets in one of those cars during a race in the middle of the summer.
My experience was awesome! I am a bigger fan today than I was yesterday. I can't wait until my next race.
New Law: Additional Military Families to Get Stimulus Payments This Fall
Married members of the military may receive economic stimulus payments this fall, even if their spouses or children don’t have social security numbers, following the newly-enacted HEART Act (Heroes Earnings Assistance and Relief Tax Act of 2008). Prior to this new legislation, some members of the military did not receive stimulus payments, or received a reduced amount, due to the absence of an SSN for a spouse or child.
In November, the Treasury will send checks and direct deposits to military families who qualify for these stimulus payments. The IRS estimates that there are more than 10,000 military families who will receive the additional stimulus payments. A specific time frame for the payments will be announced later this year.
"The IRS wants to make it as easy as possible for military families to get the stimulus payments authorized by the new law. People who already have filed don’t need to do anything else to get their money. We’ll do the rest,” said IRS Commissioner Doug Shulman. “We will work as quickly as possible to put these new provisions in place while making sure the rest of the stimulus payment program continues smoothly through the summer and fall."
To get a stimulus payment, eligible taxpayers must file a 2007 tax return. For married couples who have already filed a joint return, no further action is necessary. Generally, married couples qualify for an economic stimulus payment of up to $1,200, plus an additional $300 for each qualifying child younger than 17.
Because of the special challenges involved in making these newly-authorized payments, the IRS is taking the additional step of working with the Department of Defense to ensure that eligible filers get their money.
Originally, the Economic Stimulus Act of 2008 , enacted in February, barred economic-stimulus payments to anyone filing a return who did not have a social security number. Returns using any number issued by the IRS, such as an individual taxpayer identification number (ITIN) were not eligible. For joint filers, this meant that both spouses must use valid social security numbers.
Those barred by the original law from receiving a stimulus payment included military members filing jointly with spouses who were ineligible to get an SSN. In addition, because they were not eligible for stimulus payments, they could not receive an additional $300 payment for each eligible child.
Married couples filing joint returns who are now eligible for stimulus payments under the new law will receive a notice from the IRS telling them the amount of their payment and the date it will be issued. Payments will be made by check or direct deposit. Those who chose direct deposit for their regular tax refund will typically get their stimulus payment by direct deposit. However, anyone who chose a refund-anticipation loan, had tax-preparation fees deducted from their refund or entered into other refund-related transactions, will get a check, instead.
The payments are based on 2007 income tax returns, including basic returns filed by eligible low-income people, solely to claim a stimulus payment. Those who have not yet filed, including members of the military who received nontaxable combat pay, should do so as soon as possible.
In November, the Treasury will send checks and direct deposits to military families who qualify for these stimulus payments. The IRS estimates that there are more than 10,000 military families who will receive the additional stimulus payments. A specific time frame for the payments will be announced later this year.
"The IRS wants to make it as easy as possible for military families to get the stimulus payments authorized by the new law. People who already have filed don’t need to do anything else to get their money. We’ll do the rest,” said IRS Commissioner Doug Shulman. “We will work as quickly as possible to put these new provisions in place while making sure the rest of the stimulus payment program continues smoothly through the summer and fall."
To get a stimulus payment, eligible taxpayers must file a 2007 tax return. For married couples who have already filed a joint return, no further action is necessary. Generally, married couples qualify for an economic stimulus payment of up to $1,200, plus an additional $300 for each qualifying child younger than 17.
Because of the special challenges involved in making these newly-authorized payments, the IRS is taking the additional step of working with the Department of Defense to ensure that eligible filers get their money.
Originally, the Economic Stimulus Act of 2008 , enacted in February, barred economic-stimulus payments to anyone filing a return who did not have a social security number. Returns using any number issued by the IRS, such as an individual taxpayer identification number (ITIN) were not eligible. For joint filers, this meant that both spouses must use valid social security numbers.
Those barred by the original law from receiving a stimulus payment included military members filing jointly with spouses who were ineligible to get an SSN. In addition, because they were not eligible for stimulus payments, they could not receive an additional $300 payment for each eligible child.
Married couples filing joint returns who are now eligible for stimulus payments under the new law will receive a notice from the IRS telling them the amount of their payment and the date it will be issued. Payments will be made by check or direct deposit. Those who chose direct deposit for their regular tax refund will typically get their stimulus payment by direct deposit. However, anyone who chose a refund-anticipation loan, had tax-preparation fees deducted from their refund or entered into other refund-related transactions, will get a check, instead.
The payments are based on 2007 income tax returns, including basic returns filed by eligible low-income people, solely to claim a stimulus payment. Those who have not yet filed, including members of the military who received nontaxable combat pay, should do so as soon as possible.
Stimulus Checks for Military Combat Personel
This section is for military personnel who are serving in combat zones.
For federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard and National Guard are also included, but not the U.S. Merchant Marine or the American Red Cross.
Normally, combat pay is not counted as income and is not taxable. For the purposes of receiving an economic stimulus payment, however, military personnel serving in combat zones have the option of including their nontaxable combat pay on their 2007 or 2008 income tax returns if it helps their eligibility for the 2008 economic stimulus payments.
To receive the stimulus payment this year, combat zone personnel or their spouses must file a tax year 2007 income tax return by Oct. 15, 2008. Otherwise, they can claim the economic stimulus payment on next year’s income tax return.
Military personnel who normally would not file an income tax return because their 2007 income is not taxable can file a simple Form 1040A with the IRS if they want to receive the economic stimulus payment. They should report their nontaxable combat pay on line 40b of the Form 1040A to show at least $3,000 in qualifying income. The Department of Defense lists the amount of excluded combat pay, along with the designation, “Code Q,” in box 12 of Form W-2.
The IRS has developed Package 1040A-3, an 8-page publication containing tax tips, a sample Form 1040A and a blank Form 1040A. The package contains everything needed to file the return immediately.
Package 1040A-3 , 8-page information package
Basic Eligibility Requirements
You have, or your family has, at least $3,000 in qualifying income from, or in combination with, Social Security benefits, certain Veterans Affairs benefits, Railroad Retirement benefits and earned income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.
You are not a dependent or eligible to be a dependent on someone else’s federal tax return. (The same must be true of any family members claimed on your return.)
Due to a new law change, the spouses and children of married military personnel are not required to have valid Social Security Numbers.
To Claim Your Payment
If you normally don’t file a federal tax return but must file one this year solely to claim your economic stimulus payment, you should file by Oct. 15, 2008, to ensure that you receive the payment this year.
Find out where to send your tax return.
It will generally take a minimum of eight weeks after you file your return to get your stimulus payment.
Free Tax Help Available
Individuals who need to file a return this year to receive a stimulus payment may be able to take advantage of free tax preparation sites nationwide for low-income and older taxpayers.
Free File - Economic Stimulus Payment provides free tax preparation software and electronic filing for people who are submitting a return solely to receive their economic stimulus payment
The Volunteer Income Tax Assistance (VITA) program provides help to low- and moderate-income taxpayers. Call 1-800-906-9887 to locate the nearest VITA site.
IRS employees will help prepare Form 1040A returns for low-income workers, retirees, disabled veterans and others at IRS Taxpayer Assistance Centers. For a list of centers in your state and their hours of operation, Contact My Local Office.
For federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard and National Guard are also included, but not the U.S. Merchant Marine or the American Red Cross.
Normally, combat pay is not counted as income and is not taxable. For the purposes of receiving an economic stimulus payment, however, military personnel serving in combat zones have the option of including their nontaxable combat pay on their 2007 or 2008 income tax returns if it helps their eligibility for the 2008 economic stimulus payments.
To receive the stimulus payment this year, combat zone personnel or their spouses must file a tax year 2007 income tax return by Oct. 15, 2008. Otherwise, they can claim the economic stimulus payment on next year’s income tax return.
Military personnel who normally would not file an income tax return because their 2007 income is not taxable can file a simple Form 1040A with the IRS if they want to receive the economic stimulus payment. They should report their nontaxable combat pay on line 40b of the Form 1040A to show at least $3,000 in qualifying income. The Department of Defense lists the amount of excluded combat pay, along with the designation, “Code Q,” in box 12 of Form W-2.
The IRS has developed Package 1040A-3, an 8-page publication containing tax tips, a sample Form 1040A and a blank Form 1040A. The package contains everything needed to file the return immediately.
Package 1040A-3 , 8-page information package
Basic Eligibility Requirements
You have, or your family has, at least $3,000 in qualifying income from, or in combination with, Social Security benefits, certain Veterans Affairs benefits, Railroad Retirement benefits and earned income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.
You are not a dependent or eligible to be a dependent on someone else’s federal tax return. (The same must be true of any family members claimed on your return.)
Due to a new law change, the spouses and children of married military personnel are not required to have valid Social Security Numbers.
To Claim Your Payment
If you normally don’t file a federal tax return but must file one this year solely to claim your economic stimulus payment, you should file by Oct. 15, 2008, to ensure that you receive the payment this year.
Find out where to send your tax return.
It will generally take a minimum of eight weeks after you file your return to get your stimulus payment.
Free Tax Help Available
Individuals who need to file a return this year to receive a stimulus payment may be able to take advantage of free tax preparation sites nationwide for low-income and older taxpayers.
Free File - Economic Stimulus Payment provides free tax preparation software and electronic filing for people who are submitting a return solely to receive their economic stimulus payment
The Volunteer Income Tax Assistance (VITA) program provides help to low- and moderate-income taxpayers. Call 1-800-906-9887 to locate the nearest VITA site.
IRS employees will help prepare Form 1040A returns for low-income workers, retirees, disabled veterans and others at IRS Taxpayer Assistance Centers. For a list of centers in your state and their hours of operation, Contact My Local Office.
Alternative Motor Vehicle Credit
Hybrid Vehicles
Vehicles Purchased or Placed in Service
The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer’s tax obligation. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006.
The credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
Hybrid vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery. Many currently available hybrid vehicles may qualify for the tax credit.
These models have been certified for the credit in the following amounts:
† This reflects a decrease in the credit amount as of Oct. 1, 2006, due to the manufacturers meeting quarterly sales of 60,000 qualified hybrid cars — See Quarterly Sales, below.
†† This credit amount does not phase out. The full amount of the altenative fuel vehicle credit would be available for vehicles purchased on or before December 31, 2010.
Qualifed Cars and Credit Amounts
Model Year 2009
Model Year 2008
Model Year 2007
Model Year 2006
Model Year 2005
Quarterly Sales
Consumers seeking the credit may want to buy early since the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid passenger automobile or light truck or advance lean burn technology motor vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
More information on the latest hybrid quarterly sales is available.
For example, F Company is a manufacturer of hybrid motor vehicles, but not advanced lean burn technology motor vehicles. F Company sells its 60,000th hybrid car on March 31, 2007.
Ms. Smith buys an F Company hybrid car on June 30, 2007, and claims the full credit.
Ms. Maple buys an F Company hybrid car on Dec. 31, 2007, and claims 50 percent of the credit.
Mr. Grey buys an F Company hybrid car on June 30, 2008, and claims 25 percent of the credit.
Mr. Green buys an F Company hybrid car on July 1, 2008, and is unable to claim the credit, because the credit has phased out for F Company vehicles.
Toyota Motor Sales, U.S.A., Inc., has submitted quarterly reports indicating that its cumulative sales of qualified vehicles to retail dealiers has reached the 60,000-vehicle limit during the calendar quarter ending June 30, 2006. Effective Oct. 1, 2006, the tax credit amounts for certified Toyota models will be reduced. The models and allowable credits may be found in news releases IR-2006-145, Toyota Hybrids Begins Phaseout on October 1and IR-2006-154, Additional Toyota and Lexus Vehicles Certified for the Energy Tax Credit.
More detailed information may be found in the Summary of the Credit for Qualified Hybrid Vehicles
Advanced Lean Burn Technology Vehicles
Purchasers of advanced lean burn technology motor vehicles may claim a credit of $1,300 per vehicle.
Volkswagen
2009 Jetta –2.0L TDI Sedan manual and automatic
$1,300
Volkswagen
2009 Sportwagen –2.0L TDI manual and automatic
$1,300
Mercedes-Benz
GL320 BLUE TEC
$1,800
Mercedes-Benz
R320 BLUE TEC
$1,550
Mercedes-Benz
ML320 BLUE TEC
$900
Vehicles Purchased or Placed in Service
The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer’s tax obligation. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006.
The credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
Hybrid vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery. Many currently available hybrid vehicles may qualify for the tax credit.
These models have been certified for the credit in the following amounts:
† This reflects a decrease in the credit amount as of Oct. 1, 2006, due to the manufacturers meeting quarterly sales of 60,000 qualified hybrid cars — See Quarterly Sales, below.
†† This credit amount does not phase out. The full amount of the altenative fuel vehicle credit would be available for vehicles purchased on or before December 31, 2010.
Qualifed Cars and Credit Amounts
Model Year 2009
Model Year 2008
Model Year 2007
Model Year 2006
Model Year 2005
Quarterly Sales
Consumers seeking the credit may want to buy early since the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid passenger automobile or light truck or advance lean burn technology motor vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
More information on the latest hybrid quarterly sales is available.
For example, F Company is a manufacturer of hybrid motor vehicles, but not advanced lean burn technology motor vehicles. F Company sells its 60,000th hybrid car on March 31, 2007.
Ms. Smith buys an F Company hybrid car on June 30, 2007, and claims the full credit.
Ms. Maple buys an F Company hybrid car on Dec. 31, 2007, and claims 50 percent of the credit.
Mr. Grey buys an F Company hybrid car on June 30, 2008, and claims 25 percent of the credit.
Mr. Green buys an F Company hybrid car on July 1, 2008, and is unable to claim the credit, because the credit has phased out for F Company vehicles.
Toyota Motor Sales, U.S.A., Inc., has submitted quarterly reports indicating that its cumulative sales of qualified vehicles to retail dealiers has reached the 60,000-vehicle limit during the calendar quarter ending June 30, 2006. Effective Oct. 1, 2006, the tax credit amounts for certified Toyota models will be reduced. The models and allowable credits may be found in news releases IR-2006-145, Toyota Hybrids Begins Phaseout on October 1and IR-2006-154, Additional Toyota and Lexus Vehicles Certified for the Energy Tax Credit.
More detailed information may be found in the Summary of the Credit for Qualified Hybrid Vehicles
Advanced Lean Burn Technology Vehicles
Purchasers of advanced lean burn technology motor vehicles may claim a credit of $1,300 per vehicle.
Volkswagen
2009 Jetta –2.0L TDI Sedan manual and automatic
$1,300
Volkswagen
2009 Sportwagen –2.0L TDI manual and automatic
$1,300
Mercedes-Benz
GL320 BLUE TEC
$1,800
Mercedes-Benz
R320 BLUE TEC
$1,550
Mercedes-Benz
ML320 BLUE TEC
$900
Wednesday, October 8, 2008
Foreign Earned Income Exclusion
Choosing the Exclusion
The foreign earned income exclusion is voluntary. You can choose the exclusion by completing the appropriate parts of Form 2555.
When You Can Choose the Exclusion
Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns.
A return filed by the due date (including any extensions).
A return amending a timely-filed return. Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid.
A return filed within 1 year from the original due date of the return (determined without regard to any extensions).
You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion.
If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described above if you file before IRS discovers that you failed to choose the exclusion. You must type or legibly print at the top of the first page of the Form 1040 "Filed pursuant to section 1.911-7(a)(2)(i)(D)."
If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. You must request a private letter ruling under Income Tax Regulation 301.9100-3 and Revenue Procedure 2007-1.
Revenue procedures are published in the Internal Revenue Bulletin (I.R.B.) and in the Cumulative Bulletin (C.B.), which are volumes containing official matters of the Internal Revenue Service. The I.R.B. is available on the Internet at http://www.irs.gov/. You can buy the C.B. containing a particular revenue procedure from the Government Printing Office (online at http://www.blogger.com/app/scripts/exit.jsp?dest=http%3A%2F%2Fbookstore.gpo.gov%2Firs or call 1-866-512-1800).
Effect of Choosing the Exclusion
Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it.
Solving timely filed returns problems can be very confusing and can take a lot of know how to resolve. If you find yourself in this position, call someone who can help you out and resolve your IRS issues.
Friday, October 3, 2008
Busniess Income Defined
The challenges of business income
Internal Revenue Service research indicates that understated business income contributes significantly to the tax gap, with the majority understated by small businesses.
To assist small business and self-employed taxpayers better understand their reporting obligations, this blog entry addresses the issue of income and how to determine gross income.
Business Income, Gross Receipts or Sales
If there is a connection between any income received and a business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if the business did not exist and operate.
Small business owners and self-employed taxpayers must report on their tax returns all income received from their businesses unless specifically excluded by law. In most cases, business income will be in the form of cash, checks and credit card charges.
But business income can be in other forms, such as property or services. There are many forms, including: bartering, real estate rents, personal property rents, interest and dividend income, canceled debt, promissory notes, lost income payments, damages, economic injury payments, as well as kickbacks.
All income earned is taxable. Directing payment of income to a third party does not remove the reporting and payment requirements for small businesses and self-employed taxpayers.
Cost of Goods Sold
Some businesses may make or buy goods to sell. If so, these businesses may deduct the cost of goods sold (COGS) from their gross receipts. To determine these costs, the value of inventory at the beginning and end of the year must be calculated.
There are several factors that go into determining COGS, including: inventory at the beginning of the year; purchases less cost of items withdrawn for personal use; labor costs (generally applies to manufacturing and mining operations); materials and supplies (generally a manufacturing cost); other costs (generally applies to manufacturing and mining operations); and inventory at the end of the year.
Inventory, net purchases, cost of labor, materials and supplies, and other costs are added together. Inventory at the end of the year is subtracted from this total to determine COGS.
Gross Income
To calculate gross income, first determine net receipts (gross receipts minus returns and allowances) and minus the cost of goods sold. Returns and allowances include cash or credit refunds made to customers, rebates and other allowances off the actual sales price. Then add any other income, including fuel tax credits. Gross income must be determined first before deducting business expenses.
Tools to Use
There are tools available to assist small business owners and the self-employed track and report income such as the use of: a formal set of books and records with strong; accounting/financial computer software; and separate bank accounts for business and personal income and expenses.
Small businesses and self-employed taxpayers greatly benefit by accurately recording and reporting all income. Insufficient recordkeeping could cause income to be over-reported and too much tax paid or too little income reported and too little tax paid.
If your a small business and have a back tax issues with income tax or payroll tax there is help available to you.
Internal Revenue Service research indicates that understated business income contributes significantly to the tax gap, with the majority understated by small businesses.
To assist small business and self-employed taxpayers better understand their reporting obligations, this blog entry addresses the issue of income and how to determine gross income.
Business Income, Gross Receipts or Sales
If there is a connection between any income received and a business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if the business did not exist and operate.
Small business owners and self-employed taxpayers must report on their tax returns all income received from their businesses unless specifically excluded by law. In most cases, business income will be in the form of cash, checks and credit card charges.
But business income can be in other forms, such as property or services. There are many forms, including: bartering, real estate rents, personal property rents, interest and dividend income, canceled debt, promissory notes, lost income payments, damages, economic injury payments, as well as kickbacks.
All income earned is taxable. Directing payment of income to a third party does not remove the reporting and payment requirements for small businesses and self-employed taxpayers.
Cost of Goods Sold
Some businesses may make or buy goods to sell. If so, these businesses may deduct the cost of goods sold (COGS) from their gross receipts. To determine these costs, the value of inventory at the beginning and end of the year must be calculated.
There are several factors that go into determining COGS, including: inventory at the beginning of the year; purchases less cost of items withdrawn for personal use; labor costs (generally applies to manufacturing and mining operations); materials and supplies (generally a manufacturing cost); other costs (generally applies to manufacturing and mining operations); and inventory at the end of the year.
Inventory, net purchases, cost of labor, materials and supplies, and other costs are added together. Inventory at the end of the year is subtracted from this total to determine COGS.
Gross Income
To calculate gross income, first determine net receipts (gross receipts minus returns and allowances) and minus the cost of goods sold. Returns and allowances include cash or credit refunds made to customers, rebates and other allowances off the actual sales price. Then add any other income, including fuel tax credits. Gross income must be determined first before deducting business expenses.
Tools to Use
There are tools available to assist small business owners and the self-employed track and report income such as the use of: a formal set of books and records with strong; accounting/financial computer software; and separate bank accounts for business and personal income and expenses.
Small businesses and self-employed taxpayers greatly benefit by accurately recording and reporting all income. Insufficient recordkeeping could cause income to be over-reported and too much tax paid or too little income reported and too little tax paid.
If your a small business and have a back tax issues with income tax or payroll tax there is help available to you.
Are You Considering Opening an LLC?
Limited Liability Company
A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.
LLC's are popular because, similar to a corporation, owners generally have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLC's and foreign entities. Most states also permit “single member” LLC's, those having only one owner.
A few types of businesses generally cannot be LLC's, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLC's.
For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies.
Always ask a tax professional if you have tax questions. Get it right the first time you have to resolve an issue with the IRS, if you don't the consequences can be long lasting.
If you owe the IRS back taxes and are in need of a resolution call a company that can help.
A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.
LLC's are popular because, similar to a corporation, owners generally have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLC's and foreign entities. Most states also permit “single member” LLC's, those having only one owner.
A few types of businesses generally cannot be LLC's, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLC's.
For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies.
Always ask a tax professional if you have tax questions. Get it right the first time you have to resolve an issue with the IRS, if you don't the consequences can be long lasting.
If you owe the IRS back taxes and are in need of a resolution call a company that can help.
Choosing Subchapter S Corporation as Your Business Type
Subchapter S Corporation
The Subchapter S corporation is a variation of the standard corporation. The S corporation allows income or losses to be passed through to individual tax returns, similar to a partnership. The rules for Subchapter S corporations are found in Subchapter S of Chapter 1 of the Internal Revenue Code.
An S corporation has the same corporate structure as a standard corporation. It is a legal entity, chartered under state law, and is separate from its shareholders and officers. There is generally limited liability for corporate shareholders. The difference is that the corporation files an election on Form 2553, Election by a Small Business Corporation, to be treated differently for federal tax purposes.
Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. It is treated in the same way as a partnership, in that generally taxes are not paid at the corporate level.
An S corporation files Form 1120S, U.S. Corporation Income Tax Return for an S Corporation. The income flows through to be reported on the shareholders’ individual returns. Schedule K-1, Shareholder’s Share of Income, Credits and Deductions, is completed with Form 1120S for each shareholder. The Schedule K-1 tells shareholders their allocable share of corporate income and deductions. Shareholders must pay tax on their share of corporate income, regardless of whether it is actually distributed.
The Subchapter S corporation is a variation of the standard corporation. The S corporation allows income or losses to be passed through to individual tax returns, similar to a partnership. The rules for Subchapter S corporations are found in Subchapter S of Chapter 1 of the Internal Revenue Code.
An S corporation has the same corporate structure as a standard corporation. It is a legal entity, chartered under state law, and is separate from its shareholders and officers. There is generally limited liability for corporate shareholders. The difference is that the corporation files an election on Form 2553, Election by a Small Business Corporation, to be treated differently for federal tax purposes.
Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. It is treated in the same way as a partnership, in that generally taxes are not paid at the corporate level.
An S corporation files Form 1120S, U.S. Corporation Income Tax Return for an S Corporation. The income flows through to be reported on the shareholders’ individual returns. Schedule K-1, Shareholder’s Share of Income, Credits and Deductions, is completed with Form 1120S for each shareholder. The Schedule K-1 tells shareholders their allocable share of corporate income and deductions. Shareholders must pay tax on their share of corporate income, regardless of whether it is actually distributed.
Choosing a Corporation as Your Business Structure
Corporation
A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership.
Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.
The corporation is an entity that handles the responsibilities of the business. Like a person, the corporation can be taxed and can be held legally liable for its actions. If you organize your business as a corporation, you are generally not personally liable for the debts of the corporation. (Exceptions my exist under state law.)
When you form a corporation, you create a separate tax-paying entity. Unlike sole proprietors and partnerships, income earned by a corporation is taxed at the corporate level using corporate tax rates. Regular corporations are called C corporations because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.
A corporation files Form 1120 or 1120-A, U.S. Corporation Income Tax Return. If a shareholder is an employee, he pays income tax on his wages, and the corporation and the employee each pay one half of the social security and Medicare taxes and the corporation can deduct its half. A corporate shareholder pays only income tax for any dividends received, which may be subject to a dividends-received deduction.
A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership.
Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.
The corporation is an entity that handles the responsibilities of the business. Like a person, the corporation can be taxed and can be held legally liable for its actions. If you organize your business as a corporation, you are generally not personally liable for the debts of the corporation. (Exceptions my exist under state law.)
When you form a corporation, you create a separate tax-paying entity. Unlike sole proprietors and partnerships, income earned by a corporation is taxed at the corporate level using corporate tax rates. Regular corporations are called C corporations because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.
A corporation files Form 1120 or 1120-A, U.S. Corporation Income Tax Return. If a shareholder is an employee, he pays income tax on his wages, and the corporation and the employee each pay one half of the social security and Medicare taxes and the corporation can deduct its half. A corporate shareholder pays only income tax for any dividends received, which may be subject to a dividends-received deduction.
Choosing a Partnership as Your Business Type
Partnership
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership does not pay any income tax at the partnership level. Partnerships file Form 1065, U.S. Return of Partnership Income, to report income and expenses. This is an information return. The partnership passes the information to the individual partners on Schedule K-1, Partner’s Share of Income, Credits, and Deductions. Partnerships are often referred to as pass-through or flow-through entities for this reason.
Each partner reports his share of the partnership net profit or loss on his personal Form 1040 tax return. Partners must report their share of partnership income even if a distribution is not made.
Partners are not employees of the partnership and so taxes are not withheld from any distributions. Like sole proprietors, partners generally need to make quarterly estimated tax payments if they expect to make a profit.
General partners must pay self-employment tax on their net earnings from self employment assigned to them from the partnership. Net earnings from self- employment include an individual’s share, distributed or not, of income or loss from any trade or business carried on by a partnership.
Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership does not pay any income tax at the partnership level. Partnerships file Form 1065, U.S. Return of Partnership Income, to report income and expenses. This is an information return. The partnership passes the information to the individual partners on Schedule K-1, Partner’s Share of Income, Credits, and Deductions. Partnerships are often referred to as pass-through or flow-through entities for this reason.
Each partner reports his share of the partnership net profit or loss on his personal Form 1040 tax return. Partners must report their share of partnership income even if a distribution is not made.
Partners are not employees of the partnership and so taxes are not withheld from any distributions. Like sole proprietors, partners generally need to make quarterly estimated tax payments if they expect to make a profit.
General partners must pay self-employment tax on their net earnings from self employment assigned to them from the partnership. Net earnings from self- employment include an individual’s share, distributed or not, of income or loss from any trade or business carried on by a partnership.
Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.
Choosing a Business Structure
Make an important choice about starting your business.
Of all the choices you make when starting a business, one of the most important is the type of legal organization you select for your company. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money. Business formation is controlled by the law of the state where your business is organized.
This blog and entry and the links to business types provides a quick look at the differences between the most common forms of business entities.
The most common forms of businesses are:
Sole Proprietorships
Partnerships
Corporations
Limited Liability Companies (LLC)
While state law controls the formation of your business, federal tax law controls how your business is taxed. Federal tax law recognizes an additional business form, the Subchapter S Corporation.
All businesses must file an annual return. The form you use depends on how your business is organized. Sole proprietorships and corporations file an income tax return. Partnerships and S Corporations file an information return. For an LLC with at least two members, except for some businesses that are automatically classified as a corporation, it can choose to be classified for tax purposes as either a corporation or a partnership. A business with a single member can choose to be classified as either a corporation or disregarded as an entity separate from its owner, that is, a “disregarded entity.” As a disregarded entity the LLC will not file a separate return instead all the income or loss is reported by the single member/owner on its annual return.
The answer to the question “What structure makes the most sense?” depends on the individual circumstances of each business owner.
The type of business entity you choose will depend on:
Liability
Taxation
Recordkeeping
Which structure best suits your business?
One form is not necessarily better than any other. Each business owner must asses his or her own needs. It may be important to seek advice from business experts and professionals when considering the advantages and disadvantages of a business entity.
Of all the choices you make when starting a business, one of the most important is the type of legal organization you select for your company. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money. Business formation is controlled by the law of the state where your business is organized.
This blog and entry and the links to business types provides a quick look at the differences between the most common forms of business entities.
The most common forms of businesses are:
Sole Proprietorships
Partnerships
Corporations
Limited Liability Companies (LLC)
While state law controls the formation of your business, federal tax law controls how your business is taxed. Federal tax law recognizes an additional business form, the Subchapter S Corporation.
All businesses must file an annual return. The form you use depends on how your business is organized. Sole proprietorships and corporations file an income tax return. Partnerships and S Corporations file an information return. For an LLC with at least two members, except for some businesses that are automatically classified as a corporation, it can choose to be classified for tax purposes as either a corporation or a partnership. A business with a single member can choose to be classified as either a corporation or disregarded as an entity separate from its owner, that is, a “disregarded entity.” As a disregarded entity the LLC will not file a separate return instead all the income or loss is reported by the single member/owner on its annual return.
The answer to the question “What structure makes the most sense?” depends on the individual circumstances of each business owner.
The type of business entity you choose will depend on:
Liability
Taxation
Recordkeeping
Which structure best suits your business?
One form is not necessarily better than any other. Each business owner must asses his or her own needs. It may be important to seek advice from business experts and professionals when considering the advantages and disadvantages of a business entity.
Choosing a Sole Proprietorship as Your Business Type
Sole Proprietorship
A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete control to the owner. It is any unincorporated business owned entirely by one individual. In general, the owner is also personally liable for all financial obligations and debts of the business. (State law may also govern this area depending on the state.)
Sole proprietors can operate any kind of business. It must be a business, not an investment or hobby. It can be full-time or part-time work. This includes operating a:
Shop or retail trade business
Large company with employees
Home based business
One person consulting firm
Every sole proprietor is required to keep sufficient records to comply with federal tax requirements regarding business records.
Generally, sole proprietors file Schedule C or C-EZ, Profit or Loss from Business, with their Form 1040. Sole proprietor farmers file Schedule F, Profit or Loss from Farming. Your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return.
Sole proprietors must also pay self-employment tax on the net income reported on Schedule C or Schedule F. You may also be able to deduct one-half of SE tax on your 1040. Use Schedule SE, Self-Employment Tax, to compute this tax.
Sole proprietors do not have taxes withheld from their business income so you will generally need to make quarterly estimated tax payments if you expect to make a profit. These estimated payments include both income tax and self-employment taxes for Social Security and Medicare.
A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete control to the owner. It is any unincorporated business owned entirely by one individual. In general, the owner is also personally liable for all financial obligations and debts of the business. (State law may also govern this area depending on the state.)
Sole proprietors can operate any kind of business. It must be a business, not an investment or hobby. It can be full-time or part-time work. This includes operating a:
Shop or retail trade business
Large company with employees
Home based business
One person consulting firm
Every sole proprietor is required to keep sufficient records to comply with federal tax requirements regarding business records.
Generally, sole proprietors file Schedule C or C-EZ, Profit or Loss from Business, with their Form 1040. Sole proprietor farmers file Schedule F, Profit or Loss from Farming. Your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return.
Sole proprietors must also pay self-employment tax on the net income reported on Schedule C or Schedule F. You may also be able to deduct one-half of SE tax on your 1040. Use Schedule SE, Self-Employment Tax, to compute this tax.
Sole proprietors do not have taxes withheld from their business income so you will generally need to make quarterly estimated tax payments if you expect to make a profit. These estimated payments include both income tax and self-employment taxes for Social Security and Medicare.
Is Your Hobby a For-Profit Endeavor?
Is Your Hobby a For-Profit Endeavor?
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or is engaged in as a hobby.
Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”
Taxpayers may need a clearer understanding of what constitutes an activity engaged in for profit and the tax implications of incorrectly treating hobby activities as activities engaged in for profit. This educational fact sheet provides information for determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.
Is your hobby really an activity engaged in for profit?
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.
The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:
Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
What are allowable hobby deductions under IRC 183?
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.
Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:
Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
If you are having trouble paying the IRS or don't know how to handle your IRS situation, please call a proven tax resolution firm that can help you.
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or is engaged in as a hobby.
Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”
Taxpayers may need a clearer understanding of what constitutes an activity engaged in for profit and the tax implications of incorrectly treating hobby activities as activities engaged in for profit. This educational fact sheet provides information for determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.
Is your hobby really an activity engaged in for profit?
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.
The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:
Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
What are allowable hobby deductions under IRC 183?
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.
Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:
Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
If you are having trouble paying the IRS or don't know how to handle your IRS situation, please call a proven tax resolution firm that can help you.
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