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Effective Strategies for Growing your Existing Business

It is tough setting up a business that offers products and services, which have already captured a major part of the market, but letting your business grow and prosper involves a lot of work and formulation of new business strategies.

For Home Based Business

At first, you have to consider, what type of business you are trying to expand. If you are planning to sell self-made products like figurines or clothes, you will have to depend greatly on word of mouth. The two lowest risk options are penetrating the existing market with your unique product or entering a new market.

A careful look at the economy will give you the right idea of what factors to focus on. An economy always consists of loopholes, you have to analyze and act on that opportunity, which will help you tactfully challenge these situations.

Once you have considered the economy as a whole, you can now look at different segments of the market, which are not being currently serviced or gaining benefit from the existing products. To attack on the segments that attract consumers and continuous research helps gain a deep insight of what is achievable.

For Online Business

Online businesses are a breakthrough technique in influencing customer preferences. It is already easy for online businesses to start up but it is more important to consider the online competitors. Of course, word of mouth strategy will work here as well, but has little scope. Online businesses will require direct marketing on websites that have huge numbers of traffic every hour.

For Normal Businesses

Whether you are a manufacturing or service business, there are several factors to consider if you physically exist in the market and are involved in the strategic, tactical and operational decisions. Business can grow through two ways. First is your luck and the second is conscious awareness of the market. Optimists know that good luck does not last for long and therefore, it is important to act on the opportunity.

If you have recently decided to grow your business, it means that you are ready to face the risks that will come your way in the long term. There are 2 metrics that businesses focus on to grow.

  • Measure What Matters

Depending on a business’s objective, there are different things that matter to entrepreneurs. Some might focus on their costs strategies where as others might focus on marketing techniques. Outsourcing is a great option for those who want to reduce their management costs and the time it takes for a product to reach its potential customer.

  • Determining the Average of Customer Acquisition Cost (CAC)

The time that customers remain with your business and the efforts done by the business to retain a customer for a specific period is known as CAC, Customer Acquisition Cost. These terms provide important insight into effectiveness of marketing.

4 Myths Related To Securing Small Business Loans That Aren’t Really True

Struggling entrepreneurs often have to face great many difficulties in securing small business loans in order to kick start their new business venture. Small business loans are offered by banks as well as other lending institutions. Most business owners give up on their dreams of running their very own business because of the complicated procedures and other myths. This blog will bust the 5 biggest small business loan myths that most people believe in.

Securing a Small Business Loan Is Possible

Most people believe that securing a loan to set up a small business is next to impossible. But that’s not true. Yes, there are many complicated procedures that you will have to follow in order to have a loan successfully approved. With sound advice from small business loan lending experts, securing a small business loan is actually possible. However, it is necessary that the entire business plan is complete along with all the other necessary documents. Loan applications without submitting necessary documents are never entertained by banks and other lending institutions.

Perfect Credit Scores Are Not Necessary

Another myth that has shot down the hopes of many aspiring entrepreneurs is that a perfect credit score is mandatory when it comes to securing a small business loan. Bad credit is never favorable, but having perfect credit scores is not necessary either. Some banks still follow this rule rigidly but there are many lending institutions out there that have relaxed lending policies. Other lending institutions usually look at the performance of the business, cash flows and the type of industry other than credit scores.

Banks Are Not the Only Lending Resources Out There

Those who think that the only place to get a small business loan from is none other than a bank are completely wrong. Struggling entrepreneurs have successfully built their businesses by receiving loans from venture capitalists and angel investors. These are individuals who can very well afford to pool in some money in order to kick-start a new business. However, impressing such individuals is a completely different ball game and only a few can interest them in lending money for a new business setup. Crowd funding is another popular method used to raise funds for upcoming business ventures these days and it is definitely worth a try.

Large Sums of Money Are Never Granted As Loans

This is perhaps the worst hasty generalization you will ever come across regarding securing small business loans. Banks provide loans of various amounts to its customers depending upon their credibility and needs. The best advice one can follow when applying for a business loan is to apply for a loan with an amount that you need to kick start a business; nothing more or less. So if you are thinking that applying for a six figure loan will cloud your chances of securing a loan, you are probably wrong. Loans of bigger denominations are also granted if the business plan is solid.

For all your bookkeeping needs, SK Financial CPA in Tampa is the one firm you should definitely call. The reason why small businesses should contact SK Financial CPA is that accounting services from expert CFOs and CPAs can be availed on contract basis depending on the kind of work.

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


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.


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.


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.

Think you know your 2013 marginal tax rate?

Think you know your 2013 marginal tax rate?

It may be higher than you expect. The rates on upper-incomers can be far greater than the ones listed in the new income tax brackets. The same goes for tax-favored dividends and long-term capital gains.

Phaseouts of tax benefits are one culprit.

They actually are stealth rate increases, pushing your marginal rate above the 39.6% bracket in the new law. That rate applies to taxable income over $400,000 for singles and $450,000 for marrieds.

The cutback in itemized deductions adds up to 1.19% to your marginal rate. After 2012, these write-offs are reduced by 3% of the excess of adjusted gross income over $250,000 for singles … $300,000 for couples. The total haircut can’t exceed 80% of total itemizations. Medicals, investment interest and casualty losses are exempt. Note that the phaseout is based on the amount of your AGI and not taxable income … what’s left after itemized deductions. Filers with extremely large itemized deductions on Schedule A can start to feel the effects of this phaseout in the 28% bracket.

The loss of personal exemptions adds as much as 1.05% per exemption to your true rate. Personal exemptions are trimmed by 2% for each $2,500 of AGI over the $250,000/$300,000 thresholds we just noted. They disappear once AGI exceeds $372,500 for singles and $422,500 for joint filers. So a family of four in the phaseout zone can have a 4.2-percentage-point hike in its marginal rate.

Two other brand-new taxes for 2013 can increase your marginal rate:

The 0.9% Medicare surtax on high-earners. Singles owe it once earnings top $200,000 … couples, over $250,000. It hits wages and self-employment income.

And the 3.8% Medicare surtax on net investment income … gains, interest, dividends, royalties and passive rental income. This levy starts to bite single filers with adjusted gross income over $200,000 and married couples above $250,000.

Marginal rates on long-term gains and dividends can be higher than expected. If you are in the 10% or 15% tax brackets this year, gains and dividends are tax free until they push you into the 25% bracket … $72,500 of taxable income for couples and $36,250 for singles. Then they are taxed at 15% until your gains and dividends bump you into the 39.6% tax bracket, when the 20% top rate kicks in on the excess.

The 3.8% surtax raises the effective rate on tax-favored gains and dividends to 18.8% for filers below the 39.6% tax bracket and to 23.8% for upper-incomers.

The marginal rate can be even greater for high-incomers who owe the AMT.

Nominally, the 15% and 20% rates on gains and dividends also apply for the AMT. But for filers in the phaseout zones for the minimum tax exemptions … from $150,000 to $473,200 of AMT income for couples and $112,500 to $320,100 for singles … the marginal rate is 6.5 or 7 percentage points more. So most filers hit by this cutback pay a marginal rate of 22% on their gains and dividends. And a good chunk of them end up owing the 3.8% Medicare surtax on top of that, boosting the rate to 25.8%.

Let’s continue our review of the new tax law:

The 2013 withholding tables are out, reflecting the new 39.6% top bracket. The Revenue Service issued them Jan. 3, the day after the president signed the bill. See www.irs.gov/pub/irs-pdf/n1036.pdf for a copy. If an employer did not realize that the Social Security tax rate for employees has returned to 6.2% for 2013, the firm should adjust workers’ pay as soon as possible, but not later than March 31.

The withholding rate on bonuses over $1 million rises to 39.6% for 2013.

Trusts and estates will bear a higher income tax burden this year.

The 39.6% top tax bracket will kick in on taxable income over $11,950, replacing the old 35% maximum tax rate that applied in 2012. The next-lowest rate for 2013 is 33%.

Trusts and estates will be hit by the 3.8% Medicare surtax as well if their AGI exceeds $11,950 and they have any undistributed net investment income.

The AMT exemptions were increased retroactively for 2012 … to $78,750 for joint filers and $50,600 for singles and heads of household. In upcoming years, the exemptions will be adjusted for inflation, so the AMT rolls won’t grow dramatically. For 2013, the exemptions are set at $80,800 for couples and $51,900 for single filers and household heads. Our projection for couples in the Jan. 4 Letter was $50 low.

The adoption credit for 2013 is higher than we first reported. It can be taken on up to $12,970 of costs, IRS says, $200 above our estimate. And the phaseout zone starts at a higher level of AGI this year … $194,580. The credit goes away at $234,580.

The exclusion for company-paid adoption aid also increases to $12,970.
The tax credit for energy-saving home improvements was revived for 2012 and 2013. The credit remains at 10%, with a $500 maximum, and any credits taken in previous years are counted against the $500. No more than $150 can be claimed for furnaces and water heaters, $200 for windows and $300 for biomass fuel stoves.

Two special rules affect direct transfers from IRAs to charity. The new law restored for 2012 the rule that folks 70½ and older can directly transfer up to $100,000 free of tax from their IRAs to charity. The provision now is set to expire after 2013.

Payouts that IRA owners took in Dec. 2012 can qualify for tax free treatment as long as cash is transmitted to a charitable organization prior to Feb. 1, 2013.

And direct transfers made in Jan. 2013 can be treated as made in 2012.

The mass-transit-pass cap for 2012 was retroactively hiked to $240 a month, up from $125. Ditto for van pools. IRS recently issued guidance on FICA tax refunds and W-2 adjustments for firms that gave transit benefits of more than $125 a month. Employers that treated the excess as wages can make adjustments for all of 2012 on their fourth quarter Form 941 and on W-2 forms. But they’ll have to first reimburse their employees for the overcollected FICA tax before utilizing this special option.

The start of this year’s filing season will be delayed to Jan. 30, IRS says. Congress is to blame, since it did not finalize the income tax rules for 2012 until Jan. 1, 2013. IRS postponed the opening so it could reprogram its computers.

However, many filers will have to wait until late Feb. to file, at the earliest.
This will affect taxpayers who use several popular forms. Among them: Form 4562 for depreciation. Form 5695 for residential energy credits. Form 8582 to report passive losses. Form 8839 for the adoption credit. And many forms used for business credits, such as Form 5884 for the work opportunity tax credit.

Farmers who claim depreciation are in a bind. Estimated tax penalties for 2012 are waived if they file by March 1. But Form 4562 may not be ready by then. If the filing delay stretches into March, it’s likely that the IRS will provide them relief.
IRS loses again on levying FICA taxes on severance pay for laid off workers. The 6th Circuit Court of Appeals has refused to reconsider a 2012 decision that payments made in conjunction with a reduction in force aren’t subject to FICA.

Odds favor a Supreme Court appeal. A different Appeals Court OK’d the tax. And IRS estimates refund claims could top $1 billion if it doesn’t ultimately prevail.

A worker can be both an employee and an independent contractor of a firm, the IRS says privately in the case of a consultant who is engaged on separate projects. In such cases, the Service will examine each role independently, and FICA taxes apply only to the portion of pay attributable to an employer-employee relationship.

An IRS attempt to reclassify payments to an S firm owner is partially rebuffed. An S corporation paid its co-owner $60,000, but treated only $2,400 of it as wages. The balance was ostensibly reimbursement for cash advances he made to employees to cover their business expenses. IRS classified $55,000 as salary subject to FICA. The Tax Court agreed that $2,400 was too low a salary. But, because part of his pay was used to reimburse workers, the Court said his average pay for the past five years … $30,000 … was appropriate for payroll tax purposes (Herbert, TC Summ. Op. 2012-124).
Business Taxes

Selling and buying back a business can sometimes generate a tax break. After suffering a brain aneurysm, a CPA sold his practice for $900,000. Less than five months later, the buyer had a seizure and sold it back to the CPA for $900,000. Since the firm’s assets consisted of goodwill and other intangibles, the CPA amortized the repurchase cost over 15 years. IRS balked at the write-off, but the Tax Court OK’d the amortization deduction, finding in this case that the sale and buyback were separate and unrelated transactions (Fitch, TC Memo. 2012-358).
Social Security

Replacing private disability pay with Social Security is bad for your tax health. A disabled worker got tax free benefits under an insurance policy. However, he also was required to apply for Social Security disability and turn over the benefits to the insurer. The Tax Court ruled that he owes tax on the Social Security benefits, even though they are a substitute for nontaxable payments (Brady, TC Memo. 2013-1).

Bad news for a man who financed the purchase of a home and adjoining land:
Interest on borrowings over $1.1 million isn’t deductible, the Tax Court says. He paid $1.8 million for the property, intending to subdivide it and develop a portion of the land. But the purchase contract didn’t allocate the cost between the residential and nonresidential portions. He can deduct the interest on $1.1 million of indebtedness as mortgage interest … $1 million of acquisition debt plus $100,000 of home equity debt. He can’t write off the balance as investment interest (Norman, TC Memo. 2012-360).

Giving a family member a break on rent won’t always nullify a like-kind swap, the Tax Court decides. A landlord exchanged one rental home for another property that needed substantial renovations. His son, who had home building experience, fixed up the place and moved in with his family. The son paid below-market rent because he continued renovating the home during the four years he lived there. Thus, the low rent won’t nix like-kind-exchange treatment (Adams, TC Memo. 2013-7).

The tax implications of home foreclosures depend on the type of loan used. If a mortgage is nonrecourse, so the owner isn’t personally liable on it, the waived debt is included when figuring gain or loss on the transfer, the Revenue Service says. For primary homes, no loss is allowed, and only the portion of gain over the $250,000 or $500,000 exclusion is taxed. On a recourse mortgage, the forgiven debt is treated as income, unless the homeowner is insolvent right before cancellation. And if the loan is on the main residence, up to $2 million of debt forgiveness is deemed to be tax free.

The 2012 audit rate fell to 1.03% for individuals, one out of every 97 returns. 2011’s rate was 1.11%. The number of enforcement staff dropped nearly 6%, partly due to budget cuts. And many agents were detailed to work identity theft cases.
Filers with incomes of $1 million or more continued to get the most scrutiny. The Service audited 12.14% of these filers. That’s one out of every eight tax returns. Exams of folks with lower incomes declined in proportion to the drop in the audit rate.
Audits of all classes of business returns rose last year to 0.71%. That reflects an effort by IRS to check more S companies, partnerships and regular corporations. Exam rates ranged from 17.78% for returns by corporations with assets of $10 million or more to 1.12% for small corporations, 0.48% for S firms and 0.47% for partnerships.

IRS isn’t doing enough to police noncash donations, Treasury inspectors say. Too many tax returns that claim noncash charitable contributions of more than $500 are slipping by without a Form 8283. So the agency will start flagging such returns and asking filers to send in the missing form before allowing the charitable write-off.

Filers will have a simplified option for claiming the home office deduction, beginning with returns for 2013, which will be filed in 2014. Their write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500. This way, they avoid allocating actual costs and figuring depreciation on the 43-line Form 8829. Of course, the requirement that the office be used exclusively for business still applies, no matter which method is used.
Tax Burden

Don’t believe the talk that the 2013 tax hikes nail only the highest earners.
Lower- and middle-incomers are hit because of the payroll tax cut’s repeal. The effect of the expiration of the two-percentage-point drop in employees’ share of Social Security tax is being felt this month, as many workers see lower paychecks. An employee making $50,000 this year owes an additional $1,000 in payroll taxes, lowering his or her paycheck by about $19 a week. Individuals making under $100,000 wind up bearing more than 60% of the burden of this year’s payroll tax increase.
By contacting us, we can tailor a particular plan that will work best for you.

Tax Update as of 12/14/2012

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.

Accountable Plans

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.

SK Financial CPA Letter explains recent developments that may affect a client’s tax situation

Dear Client:The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.Social security taxes going up next year. All employees and self-employed persons will face higher social security taxes next year due to an expiring tax break. Higher earners may also face increased tax because the Social Security wage base is increasing to $113,700 from $110,100 and a higher Medicare tax applies to higher earners.The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).For 2013, the FICA tax rate for employers is 7.65% each6.2% for OASDI and 1.45% for HI. For 2013, an employee pays:

(a) 6.2% Social Security tax on the first $113,700 of wages (maximum tax is $7,049.40 [6.20% of $113,700]), plus
(b) 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
(c) 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

By contrast, for 2012, the OASDI rate for employees is 4.2%; the OASDI rate for employers is 6.2% and the HI rate for both employers and employees is 1.45%.

For 2013, the self-employment tax imposed on self-employed people is:

  • 12.4% OASDI on the first $113,700 of self-employment income, for a maximum tax of $14,098.80 (12.40% of $113,700); plus
  • 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), , plus
  • 3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

By contrast, for 2012, the self-employment tax rate is 13.3%: 10.4% for OASDI, reflecting the two percentage point drop in the OASDI rate for employees, plus 2.9% for HI.

By contacting us, we can tailor a particular plan that will work best for you.

Very truly yours,

Shams Khan, CPA, CFP

SK Financial CPA: Year-end tax planning with checklists

Year-end planning is a bigger challenge this year than in past years because, unless Congress acts, tax rates will go up next year, many more individuals will be snared by the alternative minimum tax (AMT), and various deductions and other tax breaks will be unavailable. To be more specific, as a result of expiring Bush-era tax cuts, individuals will face higher tax rates next year on their income, including capital gains and dividends, and estate tax rates will be higher as well.

Additionally, a number of tax provisions expired at the end of 2011 or will expire at the end of 2012. Rules that expired at the end of 2011 include, for example, the research credit for businesses, the election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes, and the above-the-line deduction for qualified tuition expenses. Rules that will expire at the end of this year include generous bonus depreciation allowances and expensing allowances for business, and expanded tax credits for higher education costs.

These adverse tax consequences are by no means a certainty. Congress could extend the Bush-era tax cuts for some or all taxpayers, retroactively “patch” the AMT for 2012 to increase exemptions and availability of credits, revive some favorable tax rules that have expired, and extend those that are slated to expire at the end of this year. Which actions Congress will take remains to seen. While these uncertainties make year-end tax planning more challenging than in prior years, they should not be an excuse for inaction. Indeed, the prospect of higher taxes next year makes it even more important to engage in year-end planning this year. To that end, we have compiled a checklist of actions that can help you save tax dollars if you act before year-end.Many of these moves may benefit you regardless of what Congress does on the major tax questions of the day. Not all actions will apply in your particular situation, but you will likely benefit from many of them.

We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make. We also should schedule a follow-up for later this year to see whether the November election results will require changes to year-end planning strategies.

 Year-End Tax Planning Moves for Individuals

□ Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Keep in mind that beginning next year, the maximum contribution to a health FSA will be $2,500. And don’t forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.

 If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first became eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax free if made for qualifying medical expenses.

□ Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It would be advisable for us to meet to discuss year-end trades you should consider making.

 If you are thinking of selling assets that are likely to yield large gains, such as inherited, valuable stock, or a vacation home in a desirable resort area, try to make the sale before year-end, with due regard for market conditions. This year, long-term capital gains are taxed at a maximum rate of 15%, but the rate could be higher next year as noted above. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called “unearned income Medicare contribution tax”).

□ If you are in the process of selling your main home, and expect your long-term gain from selling it to substantially exceed the $250,000 home-sale exclusion amount ($500,000 for joint filers), try to close before the end of the year (again, with due regard to market conditions). This can save capital gains taxes if rates go up and can save the 3.8% tax for those exposed to it.

□ You may own appreciated-in-value stock and you want to lock in a 15% tax rate on the gain, but you think the stock still has plenty of room to grow. In this situation, consider selling the stock and then repurchasing it. You’ll pay a maximum tax of 15% on long-term gain from the stock you sell. You also will wind up with a higher basis (cost, for tax purposes) in the repurchased stock. If capital gain rates go up after 2012 and you sell the repurchased stock down the road at a profit, the total tax on the 2012 sale and the future sale could be lower than if you had not sold in 2012 and had just made a single sale in the future. This move definitely will reduce your tax bill after 2012 if you are subject to the extra 3.8% tax on unearned income.

□ Consider making contributions to Roth IRAs instead of traditional IRAs. Roth IRA payouts are tax-free and thus immune from the threat of higher tax rates, as long as they are made (1) after a five-year period, and (2) on or attaining age 59-½, after death or disability, or for a first-time home purchase.

□ If you believe a Roth IRA is better than a traditional IRA, consider converting traditional IRAs to Roth IRAs this year to avoid a possible hike in tax rates next year. Also, although a 2013 conversion won’t be hit by the 3.8% tax on unearned income, it could trigger that tax on your non-IRA gains, interest, and dividends. Reason: the taxable conversion may bring your modified adjusted gross income (AGI) above the relevant dollar threshold (e.g., $250,000 for joint filers). But conversions should be approached with caution because they will increase your AGI for 2012. And if you made a traditional IRA to Roth IRA conversion in 2010, and you chose to pay half the tax on the conversion in 2011 and the other half in 2012, making another conversion this year could expose you to a much higher tax bracket.

□ Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-½. Failure to take a required withdrawal can result in a penalty equal to 50% of the amount of the RMD not withdrawn. If you turn age 70-½ this year, you can delay the first required distribution to 2013, but if you do, you will have to take a double distribution in 2013—the amount required for 2012 plus the amount required for 2013. Think twice before delaying 2012 distributions to 2013—bunching income into 2013 might push you into a higher tax bracket or bring you above the modified AGI level that will trigger a 3.8% extra tax on unearned income such as dividends, interest, and capital gains. However, it could be beneficial to take both distributions in 2013 if you will be in a substantially lower bracket in 2013, for example, because you plan to retire late this year or early the next.

□ This year, unreimbursed medical expenses are deductible to the extent they exceed 7.5% of your AGI, but in 2013, for individuals under age 65, these expenses will be deductible only to the extent they exceed 10% of AGI. If you have a shot at exceeding the 7.5% floor this year, accelerate into this year “discretionary” medical expenses you were planning on making next year. Examples: prescription sunglasses, and elective procedures not covered by insurance.

□ Consider using a credit card to prepay expenses that can generate deductions for this year.

□ Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.

□ If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2012 if doing so won’t create an alternative minimum tax (AMT) problem.

□ Take an eligible rollover distribution from a qualified retirement plan before the end of 2012 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2012. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2012, but the withheld tax will be applied pro rata over the full 2012 tax year to reduce previous underpayments of estimated tax.

□ You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

□ You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

□ Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxesYou can give $13,000 in 2012 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Savings for next year could be even greater if rates go up and/or the income from the transfer would have been subject to the 3.8% tax in the hands of the donor.

Year-End Moves for Business Owners

□ If your business is incorporated, consider taking money out of the business by way of a stock redemption if you are in the position to do so. The buy-back of the stock may yield long-term capital gain or a dividend, depending on a variety of factors. But either way, you’ll be taxed at a maximum rate of only 15% if you act this year. If you wait until next year to make your move, your long-term gains or dividends may be taxed at a higher rate if reform plans are instituted or the Bush-era tax cuts expire. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called “unearne d income Medicare contribution tax”). Keep in mind that you will need expert help to plan and execute an effective pre-2013 corporate distribution.

 If you are thinking of adding to payroll, consider hiring a qualifying veteran before year-end to qualify for a work opportunity tax credit (WOTC). Under current law, the WOTC for qualifying veterans won’t be available for post-2012 hires. The WOTC for hiring veterans ranges from $2,400 to $9,600, depending on a variety of factors (such as the veteran’s period of unemployment and whether he or she has a service-connected disability).

□ Put new business equipment and machinery in service before year-end to qualify for the 50% bonus first-year depreciation allowanceUnless Congress acts, this bonus depreciation allowance generally won’t be available for property placed in service after 2012. (Certain specialized assets may, however, be placed in service in 2013.)

□ Make expenses qualifying for the business property expensing option. The maximum amount you can expense for a tax year beginning in 2012 is $139,000 of the cost of qualifying property placed in service for that tax year. The $139,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2012 exceeds $560,000 (the investment ceiling). For tax years beginning in 2013, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000. Thus, if you anticipate needing property in early 2013, you may want to push the purchase into 2012 to gain a higher expensing deduction (if you are otherwise eligible to claim it). The time of purchase doesn’t affect the amount of the expensing deduction. You can purchase prop erty late in the year and still get a full expensing deduction. Thus, property acquired and placed in service in the last days of 2012, rather than at the beginning of 2013, can result in a full expense deduction for 2012.

□ If you are in the market for a business car, and your taste runs to large, heavy SUVs (those built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight), consider buying in 2012. Due to a combination of favorable depreciation and expensing rules, you may be able to write off most of the cost of the heavy SUV this year. Next year, the writeoff rules may not be as generous.

□ Set up a self-employed retirement plan if you are self-employed and haven’t done so yet.

□ Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner’s share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro rata share of an S corporation’s losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Very truly yours,

Shams Khan, CPA, CFP


Writing off family medical expenses

This strategy is a little more complicated but is well worth the extra effort. To use this strategy, first you must hire a spouse or other trusted family member to work for your business; either full-time or part-time status will work. Next, you need to set up and sign a medical reimbursement plan. You may need the advice of an accountant to help you with this.

This plan allows any sole proprietor to convert all family out-of-pocket medical expenses into legitimate health practice deductions. Finally, your spouse or family member pays all out-of-pocket medical expenses for the family, keeping receipts and documenting miles driven for medical purposes. At a specified time, your business reimburses your spouse or family member for these expenses and deducts them as a practice expense.