No Bad Debt Deduction for Cash Method Taxpayers

It's a well-settled issue, but some business taxpayers still think you can take a deduction for an unpaid invoice if you're on the cash method of accounting. You can't. And the reason is simple when you think about it. Under the cash system you only pay tax on money you receive. Since you never paid tax on the money, you can't take a deduction. (You're still getting a deduction for your cost of goods sold, labor, etc. on the return.) Under the accrual system you're reporting income even if you don't receive the cash or check, so if you can't collect, you've got a bad debt deduction.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Turn Your Home Office Into A Tax Saving Machine

A home office deduction is allowed for those who work out of their home, but it can be tricky to understand which expenses to track and who should record and pay for the expenses.

Proper tracking and recording is key for maximizing any deduction - particularly the home office deduction.

Here is a checklist you can use to help with tracking and recording your home office expenses. 

Personal Expenses for Your Home Office

A great tax benefit that comes with qualifying your home office is that a portion of your personal expenses to maintain your home becomes deductible. 

Some of these expenses are not deductible otherwise.  But even for those that are already deductible, such as your mortgage interest and property taxes, the way in which the home office calculation works, your deduction for these items is not subject to the limitations that otherwise apply. 

Track and record (and pay) these expenses personally:

• Mortgage interest
• Property taxes
• Homeowner's insurance
• Utilities
• Security
• HOA dues
• Cleaning
• Pest control
• Other expenses that relate to the running of your entire home

Caution! Certain expenses are non-deductible.  This includes pool maintenance, lawn maintenance, landscaping and the first phone line into your home.

Business Expenses

Business expenses for your home office are expenses that your business has regardless of where your office is located. 

Have your business track and record (and pay) these expenses directly:

• Supplies
• Equipment
• Furniture
• Separate business phone line
• Repairs made directly to the home office
• Other expenses that are 100% business use

Claim Your Home Office Deduction

The home office is one of the best types of deductions because it turns expenses you already have into deductible expenses. This means it is eliminating tax and that is the best type of tax planning

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.  

Additional Information On The New 1099-K

If you make payments to service providers, landlords, sub-contractors, etc. that you would normally send 1099-Misc to, you can pay them by credit/debit card and be relieved of having to provide them a 1099-Misc at year end. 

No 1099-MISC if paid by credit card.  In the instructions to Form 1099-MISC, the IRS has made it clear that payments made with a credit card, debit card, or through any third-party payer, are not reported on Form 1099-MISC.

It is important that you track which vendors you pay by credit/debit card and the ones you pay by check, which you must provide 1099's to if they are paid more than $600.

New for 2011 is the 1099-K.  The 1099-K will be used for matching purposes by the IRS computers to ensure that businesses are reporting all of their income.  The information contained in the 1099-K will include sales tax, shipping, charge backs and other charges. Adjustments may have to be made in order to properly reconcile the books against the 1099-K. It is important that payments received via credit/debit cards are properly tracked.

The 1099-K is issued by your merchant provider if the payee has more than 200 transactions or more than $20,000 of gross income paid to them. Even though the merchant provider does not need to issue a 1099-K to their payees, it is unclear if the merchant provider will report the information to the IRS anyway. 

There is a lot of mis-information on the internet concerning the 1099-K. Please email this to your colleagues and business associates. 

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Valuing Rental Property

When you're buying a house the appraiser may use several methods, but the selling price of comparables in the area is usually the one that determines the value. That's not true for investment properties such as apartment buildings, office buildings, etc. For these properties the cash flow from the property is what generally determines the value. While location and certain other factors go far in determining the cash flow, management can be a critical factor. A good manager can buy a property cheaply and turn it into a cash cow by getting the building fully leased, increasing rents, cutting costs, etc.

IRS Payment Arrangements - Installment Agreement

The Internal Revenue Service (“IRS”) is authorized to allow the full payment of a taxpayers unpaid tax debt in small and manageable monthly payment amounts.  This revolving credit arrangement is called an “installment agreement.”

 The taxpayer must satisfy the following conditions before the IRS agrees to an installment agreement:

• Taxpayer filed all tax returns;
• Taxpayer filed all employment tax returns;
• Taxpayer paid all payroll taxes for the current tax quarter;
• Taxpayer filed a financial statement (Form 433) if the tax due exceeds $25,000; and
• Taxpayer (self employed) made estimated tax payments for the current tax year.

A one-time user fee is charged by the IRS to process an installment agreement.  Another cost associated with an installment agreement is a user fee.  The fee is currently $52 for direct debit agreements and $105 for non-direct debit agreements.

Eligible low-income taxpayers (based on the Department of Health and Human Services poverty guidelines) will be charged a $43 fee.  If taxpayers fail to meet the terms of the agreement during the life of the agreement, the IRS will charge an additional $45 fee to reinstate the agreement.  

If you arrange to pay your taxes through an installment agreement, you can pay in various ways: 

• Personal or business checks, money orders, or certified funds (all made payable to the U.S. Treasury);
• Payroll deductions your employer takes from your salary and regularly sends to IRS; 
• Electronic transfers from your bank account or other similar means; or
• Direct debit from your bank account.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Are you in business? Can you deduct business expenses?

One answer is once you start generating revenue. In Michael S. Oros (T.C. Memo. 2012-4) the taxpayer traveled to South America, Asia, Africa, and Australia with the intention of writing a book. He took some 4,500 photographs and maintained a contemporaneous journal in which he wrote about his different experiences. But some four years later he had not published or completed a book about his trip. On his 2006 tax return he deducted travel, meal, and telephone expenses for a total loss of $19,140. The Court noted that to be engaged in a trade or business a taxpayer must me regularly and actively involved in the activity. The Court said that while some of the facts in the record suggested the taxpayer was engaged in a trade or business (business plan, journal, etc.), it went on to say the taxpayer failed to present any evidence of continuous or repeated activity as an author, and he was a full-time employee. The Court denied a deduction for the claimed expenses.

In Javier L. Gaitan et al. (T.C. Memo. 2012-3) the taxpayer had a business exporting clothing. The IRS disallowed a subtraction for cost of goods sold amounting to $134,575. The taxpayer attempted to prove the amount by (1) receipts and (2) an American Express card, claiming such evidence substantiated $70,275 of the amount disallowed. The Court found four problems with the receipts:

 They did not indicated which purchases were for export and which were for the taxpayers' personal use.

• Many of the receipts were illegible.
• Many of the receipts did not clearly identify the purchaser.
• Some of the receipts show the purchases were made for another business the taxpayers' owned.

The Court noted that the production of the American Express credit card statements was also flawed. The Court sided with the IRS in disallowing the cost of goods sold deduction.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Tax Tips for the Newly Self-Employed

With more than 14 million Americans currently unemployed, many have become self-employed. Starting a new business is pretty intense with entrepreneurs having to wear different hats to get the business off the ground. The financial and tax side of owning a business is a common area that most entrepreneurs need help with.

Here are some tips that will help self-employed workers get their business off the ground without running into tax problems down the road.  

Hire a Tax Pro and an Attorney. It’s part of the cost of doing business and is highly recommended by many experts, not just us tax pros and attorneys. Richard Kiyosaki, in his book, “Rich Dad, Poor Dad” stresses the importance of having a team of legal and accounting/tax experts to guide you through the process. Pound for pound, their advice will save you money in the long run. Tax planning, entity selection, financial analysis, and setting up accurate books are integral to your success.

Read more: http://smallbusiness.foxbusiness.com/legal-hr/2011/11/18/tax-tips-for-newly-self-employed/#ixzz1jP7xhIow

Are you newly self-employed?  Contact us so the IRS does not contact you.

Eight Facts to Help Determine Your Correct Filing Status

Determining your filing status is one of the first steps to filing your federal income tax return. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax.

Some people may qualify for more than one filing status. Here are eight facts about filing status that the IRS wants you to know so you can choose the best option for your situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.
2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
5. If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint return with that spouse for the year of death.
6. A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2009 or 2010, you have a dependent child, have not remarried and you meet certain other conditions.

There’s much more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

If you have any questions about this topic or or tax topic, please do not hesitate to contact us.

Advantages of Keeping Good Tax Records

You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year, which in turn may make filing your return less, well, taxing.

Records help you document the deductions you've claimed on your return. You'll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents - such as records relating to a home purchase or sale, stock transactions, IRA, and business or rental property - should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:

• Bills
• Credit card and other receipts 
• Invoices 
• Mileage logs 
• Canceled, imaged, or substitute checks or any other proof of payment 
• Any other records to support deductions or credits you claim on your return 

Good record-keeping throughout the year saves you time and effort at tax time. For more information on what kinds of records you should keep, contact our office.

New Business Tax Forms for 2011

New info on forms, Schedule C, 1120, 1120S, and 1065 and the new Form 1125-A.

You may need to file a new form with your 2011 business tax return. Form 1125-A, Cost of Goods Sold must be attached if you have inventory. The form is identical to the Schedule A used for many years on From 1120S, 1120C, 1120, and 1065.

In addition, there's a new question to answer on business forms. You'll have to check a box as to whether or not you made any payments that would require you to file Form 1099. A follow-up question asks if you did or will file all required Forms 1099. Don't forget, you're signing the tax return under penalties of perjury.