There are numerous financial calculators available on the Internet that can help you determine how much it will cost to lease a car compared to buying one. Be careful when you use these calculators--they are designed based on certain assumptions, and different calculators can give different answers. For a detailed consumer guide to auto leasing created by the Federal Reserve Board, go to the Board's website at www.federalreserve.gov/pubs/leasing.
For more information on deducting car and local travel expenses, see Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).
The IRS has established two tests to determine whether someone is in business. One is a simple mechanical test that looks at whether you have earned a profit in three of the last five years. The other is a more complex test designed to determine whether you act like a business. Under this test, the IRS looks at certain objective factors to determine whether you are behaving like a person who wants to earn a profit. The most important of these are that you act like you're running a business, you have a certain amount of expertise in the area, and you spend sufficient time and effort on the activity.
For more information, see Home Business Tax Deductions; Keep What You Earn, by Stephen Fishman (Nolo).
]]>o All employees fill out a W-4, Employee's Withholding Allowance Certificate, when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. If you have multiple summer jobs you will want to make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the Withholding Calculator on www.irs.gov.
o Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.
o Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.
o If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
o Food and lodging allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay - such as pay received during summer advanced camp - is taxable.
o Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions: You are in the business of delivering newspapers. All your pay for these services directly relates to sales rather than to the number of hours worked. You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.
]]>
As reported in a Wall Street Journal article by Emily Maltby, most of their loans have gone to start-ups and struggling businesses that wouldn't qualify for a traditional bank loan because they are considered too risky. In fact many CDFIs only work with businesses and individuals that cannot get a traditional loan. In making loans, CDFIs don't focus on a borrower's credit history. "We look at character, willingness to do the work of the business and willingness to repay the loan," says Mary Mathews, president and chief executive of a nonprofit CDFI.
You'll need to find the CDFI in your area that is the right fit for your business. Each CDFI serves a certain region and they all have their own loan criteria. You can find a complete list of CDFIs on the Treasury's website.
]]>The Cohan rule recognizes that all business people must spend at least some money to stay in business, and so must have had at least some deductible expenses, even if they don't have adequate records to back them up. If you're audited and lack adequate records for a claimed deduction, the IRS can use the Cohan rule to make an estimate of how much you must have spent, and allow you to deduct that amount. However, you must provide at least some credible evidence on which to base this estimate, such as receipts, canceled checks, notes in your appointment book, or other records. Moreover, the IRS will only allow you to deduct the least amount you must have spent, based on the records you provide. In addition, the Cohan rule cannot be used for travel, meal, entertainment, or gift expenses; or for listed property.
If an auditor claims you lack sufficient records to back up a deduction, you should always bring up the Cohan rule and argue that you should still get the deduction based on the records you do have. At best, you'll probably get only part of your claimed deductions. If the IRS auditor disallows your deductions entirely or doesn't give you as much as you think you deserve, you can appeal in court and bring up the Cohan rule again there. You might have more success with a judge. However, you can't compel an IRS auditor or a court to apply the Cohan rule in your favor. Whether to apply the rule and how large a deduction to give you, is within their discretion.
For more information, see Deduct It! Lower Your Small Business Taxes, by Stephen Fishman.
]]>When you are paid promptly, the cash method's actual receipt rule is not important; and, using the accrual method, you may prepay business expenses in advance to offset the income you received for the year -- something you can't do with the cash method. Any business can choose to use the accrual method but some businesses (mostly larger-sized ones) are required to use it. For more information, see Deduct It! Lower Your Small Business Taxes, by Stephen Fishman.
]]>Unlike with an amended return which may trigger greater IRS scrutiny of your tax return, filing for an extension should not increase your chances of an audit, according to "Business Owners Look to Extend Tax Time," a recent article in the Wall Street Journal.
You must file for an extension by your tax filing deadline, which is April 15 for flow-through entities like sole proprietorships, partnerships, and S corporations. For corporations, the filing deadline is two and a half months after the end of the company's fiscal year.
Just because the IRS automatically grants you the extra time to file doesn't mean you are off the hook for paying what you owe. You'll get extra time to gather your paperwork and make sure you haven't missed any deductions or credits but you still have to estimate your tax liability for the year and pay that amount when you file for the extension. If you underestimate, the IRS will charge 3% to 6% interest on the amount you underestimated by. And if the IRS thinks you didn't act in good faith, it can add a .5% penalty per month until the liability is paid. Nevertheless, in the end, it is more important that you spend the time to do your taxes accurately. If it means filing for an extension, then take advantage of this automatic reprieve the IRS grants to all taxpayers.
]]>Tax Credit. Small businesses with 25 or fewer employees and $50,000 or less in annual average salaries can receive a tax credit for providing health insurance for employees. For 2010 through 2013, the credit will be up to 35% of the health care premiums the company pays for its employees each tax year. The credit will go up to 50% in 2014 provided the company buys its insurance through the new small business health insurance exchanges that will begin operating in 2014.
Penalties. Starting in 2014, businesses with more than 50 employees that don't offer affordable health care options for employees would be subject to a penalty. However, according to a blog on health care reform posted by Robb Mandelbaum in the New York Times, as bad as this may sound, it won't really affect many businesses because "Ninety-six percent of businesses in the country with more than 50 employees offer health insurance (according to the Kaiser Family Foundation). . . .And 95 percent of the 28 million small businesses in America have fewer than 50 employees."
Health Care Exchanges. Starting in 2014, Small Business Health Options Programs - or SHOP exchanges - will be established. Through these exchanges, small companies with 100 or fewer employees will be able to pool their resources so they have greater buying power. This could result in tremendous savings for these small businesses. Also acording to Robb Mandelbaum of the New York Times, supporters of health care reform legislation predict that health costs for small businesses will drop by 20 to 30% and the current inequity between what small and big businesses pay for health care will be lessened.
]]>Payroll tax credit: Under the Act, businesses do not have to pay their share of Social Security taxes (6.2%) on wages paid to qualifying new hires. Qualifying new hires include anyone hired to a new position after February 2, 2010 and before January 1, 2011 who has been unemployed for at least 60 days or only working part-time. Workers hired to fill existing positions qualify only if the worker they are replacing left voluntarily or for cause.
Business tax credit: For qualifying new hires, small businesses can also claim an additional general business tax credit of up to $1,000 per worker on their 2011 tax returns provided the worker stays employed for at least a year.
Section 179 deductions: The HIRE Act extends the American Recovery and Reinvestment Act provisions that allow small businesses to deduct up to $250,000 of the cost of qualifying property in the year purchased (with a phase-out for expenditures over $800,000). Without this new legislation, the Section 179 deduction was scheduled to go down to approximately $133,000 in 2010. The extended higher limits apply for any qualifying property purchased during the 2010 tax year.
]]>
]]>