October 19, 2010

New 1099 Reporting Requirements for Landlords

In the past, only landlords whose rental activities qualified as a business were required to file Form 1099s with the IRS. However, starting in 2011, all landlords must comply 1099 reporting requirements, including those who are considered investors (not landlords) for other tax purposes. However, there are some important exceptions to this new rule. Investor-landlords who fall into one of the following groups are exempt from the new 1099 reporting requirements:
  • landlords who obtain substantially all of their rental income from renting their principal residence on a temporary basis
  • landlords whose annual rental income is less than a minimum amount (to be established by the IRS), and
  • other investor-landlords for whom complying with the reporting requirements would cause hardship. The IRS will adopt regulations providing guidelines on what constitutes a hardship.
  • The IRS can impose monetary penalties on landlords who fail to comply with the reporting requirements. The penalty is $250 for each 1099 you intentionally fail to file. The penalty is less if the failure is not intentional, ranging from $30 to $100, depending on how quickly you fix the error.
October 14, 2010

New Tax Breaks for Small Businesses

On September 27th, President Obama signed into law the Small Business Lending Fund Act of 2010. The law creates a lending fund for small businesses and also includes important tax breaks for small businesses. Some of the key tax breaks include:

Section 179 deduction increased. The Section 179 depreciation limit was increased from $250,000 to $500,000 for 2010 and 2011. Under this provision, small businesses can immediately deduct up to 100% of the cost of new or used equipment purchased in 2010 or 2011 up to the $500,000 limit. This includes any business items such as computers, trucks, machinery, and office furniture. The annual phase-out threshold for total equipment purchases was increased to $2,000,000.

Bonus depreciation extended. First-year bonus depreciation was extended for 2010 and 2011. This allows businesses to immediately deduct up to half of the cost of new business property purchased and placed in service in 2010 and 2011.

Start-up cost deduction increased. The start-up cost deduction for small businesses was increased from $5,000 to $10,000 for 2010 only. The phase-out threshold for the deduction was increased to $60,000 from $50,000.

New health insurance deduction for self-employed. When calculating their self-employment taxes and income, self-employed people can deduct the cost of health insurance they pay for themselves and their families (including their spouse, dependents, and any children under age 27).

Cell phones no longer listed property. Beginning with tax year 2010, cell phones are no longer considered "listed property" for IRS purposes. This means cell phones can be deducted without the burdensome documentation required for listed property.

For more information, see the White House press release on the new tax law.

August 30, 2010

Was Your Business Affected by the Oil Spill?

For many small business owners in Louisiana, Mississippi, Alabama, Florida, and Texas, the oil spill has meant lost profits, lost income, property damage, and health problems. Nolo has wriiten two new articles that discuss some of the legal issues raised by the BP oil spill, including whether you should file a lawsuit or submit a claim through BP's $20 billion compensation fund.Here are the articles on Nolo.com:

BP Oil Spill Lawsuits and Legal Issues - Legal options for the thousands of people and businesses affected by the oil spill.

BP Oil Spill: Filing a Claim with BP's Compensation Fund - The process for getting a claim filed with BP's compensation fund.

July 26, 2010

Should You Lease or Buy Your Car?

When you lease a car, you are paying rent for it--a set fee each month for the use of the car. At the end of the lease term, you give the car back to the leasing company and own nothing. As a general rule, leasing a car instead of buying it makes economic sense only if you absolutely must have a new car every two or three years and drive no more than 12,000 to 15,000 miles per year. If you drive more than 15,000 miles a year, leasing becomes an economic disaster because it penalizes you for higher mileage.

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).

 

July 19, 2010

Hobby Versus Business--A Significant Tax Difference

One of the most powerful weapons in the IRS arsenal is the hobby loss rule. Under this rule, only taxpayers engaged in a bona fide business--as opposed to a hobby--can take business deductions. This means you need to be regularly engaged in an activity and your primary purpose must be to earn a profit. You don't have to show you earn a profit every year. But making a profit must be your primary purpose. Your business can be full time or part time, as long as you work at it regularly and continuously. In contrast, if the IRS decides that you are indulging a hobby rather than operating a business, you will face some potentially disastrous tax consequences. You may still be able to deduct some of your hobby-related expenses but there are serious restrictions and limitations on these deductions.

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).

July 11, 2010

IRS Tips for Students With Summer Jobs

Summer is here and many small businesses are hiring students for full or part time work. For some of these newly-employed, it may be their first time earning money and their first introduction to tax obligations and the IRS. Here is a list of what the IRS wants income-earning students to know about their tax obligations.

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.

 

June 7, 2010

Bankruptcy for Small Business Owners

If you're considering filing for bankruptcy because your small business cannot pull itself out of debt, you're not alone. While the economy's getting better every day and many businesses are finally showing a profit again, some businesses suffered too many losses during the height of the recession to be able to pay off their past due debt. If it looks like it's time to throw in the towel, you can use Chapter 7 personal bankruptcy to wipe out your liability for your business's debts and start over. 

It used to be hard to find information on Chapter 7 personal bankruptcy that addresses the concerns of small business owners, but Nolo has published a helpful new book on the subject: Bankruptcy for Small Business Owners: How to File for Chapter 7. (Disclosure: I'm one of the book's co-authors. I'm a little late in plugging the book; it's been out since March.) 

The book can help you decide whether chapter 7 personal bankruptcy is the best solution for you by teaching you about:
  • the difference between personal and business bankruptcy
  • how to determine whether you're personal liable for your business debts
  • which if your business debts and assets will be affected by bankruptcy
  • your eligibility for bankruptcy
  • exemptions that can protect your property, and 
  • what happens to your house and car in bankruptcy.
If you're considering closing down your business and filing bankruptcy to wipe your slate clean--or even trying to keep your business open but filing bankruptcy to get out from under your past debts, it might be helpful to you. You can read the first chapter for free on Nolo's site.
June 2, 2010

How Doing Social Good Can Help Your Business

There's a good article on Mashable by Meaghan Edelstein on how small businesses can do social good and at the same time create goodwill and publicity for their company. It walks you through creating a social good campaign step by step and has some great ideas. A social good campaign is a great way to market your company without spending a lot of money--and it's good for the community too.
May 14, 2010

CDFIs--An Alternative Loan Source for Small Businesses

Unable to secure a traditional bank loan for your small business? You might want to check out your local Community Development Financial Institution ("CDFI"). CDFIs are government-designated lenders--usually small banks, credit unions, nonprofits, and others--whose mission is to promote community development. In return for access to funding sources like grants and Treasury and SBA financing, they agree to make at least 60% of their loans to low income borrowers.

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.

For a comprehensive guide to all aspects of running a small business, see Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo).

May 3, 2010

IRS Open House for Small Business Tax Help

On Saturday, May 15th, the IRS will host a nationwide Open House for small businesses who need help with tax problems or tax forms. There will be 200 IRS offices, at least one in every state, open to the public from 9 am to 2 pm local time. IRS staff will be there in person or by telephone to help with small business tax problems, including notices and payments, return preparation, audits, and a variety of other issues. So, for example, if your business owes taxes you can't pay, you could discuss your options--such as an installment agreement or offer in compromise--with an IRS professional. Depending on what you decide, you could get help completing the paperwork and leave with your problem resolved. Or, if you're having trouble completing an IRS form or schedule, you can work directly with IRS staff to get the job done. At a previous IRS Open House this spring, 88 percent of the taxpayers who went for help had their issues resolved the same day. Here is the link for the Open House locations. Two more are planned for Saturday, June 5th and Saturday, June 26th.
April 19, 2010

What If You Don't Have Proper Tax Records?

Because you're human, you may not have kept all the records required to back up your tax deductions. Don't despair, all is not lost--you may be able to fall back on the so-called Cohan rule. This rule (named after the Broadway entertainer George M. Cohan involved in a tax case in the 1930s) is the taxpayer's best friend.

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.

April 14, 2010

How Long Should You Keep Records?

You should keep your business and tax records for as long as the IRS has to audit you after you file your returns for the year. These statutes of limitation range from three years to forever. To be on the safe side, keep your tax returns indefinitely. They don't take up much space, so this is not a big hardship. Your supporting documents probably take up more space. You should keep these for at least six years after you file your return. Keeping your records this long ensures that you'll have them available if the IRS decides to audit you.You might also need them for other purposes--for example, to get a loan, mortgage, or insurance. Keep your long-term asset records for three years after the depreciable life of the asset ends. For example, keep records for five-year property (such as computers) for eight years. You should keep your ledger sheets for as long as you're in business because a potential buyer of your business might want to see them. For more information, Deduct It! Lower Your Small Business Taxes, by Stephen Fishman.

April 12, 2010

Accrual or Cash Method of Accounting - Which Is Best?

There is no best accounting method. Each method has its advantages and disadvantages. The cash basis method is much simpler to use and easier to understand. You don't report income until it's actually received, so it's more advantageous than the accrual method if you're in a business in which you're paid slowly. The accrual method is more complicated than the cash basis method, but you get a truer picture of your net profits for any given time period because income earned in one period is accurately matched against the expenses for that period. So you see the ebb and flow of business income and debt. Moreover, the accrual method is more advantageous than the cash basis method if you are paid promptly by your clients because you are allowed to deduct expenses when you incur them, not when you actually pay for them.

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.

April 7, 2010

New IRS Form Available for Special Payroll Tax Exemption

The IRS has released and posted on its website a new form, Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee AffidavitThis form can be used by employers who want to claim the new special payroll tax exemption created under the HIRE Act (the Hiring Incentives to Restore Employment Act). To claim the exemption, employers must obtain a statement from new hires certifying that they were unemployed for 60 days or worked fewer than 40 hours during the 60-day period prior to being hired. The new Form W-11 can be used for this purpose. In order to claim the payroll tax exemption for new hires and the related new hire retention credit, employers must have this certification in their records--but they don't file the form with the IRS. The IRS also has FAQs about the payroll tax exemption and new hire retention credit posted on its website at www.irs.gov.

April 6, 2010

Asking the IRS for a Tax Filing Extension

As anyone -- especially a busy small business owner -- knows, that annual IRS tax filing date can come up quickly. If you need more time to pull together all your tax records and documentation to send to your accountant or tackle on your own, consider filing for an extension with the IRS. 

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.

For help in developing the best tax plan for your small business, see Tax Savvy for Small Business, by Frederick Daily (Nolo).