Tag Archives: SK Financial CPA LLC

New Business setup

5 Ways to Finance your Small Business

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Small businesses are the hardest to take off but with proper planning and good strategies, these small businesses can be turned into multinational corporations in a very short time!

One of the most difficult things about starting a small business is having access to resources. All resources, be it the finances or the capital assets, are limited and difficult to get hands on. To help all you new entrepreneurs, we have compiled the 5 easiest ways to obtain finances to kick start your small business!

Credit Cards

If you are a new business and your expenses are not that much, then credit cards are the best way to obtain finance. You can charge your card for all the expenses that you need to incur and make the minimum payment when due. The advantage of obtaining finances this way is that it is readily available. You do not have to look for lenders or give guarantees. All you have to worry about is the small amount of minimum payment that you can easily make as soon as your business gets going.

Home Equity

Obtaining a loan against your home equity is yet another easy way of obtaining finance. You can take out a loan against the amount that equals the value of your home minus the liabilities. Again, the method is readily available, has low interest rates and flexible clauses. These home equity loans are quite easy to obtain as compared to traditional business loans.

 Assets

There might be some capital assets at home that you can probably live without. For example, you may have an extra car or even only one car that you rarely use. You can sell such assets for a generous amount of money and can buy them back (and better), once you start hitting profits in your newly started business. This method of financing is liability free. You do not owe anyone anything, there are no interest payments to worry about and you can easily buy back the asset later on.

Angel investors

Angel investors are wealthy people with a high-risk loan profile. This means that these affluent people are ready to invest in risky ventures and therefore, easily lend money to new entrepreneurs. Angel investors expect a 20 to 25% return rate when the business hits off and are usually very smart individuals, who not only have the knowledge of the sectors they invest in but are also good businessmen. This means that apart from obtaining finances from them, you can receive free advice on business problems and get access to their valuable contacts too.

Pre-Sales

This is quite a risky method but if you are confident about your business, this method of obtaining finance is probably the most advantageous one. It requires you to have thorough knowledge of how you expect your sales to be and necessitates intensive marketing. With tactics like online marketing and rigorous salesmanship, you can easily coordinate with suppliers and customers so that your sales money can be used to pay off your inventory investments!

All of the financing methods have their own advantages and risks. With a good CPA, like a SK Financial accountant, by your side, you can easily obtain finances and hit profits in no time at all!

Financial Planning

Motivating Employees for More Productivity

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Motivating employees is one of the key tasks of the human resource department of any business. What most business owners and human resource managers fail to realize is that the aim is not to motivate people but to create an environment which instills motivation in all employees.

Letting Employees Use their Own Creativity

The traditional methods of financial rewards and extreme control by HR managers are likely to fail in today’s environment, where innovation and creativity are extreme necessities. What managers need to do to motivate people is allow them to use their strengths the way they think is best and make them genuinely interested in their work. One of the best ways of doing it is structuring the task at hand in a way that each employee can work using his personal style, without having to adapt much or fear punishment in case of failure.

For example, if you think that a particular employee is more of a follower than a leader, then, assign him tasks with set guidelines, where little or no innovation is required. If you feel that a particular employee will excel more as a leader, giving him a task with restrictions will most likely cause friction and result in failure. Instead, give him a more managerial task, where result is more important than the journey to the result and where he or she can innovate and put his or her ideas to test.

Hygiene and Motivational Factors

Furthermore, there are many other factors that help motivate employees. These can be divided in two groups: hygiene factors and motivational factors. The hygiene factors are important in a way that if they are not present, the employee will feel demotivated but on their own, they result in little motivation. This means that in spite of the presence of all the hygiene factors, there are likely to be situations where the motivation is below expected levels. These hygiene factors include salary, benefits, physical working environment, job status and job security.

These hygiene factors are all superficial and cannot contribute so much in motivating employees. What really makes the employees truly dedicated is work itself. If the work has little or no value, the employee will feel demotivated. The employees need to feel that his or her work is important to the organization and their contribution matters. They should feel that they are being given responsibility and acknowledged for all work done.

Let the Employees Grow

Furthermore, employees expect growth, not only in terms of financial salary and job status, but also in terms of work assigned. For example, if an employee has always been given a low level, basic task, he or she should gradually be assigned to a more difficult task that requires more skills and effort. This will make the employee feel important and recognized. It makes them feel productive and motivates them to work harder.

Materialistic factors like job status and salary can motivate employees to only an extent. What will really drive and motivate them to work harder and be more productive is their genuine love for the work that they do. Assign employees the work that they enjoy doing and reward them with growth prospects and acknowledgments. These motivational factors will go a long way in encouraging employees than the traditional hygiene factors.

HR and Payroll

Human Resource and Performance Appraisal

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Performance appraisal is the evaluation of the employees, based on their work done, to assess their future potential and reward them for their work. Performance appraisal usually creates friction between employees and human resource departments because the employees feel judged by the HR managers. This behavior defeats the entire purpose of performance appraisal and if your employees feel resentment towards it, then it means you are doing something wrong.

The main aim of performance appraisal is the development of the employee as a worker. It should be more of an act of constructive criticism than a form of condemnation and punishment.

Clarify the Purpose

The first thing that HR managers should do as part of the performance appraisal is to clarify the employees about the main aim of it. They should clearly convey that the appraisal is going to be done so that feedback could be provided on how the employees can improve their work and can be rewarded accordingly. Moreover, employees should know well beforehand about the criteria along which they will be judged so that they can work accordingly.

Avoid Formal Appraisal Process

The appraisal process should not be very formal either. A formal appraisal process reflects itself as a judgment rather than an improvisation process. Also, an employee should be appraised not only by the ultimate seniors and the HR department but also by their immediate seniors, team members and juniors. This provides an overall assessment of the employee as a worker of the organization. This also ensures that the employee is not only a good subordinate but also a good leader and a co-worker.

Assessment Based on Achievements

Yet another good way of conducting performance appraisals is assessing on the basis of the achievement of objectives. This method is more appropriate for modern times, where innovation and creativity hold more value than following a set of commands. In this method, the employee should be assessed on the basis of how well he or she achieved the objective of the task, how productive they were and how they managed to use the set amount of resources. This allows the employee to really shine through using their set of strengths rather than being forced to do the usual. This also allows the organization as a whole to achieve productivity and innovation.

Encouragement is Better than Criticism

Where, an appraisal resulting in a good evaluation of an employee should be rewarded with appropriate awards and benefits, a bad appraisal result should not be heavily criticized. If you feel that a particular employee failed to prove himself, criticizing him and punishing him is not the right way to do. Instead, you should offer them training and guidance opportunities where they can learn about their strengths and can improve where they lack behind. Being harsh and passing on destructive criticism will not only demotivate the employee but will also create an aura of fear in other employees as well.

Performance appraisal is a sensitive task. It can make or break your business’s entire human resource. The way it is being conducted in the past has given it a negative image of a way to punish and criticize employees rather than an opportunity to improvise.

CPA

An Accountant in Tampa Can Help Your Business Dreams Soar

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As a business owner in Tampa, Florida, you’ve got a lot on your mind. You’re extremely good at what you do, but the heart of a business can’t keep beating without all the peripheral things that keep the money flowing: bookkeeping, human resources, taxes, financial planning. There’s so much to keep track of that it can seem overwhelming when you’re trying to live your dream of building, selling, creating, repairing and generally getting wonderful things done. But, as a smart business owner, you know that one of the best ways to get things done to their maximum potential is to delegate to an expert. That’s why many business owners look for accountants in Tampa to help lift the burden of finances from their business.

There are several reasons an accountant in Tampa in an excellent business choice. The factor that draws many people to look for an accounting expert is the problem of time. Dealing with money takes time, and correcting financial mistakes can take a lot of time. And let’s face it: money is math, and not everyone has a talent for math! Who wants to spend hours or even days tracking down a mathematical error when a qualified accountant can do the job quickly and correctly, leaving you headache-free?

Correctness is also an important factor that makes an accountant in Tampa a decision that business owners won’t regret. Beyond the fact that accountants are probably better at dealing with numbers than anyone else on your staff, they know all the tricks to avoid errors and simplify processes that don’t need to be complicated. An accountant won’t make the mistakes that a beginner would, and they will most likely be willing to help you make their job easier by showing you fast and easy ways to handle your finances.

Last, but absolutely not least, many Tampa business owners choose to hire an accountant in Tampa because accountants can help your business make money. How much money? You may be surprised! Accountants have more tricks up their sleeves than just making your bookkeeping and HR department run smoothly. They can implement tax strategies that can help you make money all year long. They know where to look for money leaks and how to stop those gaps for you. An accountant in Tampa is as much an expert at their job as you are at yours, and with their help, your business has nowhere to grow but upwards!

There are many different ways to go into business in Tampa. Whether you’re running a small shop or a big corporation, whether you’re selling computers or fixing cars, whether your dream is to serve the perfect burger or to build homes that will last for generations, you’re in it for the dream as much as for the money. So why not give yourself the extra time (not to mention the extra money) to chase that dream even further? An accountant can help your business climb higher than you ever thought possible. Look up an accountant in Tampa today and see how far your business dreams can go!

Bookkeeping Services

Bookkeeping Tampa Florida Services and Why Your Small Business Needs One

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If you’re starting a business in Tampa, the first thing you need to find is a bookkeeping Tampa service to do your monthly accounting for you. The internet is the best place to do that, but it is a good idea to search locally, and not globally when it comes to your businesses’ books. Bookkeeping is the most critical accounting service every organization needs, whether they are big or small. The main reason is many transactions take place daily, and they need to be recorded accurately. As well, a Tampa bookkeeping service knows all State tax laws.

Outsourcing Monthly Bookkeeping Services in Florida

The only way to keep accurate records is by bookkeeping. Rather than doing them yourself, and taking the chance for errors; a skilled bookkeeping Tampa service has all the qualifications, skills, experience and software necessary to keep track of all credit and debit balances.

Outsourcing Saves Money

When you delegate your bookkeeping in Tampa services to an outside firm, you don’t have to provide them with office space, equipment or software. This of course saves money for your business long-term, and releases a lot of your duties.

A Bookkeeping Tampa Service Provides Audit Protection

If business records aren’t recorded properly it can mean serious repercussions if the IRS audits the business. A bookkeeping service will resolve notices and audits. And if your business gets audited, they can handle all the details for you. As we all know, the IRS is intimidating to deal with.

Reconcile Bank Account and Credit Card Statements

A bookkeeping Tampa service also reconciles bank accounts and credit cards. This is important so you can make sure there are no errors or discrepancies between your records and your bank account and credit card statement.

Bookkeeping Service for a Clear Financial Picture

bookkeeping servicesA bookkeeping Tampa service allows you to know where your business stands financially every month so there is no guesswork. You get a clear idea of how much your business is spending, and how much money is coming in or is owed. This gives you more time to spend on the more important aspects of your business because it frees up a lot of your time. Especially if you are like most people, and don’t like math, or dealing with numbers. As well, it makes estimating your yearly budget a lot easier.

A Bookkeeping Tampa Service Also Analyzes Expenses and Income

Along with monthly bookkeeping, an agency can also analyze expenses and income. Sometimes these tasks are taken care of on a regular basis, but a specialized service can also:

  • Prepare customer reports
  • Provide a cost analysis for employees
  • Determine how profitable, or unprofitable certain expenses are
  • Employee payroll
  • Tax planning
  • Advice with regard to tax reduction strategies
  • Personal and business income tax returns
  • Consultation and guidance to help your business increase profitability and manage costs to help your business grow.

If you have a business, and need a professional bookkeeping in Tampa, you can visit SK Financial and have a free consultation with one of our staff.

Financial Planning

Interview Strategy for Hiring an Accountant in Tampa

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Finding the right accountant can be a complex process depending on one’s individual or business needs. Finding an accountant in Tampa considering the variety of quality CPAs, but one must find the right fit for one’s unique needs. An accountant can either provide limited services come tax time, or become an integral part of one’s business life, acting as a financial and business consultant.

When searching for a CPA in Tampa, it is important to go into process with a full awareness of what ones priorities are and what role they need the accountant to fill. Once one has decided which services they need the accountant to perform, and then the search can begin. An accountant is qualified to perform complex services outside of tax and auditing is not difficult to find, if one knows where to start looking. Generally it is a wise decision to consult ones friends, family and colleagues to see if there are any suggestions or recommendations that they might have. Most individuals and businesses have had to use a variety of financial services at one point or another, so it stands to reason that one’s inner circle will have both good and bad experiences.

Referrals from people that are trustworthy are a good way to begin ones search for a qualified and competent CPA. One must always keep in mind however, that simply because somebody has referred a qualified CPA, does not mean that this individual in particular is specialized or experienced enough in the areas that one requires. When one finds a qualified accountant in Tampa that fits ones expectation of the role they must fill, the interview is the next important step. When choosing accountants, the more questions asked the better; as the more information gathered, the better the relationship can be fostered. If one is a business owner, ask about previous businesses that the CPA has worked with, and what services they provided. The more detail the better, as to reflect the confidence that the CPA exudes when speaking on the subject.

Throughout the interview, if the CPA appears reluctant to share their previous experiences or provide references, then this might very well be a red flag. References should be readily given, and descriptions of previous employment given, in order to provide a picture of competence in the candidate. However, the candidate should not reveal confidential details about the financial affairs of any specific business they work for; one must be sure that the accountant in Tampa be trustworthy enough to handle ones private affairs with professionalism. Throughout the interviewing process, the client and the candidate should be able to develop a connection, whereby the subsequent working relationship could be amicable and fruitful.

Whether one is looking for a simple bookkeeper to manage ones affairs, or a full blown financial firm, like ours, for your business – the right CPA is out there. The interview process is vital to finding the right match for an individual or ones business. Be sure to ask for references and develop a connection with the accountant in Tampa before hiring them. This way, the best relationship can be developed, and might prove to be beneficial for a long time to come.

Bankruptcy, Benefit Plans, Estate Taxes, Health Coverage, Retirement, Tax Planning

Owners of self-directed IRAs must be very careful with the IRAs’ investments…

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IRAs

Owners of self-directed IRAs must be very careful with the IRAs’ investments, as this case shows. Two individuals formed a new firm and directed their IRAs to buy all of the stock. The company that the IRAs owned then purchased a business for cash and a note that was secured by the personal guaranties of the IRA owners.

The guaranties by the IRA owners violate the prohibited transaction rules, according to the Tax Court. That means the IRAs are terminated for tax purposes, and the owners wound up having to pay a substantial tax bill (Peek, 140 TC No. 12).

The moral of the story: Be sure that you get good legal advice in advance if you are planning to have your IRA invest in nonpublicly traded stock and the like.

IRS

Funding for the IRS will remain very tight. Congress will be stingy until the agency can prove that it has been able to clean up its act.

So expect fewer examinations. The current trend toward single-issue audits by mail and away from face-to-face exams with agents will continue at full throttle.

Poorer customer service. Anticipate longer waits if you’re trying to call IRS.

And a decline in respect for the tax system. That may embolden people to be more fast and loose with the Service, leading to a dip in voluntary compliance.

Estate Taxes

Relief is on the way for estates that made late portability elections. According to an IRS official, the agency is weighing issuing private rulings granting additional time to elect portability. Under this rule, when one spouse dies, any unused estate and gift tax exemption passes to the surviving spouse. We expect that the Service will rule favorably on late elections. Many executors did not realize that the election must be made on a timely filed estate tax return, even if total assets are less than the normal filing threshold for Form 706 … $5 million for deaths in 2011, $5.12 million for 2012 and $5.25 million for estates of decedents who die in 2013.

Benefit Plans

Hardship distributions from 401(k) plans can be hit with the 10% penalty if the recipient hasn’t reached age 59½, the Tax Court says. In addition, withdrawals that are made on account of hardship are taxed (Mayer, TC Summ. Op. 2013-39).

The IRS has a helpful chart listing withdrawals that escape the penalty, such as a series of substantially equal payments that last for the longer of five years or until age 59½ and withdrawals that are made to cover large medical expenses. The chart also notes which exceptions apply to 401(k)s and other qualified plans, those only for IRAs, SIMPLEs and SARSEPs, and which ones apply to all plans. Go here here to view the complete list.

Enforcement

The Service will not have access to taxpayer medical records as the agency enforces the penalty on people who don’t have health insurance after 2013.

Insurance companies will send a report of coverage to IRS and taxpayers, listing the names, addresses and tax ID numbers of all individuals with coverage. If an employer self-insures, the employer will make the report. No medical history will be listed. The Service will then check to make sure that uncovered individuals have paid the penalty, which is capped at $95 a person for 2014. And remember, IRS can enforce the penalty only by docking tax refunds. It can’t use liens or levies.

Tax-related identity theft may result in even slower refunds next year, according to IRS officials. Fraudsters are taking stolen Social Security numbers and quickly filing for fake refunds. Victims learn that their identities have been stolen only after their true return filing is rejected. The number of such cases is skyrocketing. Efforts IRS took this year to stop refund fraud slowed down payment of valid refunds, but the problem has continued to grow. So if the Service implements stricter controls to combat fraudulent refunds, the waiting time for refunds will only get longer.

The Service is continuing to aggressively pursue offshore tax evasion. Its latest project involves working with tax authorities in Australia and the U.K. to target foreign trusts and companies that are organized in offshore tax havens such as Singapore, the Cook Islands, the British Virgin Islands and the Caymans. The three countries will share information on the individual owners of these entities as well as on the advisers who assisted in establishing the offshore structures.

Tax Tips

Should I File My Own Taxes This Year?

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The many pros and cons to do your own tax filing and the benefits of having a tax preparation service file your income taxes instead.

It’s that time of year again: Tax Season. While it may be very tempting to try and complete your own tax preparation, there are a few things you should know before you begin. The tax laws and codes are accessible to everyone, but the reality is they are very complex. Understanding the US tax laws takes many years of training and expertise with filing tax returns. Since the tax laws change every year, it makes it all the more complicated to keep up with. You would need ongoing training in order to ensure your taxes get filed with all of the applicable deductions and credits for your tax situation. The downside is that you may miss something vital or incorrectly record a number, which can result in large fines, an audit, or even worse, being charged with fraud.

Help-buried-under-paperwork

 

 

So, if you are still intent on doing your own taxes, then the next question you have to ask yourself is, “Am I ready to learn?” Because if you are going to take on your own tax preparation, then you need to make sure you are indeed aware and educated in all the vital information, new legislations, and guidelines necessary to claim each deduction and credit you file. If you have the time and money to invest in the proper courses and training, then filing on your own may very well be a good choice for you. However, if you are not good at arithmetic or studying, then it’s best to leave tax preparation to the professionals.

 

There are different tax preparation services to choose from.  A variety of companies offer online software that can be used. These different software programs can be very convenient by allowing you to complete your tax preparation in the comfort of your home. The drawback of these programs is they are set up as your standard tax filing systems, meaning that they may not get you all the deductions and credits you really have coming to you. Are you willing to take the chance on losing out on more money?

 

The best choice is to find a good tax preparation service with actual people, as opposed to a computer program. It is important to find an established company with a good reputation that offers many benefits with their services, along with a staff of seasoned, experienced CPA’s and tax professionals. The best tax preparation services typically offer free electronic filing, past refund reviews, free consultations, and year round assistance. Finding a company that offers a guarantee gives you peace of mind that your taxes have been done properly, and in accordance to all of the US laws. There are even some companies that allow you to drop off your taxes to be completed while you finish other errands. It’s an obvious decision to choose a service with plenty of experience, excellent customer service, and that way you can take confidence in the fact that they are doing all they can to get you the maximum refund.

 

If you are unsure and nervous about completing your own tax preparation, then you should definitely choose our tax professionals here at SK Financial to handle your tax returns, and let us seek out all your deductions and credits to maximize your tax refund.

Financial Planning, Tax Tips

Tax Update as of 12/14/2012

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As the stalemate on taxes continues between President Obama and Speaker Boehner…

Look at two tax hikes that will apply in 2013, regardless of the outcome of the current negotiations. IRS has issued guidance on these Medicare surtaxes for upper-incomers…a 3.8% tax on unearned income and a 0.9% levy imposed on their earned income.

 

Start with the 3.8% Medicare surtax. It applies to unearned income of single filers with modified adjusted gross incomes above $200,000 and of couples over $250,000. Marrieds filing separately get a $125,000 threshold. Modified AGI is AGI plus any tax free foreign earned income. The surtax is levied on the smaller of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, payments of substitute interest and dividends by brokers, capital gains, annuities, royalties and passive rental income. Tax free interest is exempted, along with payouts from retirement plans such as 401(k)s, IRAs, deferred-pay plans and pension plans.

 

Most gain on the sale of a primary residence is exempt from the surtax. Only profit in excess of the $250,000 exclusion for singles or $500,000 for couples can be hit by the surtax. But the levy can apply to all gain on a second home.

 

Income from a passive activity is subject to the surtax if the recipient doesn’t materially participate in the operations, even if the income is from a business.

 

Now turn to the 0.9% Medicare surtax on earned income…wages and income from self-employment. Singles will owe the levy once total earnings exceed $200,000. Couples…over $250,000. Marrieds filing separately…over $125,000. So for earnings

over the thresholds, the effective Medicare tax rate will be 3.8%…the usual 2.9% rate plus an extra 0.9%. The surtax applies only to the employee’s share of Medicare tax.

 

Employers don’t owe it. Employers will withhold the surtax once an employee’s wages

exceed $200,000. Employees will then calculate the actual tax due on their 1040s.

So marrieds who each make below the $200,000 threshold but expect their total wages

to top $250,000 in 2013 should consider having more income tax withheld on their pay

 

Year End Tips:

 

Our final tax reminders for 2012 so you can avoid making last-minute errors:

 

Check the balance in your flexible spending account. You must clean it out by Dec. 31 if your employer still has not implemented the 2½-month grace period that IRS now permits. Otherwise, any money remaining in your account is forfeited.

Remember that a $2,500 annual ceiling on health FSA payins takes effect for 2013.

 

People 70½ and over must take their payouts from IRAs and company plans by year-end. You start with your Dec. 31, 2011, IRA balances and divide each of them by the factor for your age, which you can find in a table in IRS Publication 590.You can use a higher factor if you are more than 10 years older than your spouse. The sum of these amounts can be taken from any IRA you pick. The process is similar for retirement plan payouts, but you must take the required amount from each plan.

 

If you turned 70½ this year, you can delay the distribution for 2012 to April 1, 2013. But this option doesn’t apply for payouts in subsequent tax years, and the withdrawal for 2012 must still be based on the total of your IRA balances as of Dec. 31, 2011. And be careful if you decide to defer the distribution to 2013. Doing so means that you will be taxed in 2013 on two payouts: The one for 2012 that you deferred and the required withdrawal for 2013. The doubling-up of payouts in one tax year could have the effect of pushing you into a higher tax bracket.

 

Note the various deadlines for retirement plans, IRAs and Coverdells. Generally, employer plans such as Keoghs must be established by Dec. 31 so payins to them can be deducted for 2012. Self-employeds who miss the Keogh setup deadline for 2012 can open up a SEP by the due date for filing the 1040 plus any extension.  Keoghs and S EPs have the same payin cap: 20% of net self-employment earnings… the net profit shown on your Schedule C less one-half of your SECA tax liability.

 

Regular IRAs must be established by April 15, 2013, for 2012 deductions. Payins are due by then as well. A filing extension will not buy you additional time. Nondeductible payins to IRAs and Roth IRAs are also due by April 15. Ditto for contributions made to Coverdell education savings accounts.

 

If you are making a gift by check, be sure the donee deposits it in 2012 if you want the money to count as a 2012 gift for gift tax purposes. Alternatively, deliver a certified check to the recipient this year. That will count as a 2012 gift, even if the donee does not deposit the check into his or her account until next year. Remember that if you don’t use up the full $13,000-per-donee exclusion this year, you lose the shortfall forever. You can’t give a donee extra next year to make up for it.

 

If you’re giving securities, endorse them over to the donee and deliver them by year-end if you want the gift to count for 2012. If you send them to the corporation late in the year to be retitled, the process might not be completed by Dec. 31.

 

Mail checks for deductible items before year-end to ensure a 2012 write-off. You’re able to claim the deduction this year even if the checks don’t clear until Jan.  And make sure you know the tax rules if you are charging deductible items.

 

For charges that you make with a retail store credit card, you are allowed to claim the deduction for the item only in the tax year in which you pay the bill. For transactions made with a bank credit card, you take the write-off in the tax year that you charged the goods, even if you pay the bill next year.

 

Business Taxes:

The standard mileage rate for business driving is ticking upward for 2013. The rate will increase to 56.5¢ per mile, up a penny from 2012. Businesses with fewer than five vehicles can use the allowance. If you use the standard rate, you must reduce the vehicle’s basis by the depreciation component…23¢ per mile.

 

The rate for medical travel and moving will rise to 24¢ a mile next year, up 1¢ from this year. But the rate for charitable driving will stay static at 14¢ a mile because the amount of that write-off is determined by Congress, not by the IRS.

 

You also can claim the cost of parking and tolls. Use of the standard rate won’t bar deducting personal property taxes on the vehicle. But you can’t add the cost of fuel or repairs. And you can’t use the rates if you depreciated or expensed the car.

 

A warning to accrual method firms that pay bonuses to their employees:

The tax write-off is delayed if the funds can revert back to the employer, IRS lawyers say. A firm pays its workers bonuses a couple of months after year-end, based on their performance in the prior year. Under the plan, if an employee leaves after the manager finalizes the awards but before payment is made, his or her share is forfeited to the company. Thus, the firm’s liability isn’t fixed until the money is paid.

 

Watch what you put on a credit application. IRS may use it against you, as a woman who ran a cash-intensive massage therapy business at home discovered. She failed to file tax returns and didn’t cooperate with the Service during the audit. IRS reconstructed her income, relying on the income she listed on a credit application she filed with a bank. The Tax Court sided with IRS (Trescott, TC Memo. 2012-321).

 

Preparers of earned income credit returns for 2012 have extra work to do.

The IRS is requiring more documentation of due diligence efforts. Preparers of returns taking the credit must submit Form 8867 to show how they determined that the filer’s claim for the credit was valid, or IRS can slap a $500 penalty on them. Now, preparers will have to detail the documentation that clients supplied on issues such as residency and disability of qualifying children, as well as income reported on Schedule C. Preparers also have to disclose whether they asked follow-up questions when a qualifying child wasn’t the client’s child or when a child lived over six months during the year with someone else who could also claim the credit for the child.

 

IRS is eyeing businesses that fail to report income shown on 1099-K forms. It compared 1099-Ks filed by credit card companies and third-party networks such as PayPal with income shown on returns by taxpayers who received the forms. It’s now mailing notices to firms it believes may have underreported gross receipts.

 

But the 1099-K matching program is imprecise. The form reports receipts for a calendar year, which doesn’t jibe for firms with fiscal years. And businesses don’t have to separately report amounts shown on 1099-Ks. So the form’s usefulness as a tool to spot underreporting is lessened. Nevertheless, IRS will still ask businesses to explain discrepancies and will follow up with firms that don’t respond to the notices.

 

The Service is getting serious about the governance practices of nonprofits. Based on the results of surveys that agents fill out after exempt-organization audits, IRS believes nonprofits with good governance policies, such as independent boards and written management policies, are more tax compliant. It will test this premise by examining 200 social welfare groups and a like number of charities next year.

 

The Revenue Service is tightening the rules for individual tax ID numbers. ITINs are issued to individuals who are not eligible to get Social Security numbers. Newly issued ITINs will expire after five years unless the recipient reapplies for validation, IRS says. And all applicants must supply original documentation of identifying information, such as birth certificates or passports, or copies certified by the issuing agency. Folks can mail the documents to IRS along with Form W-7,or submit them to a certifying acceptance agent. The Service has tightened the rules on these agents, too.

 

Filers with ITINs who claim the refundable child tax credit are on IRS’ radar.

It’s clamping down after being criticized for permitting too many bogus tax refunds.

Schedule 8812 will require more residency information for dependents with ITINs.

And the Service is reconfiguring its computer programs to screen questionable claims.

HR and Payroll

Accountable Plans

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Accountable Plans

To save yourself and your employees some payroll tax expenses, the Internal Revenue  Code and the IRS regulations allow expenses to be deductible for a business and not income to the employee who is being reimbursed for his business expenses if, and only if, the reimbursements are made under an accountable expense reimbursement plan.

To be an “accountable plan”, the reimbursement program must have these characteristics:

  • Business connection of expenses;
  • Proper substantiation of expenses;
  • Written plan requiring that employees return to the employer reimbursed amounts in excess of actual expenses incurred;
  • The actual return by employees, within a reasonable time, of reimbursed amounts in excess of actual expenses incurred; and
  • Any advance made by an employer to an employee must be reasonably calculated and must not be expected to exceed the amount of reasonably anticipated expenditures to which such advance relates.
The Accountable Plan requirements are located at Internal Revenue Code Sec. 62(c) and IRS regulations 1.62-2.

The result of not meeting the requirements of an accountable plan is that the money that is paid to the employee is taxable compensation to the employee. The employee can then deduct his business expenses on his Individual Income Tax Return.

Each of the five accountable plan requirements is highlighted in detail below.

I. Business Connection
A reimbursement arrangement has a business connection if through it the employer in good faith provides advances, allowances or reimbursements for deductible business expenses incurred by the employee in connection with the performance of services as an employee. A reimbursement arrangement will fail the “business connection” requirement if the employer does not reasonably believe that the employee will use the reimbursement to pay for deductible expenses.

II. Proper Substantiation
There are two categories of expenses to which the substantiation rules apply:

Code Sec. 274 Expense items. Basically, the written substantiation required relating to a specific expenditure is that the “who, what, where, when, why and how much” information related to the expenditure must be documented in writing. For example, for listed property such as business cars, actual substantiation must meet the following four requirements:

  • the amount of the expense (repairs, gas, depreciation, etc.);
  • business use (number of business miles);
  • time (date) of use; and
  • business purpose of business use (name of customer will do).

Other Expense Items. For employee business expenses that do not fall within Code Sec. 274 (such as professional journals, professional dues, etc.) an employee is considered to have substantiated expenses for this purpose if information submitted is sufficient to enable the person providing the reimbursement to identify the specific nature and amount of each expense and to conclude that the expense is attributable to the employer’s business activities.

It is not sufficient if an employee merely aggregates into broad categories (such as “travel”) or reports individual expenses through the use of vague, non descriptive items (such as “miscellaneous business expenses”).

III. Written Plan

The determination of whether an expense reimbursement plan requires an employee to return amounts received from the employer to the employer in excess of substantiated expenses will depend on the facts-and-circumstances. The easiest and perhaps the only way to prove that the “arrangement requires an employee to return amounts in excess of substantiated expenses” is to have a written expense reimbursement plan (which is incorporated by reference into the worker’s employment contract), which clearly so provides.

IV. Actual Return by Employees of Excess Reimbursed Amounts.

A plan must require the employee to pay back any reimbursements in excess of actual substantiated expenses.

Both the requirement of substantiation and the requirement to return excess reimbursements must be met within a “reasonable period of time”. What exactly constitutes a reasonable period of time depends on all the facts-and-circumstances. Two safe harbor rules exist to establish that the “reasonable period of time” requirement has been met:

1. Fixed Date Method. If an advance is made within 30 days of when the anticipated expense is paid or incurred, and the expense is substantiated within 60 days after it is paid or incurred, or the excess amount, if any, is returned by the worker to the payor within 120 days after the expense is paid or incurred, the “reasonable period of time” requirement has been met.

2. Periodic Statement Method. If the payor provides employees with periodic statements (no less frequently than quarterly):

Stating the amount, if any, paid under the arrangement in excess of the expenses the employee has substantiated; and…

Requesting the worker to substantiate any additional expenses that have not yet been substantiated, and/or return any amounts remaining unsubstantiated within 120 days of the statement, then, any expense substantiated or nay amount returned within that time period will be treated as being substantiated or returned within a “reasonable period of time”.

V. Reasonableness Requirement

Where money is advanced to a worker to defray expenses, such advance must be reasonably calculated to not exceed the amount of anticipated expenditures, and must be made on a day within a reasonable period of time prior to the day that the anticipated expenditures will be paid or incurred by the worker.

Keys to Understanding Accountable Plan Requirements

The keys to understanding the accountable plan requirements are:

1. amounts reimbursed must actually be for legitimate, properly substantiated business expenditures; and –

2. not only must the plan require advances or allowances which are not actually spent on business expenses to be returned to the employer, such amounts must actually be returned to the employer within approximately 120 days.

Different Categories of Expenses

Different categories of expenses are eligible for different treatment in expense reimbursement plans, as follows:

1. Transportation expenses (local automobile expenses);

2. Away-from-home travel (meals, incidentals and lodging, or meals and incidentals only) expenses; and

3. Other expenses.

The options available regarding each of the three foregoing types of expenses are set forth below. Any option for transportation expenses may be freely combined with any option for away-from-home travel and any option for other expenses, In other words, options in each of the three main expense categories may be freely mixed and matched with the options available in each of the other categories in any desired order.

1. Transportation Expenses

Options available for the reimbursement of local transportation expenses include:

1) IRS Standard Mileage Rate. The IRS standard mileage rate changes each year.  In 2012 it was 55.5 cents per mile. If a worker substantiates the number of miles driven, and the business purpose for the mileage, a monetary reimbursement for each such mile at any amount of cents per mile up to, but not exceeding, the standard IRS mileage rate, will not be taxable wages to such worker.

2) Actual Cost Method. Reimbursable actual car expenses include the costs for gas, oil, repairs, maintenance, insurance, taxes, licenses, and other similar items. Interest incurred by employees on loans after December 31, 1986 to purchase a car is not an employee business expense and, therefore, not reimbursable.

Under the actual cost method, actual expenses such as these are totaled and multiplied by the business use percentage to determine the business expense. In addition to the above expenses, all business parking fees and tolls may also be deductible at one hundred percent if related to business use.

3) FAVR Method. the FAVR allowance method allows an employer to calculate a standard mileage rate per mile. This method is described in Rev. Proc. 90-34 and if you are interested in it, I suggest reading the Rev Proc. But, since it is very complex, and since it is not available to board members or management employees, I will not discuss it here.

2. Away-from-home travel

You are allowed to use the IRS approved per-diem expenses to reimburse employees for their away from home travel expenses.  These per-diem expenses are separated between meals and lodging.  In addition, you can use per-diem rates specified for certain “high cost” locations, such as LosAngeles and New York city.  If you are a business owner you can use the per-diem for meals and incidental expenses but you must substantiate your lodging expenses.

3. Other expenses

Any true business expense, unless it is considered to be “lavish” can be deducted as long as you provide the substantiation required.