Nolo's Small Business Legal Blog

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).

 

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).

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.

 

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.

The IRS has released and posted on its website a new form, Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit. This 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.

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 many small businesses, it's taxtime. When it comes to doing your tax returns, it pays to slow down and pay attention to details. It's the small things that can cause delays with the IRS--which means a longer wait for you for any refund you are owed. Here is the IRS list of the most common errors on tax filings:

1. Incorrect or missing Social Security Numbers. When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.
   
   
2. Incorrect or misspelling of dependent's last name. When entering a dependent's last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.
   
   
3. Filing status errors. Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.
   
   
4. Math errors. When preparing paper returns, review all math for accuracy. Remember, when you file electronically, the software takes care of the math for you!
   
   
5. Computation errors. Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.
   
   
6. Incorrect bank account numbers for Direct Deposit. If you are due a refund and requested direct deposit, be sure to review the routing and account numbers for your financial institution.
   
   
7. Forgetting to sign and date the return. An unsigned tax return is like an unsigned check - it is invalid.
   
   
8. Incorrect Adjusted Gross Income information. Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from their originally filed 2008 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS. 
   
   
9. Claiming the Making Work Pay Tax Credit. Taxpayers with earned income should claim the Making Work Pay Tax Credit by attaching a Schedule M, Making Work Pay and Government Retiree Credits to their 2009 Form 1040 or 1040 A. Taxpayers who file Form 1040-EZ will use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Tax Credit. The credit is worth up to $400 for individuals and $800 for married couples filing jointly. Many people who worked during 2009 are slowing down the processing of their tax return by not properly claiming this credit.

 

In an effort to stimulate hiring and increase employment, the Obama administration has proposed a one-year tax credit for businesses that hire new employees in 2010. Under the proposal, any firm that hires a new employee in 2010 would get up to a $5,000 tax credit for each hire. The credit is capped at $500,000 per company. In addition, firms that hire new employees or increase salaries of current employees would be reimbursed for Social Security taxes related to their increased payroll. The Social Security reimbursement would not apply to wages above the $106,800 Social Security maximum to make sure the benefit is tied to -- and encourages the hiring of -- less highly paid workers.

The administration estimates 1 million small businesses will take advantage of the credit, which is expected to cost the government $33 billion. The money would come from savings from the Troubled Asset Relief Program, which officials now think will cost $200 billion less than expected.  

The IRS announced the 2010 standard mileage rates for the use of a car (including a van, pickup, or panel truck). Effective January 1, 2010, the standard mileage rates are:
50 cents per mile for business miles driven 
16.5 cents per mile driven for medical or moving purposes 
14 cents per mile driven in service of charitable organizations 

The 2010 rate for business miles is lower than the rate that was in effect for 2009, which was 55 cents per mile. According to the IRS, the lower rate for business use of a vehicle for 2010 reflects "generally lower transportation costs compared to a year ago," such as the cost of gasoline.
Self-employed people can choose either the standard mileage rate with the rate set annually by the IRS or they can calculate their actual costs of operating a business vehicle. There are certain restrictions on using the standard mileage rate however. You must use that method the first year you use the vehicle in your business, and you can't have claimed accelerated depreciation deductions or have taken any Section 179 deductions for the vehicle.