Appointments
Items to Bring to Your Individual Tax Preparation Appointment
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Be it for a return filed on time, or for the extension you might now be working on. No mater when you do this, most everybody is going to need to bring the same things.
- Be sure to include any changes in address, dependents, filing status, or any other substantive changes from the prior year which would have impact on this years return.
- W-2s from all jobs.
- Forms 1099 from all investments and bank accounts (be sure they are all accounted for as the IRS has a complete – list – sometimes).
- Brokerage statements, interest, dividends, etc.
- Student loan interest, child care expenses, tuition, and any other miscellaneous deductions/income.
- Summary of property taxes with copies of all individual items over $1,000.
- Summary of All valorem Taxes (property tax on cars) with copies of all individual items over $1,000.
- Form 1098 reporting home mortgage interest.
- Documentation of mortgage insurance
- Form K-1s from any estate(s), partnership(s), or S corporation(s) from which you’ve received an inheritance. Call and check if you are missing any, as these often do not arrive until March or April.
- Summary of all medical expenses with copies of all individual items/receipts over $1,000. Along with mileage, and any insurance reimbursements.
- Records of gambling profits and losses. To offset reportable profits, you must have an accurate log of expenses and losses including amounts, dates, and locations.
- Itemized record of charitable donations, including cash, checks and donated property. Keep all receipts. If value of donated property exceeds $500, an itemized list is necessary.
Example list: “12 shirts, 3 suits, and2 jackets” with Fair market values, as opposed to a “bag of clothes,” will allow a true value for the items. (You can find my researched FMV guide at Fair Market Value Guide for Used Items . I have recently updated the cost for this year –filing for 2011 returns)
Charitable gifts over $500 must include a receipt from the charity.
- A copy of last year’s tax return. (last three years if you are a new client to your preparer)
- A list of financial goals and the last three years of returns, if seeking counsel.
Some additional items you may need to give:
- Alimony paid or received, including Social Security Number of recipient (save cancelled checks)
- Records of purchase and sale of a personal residence, including the settlement statement from closing (Keep records of all home improvements.)
- Schedule of estimated federal, state and local taxes paid during the year
- Child care expenses and provider information. The tax identification number of the provider is required.
- Information on IRA contributions made or to be made for the tax year
- Summary of moving expenses, if eligible for the moving expense deduction
- Summary of casualty losses from fire, theft or natural disaster
- Receipts and records for all business-related income and expenses
- Job-related expenses, such as union or professional association dues, work clothing, tools, supplies, job-hunting and job-related education.
- Log book for business use of a vehicle.
- Other records relating to vehicles purchased or leased during the year for which you are claiming business expense deductions
- Receipts for travel, lodging and meals while on business
- Records of all income from and expenses paid for rental real estate you own
If You Can Answer Yes to the Following Questions, You Should Give All Related Documents to Your Tax Preparer.
- Did you pay interest on higher education loans?
- Were there any births, deaths, adoptions, divorces or marriages in your household?
- Did you convert a traditional IRA to a Roth, or re-characterize a Roth back to a traditional IRA?
- Did you receive tip income?
- Did you receive a notice from the IRS, state or local taxing agency regarding a prior year tax return?
- Did you receive installment payments on property sales?
- Did your children under 14 years of age receive investment income?
- Did you support anyone other an your own children?
- Did you make gifts to any individual other than your spouse of more than $12,000?
- Do you have a foreign bank account?
- Did you refinance your mortgage during the year?
- Did you pay points to purchase a home or refinance a mortgage during the year?
- Did you receive non-taxable sick pay?
- Did you have household employees?
- If you did not receive a W-2 from a former employer, do you have the final pay stub from that employer?
- Did you receive money from a lawsuit?
- Did you receive money from any other source not previously mentioned in this checklist?
As you can tell by the last question, this is not all inclusive. It is this reason I regularly encourage taxpayers to have enough trust in their prepares to be able to tell them everything.
When Choosing a tax preparer. . ., “If the tax professional you are talking to (or the tax practitioner you currently use) can’t do what you want honestly, don’t give him/her your business.”
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- Hobby or Business? It matters to the IRS
More of “Things your tax pro may not tell you”
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“You wouldn’t believe it.”
Complaints about tax preparers, including allegations of inaccuracies and returns that weren’t filed on time, are up 80% in the past five years, says the Council of Better Business Bureaus. But when it comes to the Internal Revenue Service policing problem preparers, “the lifeguard is still asleep.”
Less than 1.5% of returns get audited, and while that may pacify nervous taxpayers, audits are the primary way to catch bad tax pros. The GAO found that a year after it reported poor preparers by name to the IRS, the agency had failed to audit a single one. Professional organizations, such as the American Institute of Certified Public Accountants and the National Association of Enrolled Agents, pack even less of a wallop because they often wait for the IRS to act. Then the institute will strip membership and report bad accountants to the relevant state-licensing group.
Finding this information is a two-step process. If your CPA is an AICPA member, you can find out if he’s been disciplined by the institute by checking on the AICPA website. You can retrieve details by putting his name in the site’s search box. If your CPA has been disciplined, it’s important to note the reasons why, “There is a whole range of situations where the (institute) would discipline a member.” Those could include not returning client records, disclosing confidential client information and not exercising due care in preparing a tax return. To find out if a CPA’s license has been revoked, you should check with your state board of accountancy.
“What are your qualifications?”
Concerned about unethical, unlicensed tax preparers and what has been called “sharks in the water.” “Anyone can call himself a tax preparer.” Many have. At one point as many as 600,000 tax preparers were unregulated, according to the National Taxpayer Advocate, the taxpayer assistance wing of the IRS. Some set up shop in a local real-estate office, but many work for the big chains.
This all changed with the IRS RTRP program. If your preparer doesn’t have an PTIN, they are not allowed, by law, to prepare your return for profit. (This includes any CPA, EA, Attorney, RTRP anyone who prepares) by the end of this year (2012) All non-CPA’s, EA’s, or Attorneys will have had to pass a competency test. A minimum competency test is now live and by the end of 2013, all preparers will have to pass the test in order to prepare tax returns for compensation. The new RTRP (Registered Tax Return Preparers) will also have an annual continuing education requirement of 15 hours. All the hours will be tax related.RTRP - Ask your Representative why it is that CPA’s, and Attorneys are exempt from these requirements. I say this because As it stands now, They are not and will not be tested concerning tax issues nor will they need to take CPE related to tax matters like an EA or RTRP.
“If it’s February, you’re late.”
A savvy tax pro may be able to cut your tax bill or juice your refund. But don’t expect to find one come mid February. From that point through April, tax pros are generally too busy to talk to new clients. So if you don’t already have a preparer lined up, by the time you actually have your W-2s in hand, you’re probably not going to get good service.
This means you should be talking to tax preparers in October, November or even as late as early January. They’ll have time to answer questions, look over your old returns and suggest changes. Not only that, but talking to a tax pro in the fall means you still have time to plan. If you wait until you have all your W-2s, you’ve locked in all your income for the year. But in the fall a good preparer can help you figure out ways to manipulate your income by increasing your 401(k) contributions, deferring a bonus until the new year or taking taxable losses.
Wait until spring and a professional can help you make small decisions, like whether to itemize or think about different deductions, but you’ve lost most of your flexibility.
“Taxes, whatever — let me see what else I can sell you.”
The real money in tax prep has nothing to do with 1040 forms and W-2s. For the big-chain preparers, as well as your local accountant, the register really lights up only when they persuade you to take a loan, open a retirement account or buy insurance. Chances are you don’t need what they’re selling, but the sales pitch may blur the issue. GAO staffers reported that when they visited the big-chain tax preparers, loans were described as “options” or “bank products”; on one visit a customer was asked to sign a loan application without being told what it was. RAL means Refund Anticipation Loan.
Worse, these extras can do you more harm than good: More than 80% of those who opened an “Express IRA” at H&R Block, for example, paid more in fees than they earned in interest, according to a lawsuit filed by the New York attorney general. (H&R Block says most Express IRA accounts opened between 2001 and 2005 have yielded “positive net tax savings benefits and interest earnings,” even as the company “has lost money operating this program.”)
CPAs, too, are in the sales game, ever since the AICPA allowed members to sell insurance products. When commissions can be $20,000, it’s easy to get greedy.
“If I screw up, I’ll pay up.”
Worried about an audit? H&R Block and Jackson Hewitt are happy to ease your mind — for a price. Both offer the option of buying a geared-up guarantee that promises to cover any back taxes you owe, plus interest, fees and penalties.
Here’s what they don’t say: You don’t need the extra protection. If it turns out you owe back taxes, the big chains’ basic (read: free) guarantee already covers fines, penalties and interest. Many CPAs and EAs and RTRP will do the same; they often have insurance for that very purpose. Just be sure to ask about it before one does your return. But what about the back taxes?
True, they could amount to a bigger expense than the fines and penalties, which may be why some chains can sell that extra guarantee. But H&R Block and Jackson Hewitt will cover you only up to $5,000 and exclude the most complicated returns. If you’re tempted, know there may be an unintended consequence: If someone pays your taxes, the IRS considers that taxable income.
In other words if you buy the guarantee, and H&R Block ends up paying your back taxes, expect to get a 1099 next January.
“Tax preparation is an art, not a science.”
Recent law changes (EIC to name one) tightened penalties for tax preparers who play fast and loose with the tax code, taking far-fetched positions because they know 99% of returns never get audited. That said, for anyone with a complicated or unusual financial life, there’s still lots of wiggle room, I’ve never heard “It’s about 10% black, 10% white, and everything else is in the middle.”
Chances are good you have room to maneuver if you have income in a category the tax code treats flexibly — you’re self-employed, for example, or own rental property. Ditto if you’ve earned big capital gains or incurred high or unusual medical expenses. In short, if you’re attaching a schedule to your return, a good tax preparer will pay for himself.
Now, that may mean raising a red flag with the IRS, and a good preparer should explain if he’s taking risky positions. If you can’t stomach the specter of an audit, you’ll want a pro to travel on the side of caution.
Think twice before paying someone to look for loopholes if your income picture is relatively simple. If you’ve got one W-2, you don’t need someone fancy, there’s not a lot we can do for you.
“You’d be better off.”
Maybe you’re hiring a tax preparer because you’ve got better things to do with your weekend or numbers make you dizzy — more power to you. But if you’re hiring a pro because you think he’s smarter than you, think again. On average, tax preparers make more mistakes, and costlier ones, than John Q. Taxpayer does.
According to a study of IRS data, 56% of professionally prepared returns showed significant errors, compared with 47% of those done by the taxpayer. And audited taxpayers who used preparers owed an average of $363, while those who filed themselves owed $185.
Of course, tax preparers often see more-difficult returns, which could lead to more errors.
For a family with one W-2, mortgage interest and a couple of kids, TurboTax is just fine. If, on the other hand, you’re attaching a schedule for self-employment income or capital losses, consider getting help. And even then, if a return is made complicated by a one-time event — say, the birth of a child or the acquisition of a rental property — you might need only one year’s worth of advice. If nothing changes, you should be able to copy it from year to year, so long as you keep up with tax law changes to your situation.
“You should shop around.”
There’s no standard price for doing taxes. Some preparers charge by the hour, others by the form; either way the cost depends on where you live, the complexity of your situation and the qualifications of your tax pro. Consider: The average H&R Block customer pays about $150; a CPA may charge 15 times that.
People rely too much on word of mouth; they don’t shop prices. If they did, they might be surprised. A licensed local pro may not cost much more than a national chain.
I charge by the form, and a simple return could cost just under $150.00 – not much more than what you might pay at a big chain.
Even among franchises, prices vary. The return that cost $90 to prepare at one big store cost more than three times that at another, according to a GAO study. To be fair, it may be hard to know what your return will cost before the preparer actually spends time on it. Ask for estimates using last year’s return — that’ll give you a point of comparison to find the best price.
Shop around.
Related articles
- Using the Title “Registered Tax Return Preparer”?!
- Help Me Prepare My Taxes
- A Cpa For Taxes-does It Make A Difference?
- Preparer Registration Wastes Time and Money – Guest Post by Joe Kristan
Receive a Faster Refund with Direct Deposit
. . . it’s tax time!
This year, do you want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 61 million people had their tax refunds deposited directly into their bank accounts last year. It’s the secure and convenient way to get money in your wallet faster.
- Security. The payment is secure – there is no check to get lost. Each year thousands of refund checks are returned by the US Post Office to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund stolen.
- Convenience. There’s no special trip to the bank to deposit a check!
You can also electronically direct your refund to multiple accounts. With the new “split refund” option, taxpayers can divide their refunds among as many as three checking or savings accounts and three different U.S. financial institutions. The split refund option, using Form 8888, is also available for paper returns.
Caution: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Also, make sure you have the correct nine-digit routing number and your account number when selecting direct deposit.
Don’t have a checking account? L & R Tax Preparation ( or your tax Professional) can Still give you the speed and Security of Direct Deposit.
To request direct deposit, ask us at L & R Tax Preparation for information..
Filing Status – What You Need to Know
Your federal tax filing status is based on your marital and family situation. It is an important factor in determining your standard deduction and your correct amount of tax, and whether you must file a return.
Your marital status on the last day of the year determines your status for the entire year. If more than one filing status applies to you, you may choose the one that gives you the lowest tax obligation.
There are five filing status options:
- Single. Generally, if you are unmarried, divorced, or legally separated according to your state law, and you do not qualify for another filing status, your filing status is Single.
- Married Filing Jointly. If you are married, you and your spouse may file a joint return. If your spouse died during the year and you did not remarry, you may still file a joint return with that spouse for the year of death. This is the last year for which you may file a joint return with that spouse.
- Married Filing Separately. Married taxpayers may elect to file separate returns.
- Head of Household. Generally, you must be unmarried and paid more than half the cost of maintaining a home for you and a qualifying person for more than half a year.
- Qualifying Widow(er) with Dependent Child. You may be able to file as a qualifying widow or widower for the two years following the year your spouse died. To do this, you must meet all four of the following tests:
- You were entitled to file a joint return with your spouse for the year he or she died. It does not matter whether you actually filed a joint return.
- You did not remarry in the two years following the year your spouse died.
- You have a child, stepchild, or adopted child (a foster child does not meet this requirement) for whom you can claim a dependency exemption.
- You paid more than half the cost of maintaining a household that was the main home for you and that child, for the whole year.
After the two years following the year in which your spouse died, you may qualify for head of household status.
I can definitely help you determine which filing status is best for your situation. Just send an email.
A Week in Perspective
Want to let everyone know that with the upcoming holidays and my need to catch up my readiness for this upcoming season, The will be no Week In Perspective on December 26th, or January 2nd.
I also want to let you all know that I have a very special post for you scheduled for January 4th.
Happy birthday to us! – Twenty years ago, five more-or-less young accountants went over the wall of a national CPA firm to start their own firm. They wisely discarded their first working firm name (“Dunderhead CPAs”) and settled on the name “Roth & Company.”
Not sure how I missed this:
Are You Ready For The Big Payroll Tax Deposit Change? – The IRS is changing the rules in a BIG way, when it comes to payroll and corporation tax deposits. Are you going to be ready for this new change? If not, you don’t have long to get ready! The new change goes into effect on January 1, 2011.
IRA Investment Planning for Taxation
3 Ways to Improve Your Credit in the New Year – Improving your credit quickly can be tough since the whole point of a credit history is to establish good financial trends – a pattern of paying off your debts. However raising your score over a longer period of time isn’t too tough if you consistently follow good money habits.
Why Don’t We Tip Everyone? – Earlier this week I asked my readers why they tip at the holidays. I was afraid a lot of you would read that, scoff, and say “Of course I tip my coffee barista! Every day!”. Of the few people that commented it seemed that everyone thought there was an appropriate time to tip (I agree) and sometimes it just doesn’t make sense to tip. But as I considered holiday tipping another thought crossed my mind. Why do only certain professions warrant the expectation of tips?
Everyone is Deserving, Right?
Friday’s Tax Quote – December 17, 2010 – “People don’t complain about taxes because they are selfish or stingy. They complain because they simply don’t believe they’re getting their money’s worth.”
- Zell Miller
Don’t Overlook This Easy Way to Put More Money in Your Pocket – If you have an employer, you might be offered a health care or dependent care flexible spending account benefit. Flexible spending accounts are one of those benefits that can make your eyes glaze over, because at first glance they don’t seem like a benefit. But they’re actually great, because when you take advantage of them you get to:
Are You on the Hook for Repaying Your Homebuyer Tax Credit? – In the wake of the financial crisis and the housing market crash, there were a number of efforts made to prop up the failing market. Among these efforts were tax credits for homebuyers, encouraging them to buy homes. However, not all the tax credits were created equal; in some cases, homeowners may be on the hook for repaying the tax credit.
Merry Taxmas! House OKs tax bill – In addition to keeping the current six tax rates that range from 10 percent to 35 percent, the bill contains a raft other tax breaks for both individuals and businesses. Many of the provisions relate to 2011, but there are some of the individual tax provisions that expired at the end of 2009 and were extended retroactively for the 2010 tax year:
- Alternative minimum tax (AMT) patch
- State and local sales tax deduction (itemizing required)
- Tuition and fees deduction
- Teachers et al write-off for $250 of out-of-pocket expenses
- Private mortgage insurance (PMI) deduction
- Direct donation of IRA money by older account holders
A New 2011 Economic Stimulus Package With Obama-Bush Tax Cuts and Unemployment Benefit Extensions – [Update - No New Taxes with Tax Extensions Approved] President Obama has signed into law a bill that covers an extension of all the bush-era tax cuts and additional tax benefits. With this legislation he has essentially created a new 2011 Economic Stimulus package, estimated at around $858 billion. Here’s how various key components of the “2011 economic stimulus package” legislation will affect you:
Estate tax extension through 2012: Nudging mama off the train in two years?
With Obama’s signing of the compromise tax deal yesterday, the really wealthy were among those who got an early tax present.
Some of the House Democrats railed against this latest version of the estate tax, but in the end, it passed.
For 2011 and 2012, estates worth $5 million or less won’t be taxed at all. For estate values greater than that, a 35 percent tax rate will apply.
Bush-rate extension passes; what it means – After a day of posturing, the extension of the Bush-era tax cuts ended up passing easily last night, 277-148.
So what does it do? Go to the above page for Joes great list of. . .
Also with More coverage of the final bill:
Robert D. Flach, TaxGrrrl, Tax Foundation, Kay Bell, Peter Pappas, The Blog that Inexplicably Hates Our LInks
Tax Bill Passes: What This Means for You – Here’s what’s in and out and what this means for you.
Boston Tea Party Anniversary – The Boston Tea Party was 237 years ago.
Steps To Stimulate A Recovery And Employment The Law Of Opposites
December 19th, 2010 Filed under: MBA Finance Jobs — Finance Author
As I wrote in 2008 on the financial crash, I was in the small minority that would have let the market crash. Now, you may be wondering what I meant then and mean now:
How do we distribute tax benefits for charitable donations? – I’m struck by the remarkable generosity of many of the low-income taxpayers at our Union College Volunteer Income Tax Assistance (VITA) site, who rarely get any tax benefits for their donations.
The AMT Effect for Individuals – For years, tax practitioners have been clamoring for a permanent fix to the AMT system. Ask a tax preparer about the late extension passed in 2007. If Congress does not pass the extension this year, it is estimated that 28 million taxpayers will pay AMT, with 82% of those taxpayers earning below $200,000. You will notice, that in 2009, 4.5 million were subject to the AMT.
2010 and 2011 AMT Tax Brackets – AMT is Alternative Minimum Tax. The Bush tax cut extension law officially known as the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853) includes an AMT patch for 2010 and 2011. Congress used to patch AMT one year at a time. This time they did two years in one shot. That’s a 100% improvement!
How much are those New Year’s Eve babies worth?
A time to be born … a time to die – Playing the video while you read this post. And yes read the post. This is a great Article Mary.
“There’s no such thing as a free bike.” – Those “gift” bikes could turn out to be very expensive, because the IRS does not treat it as a “gift” but as a “taxable fringe benefit.”
It raises interesting tax questions.
Rentals and 1099s – Beginning in just a few days, landlords will have a new complication to renting their properties. As if dealing with renters who don’t want to pay their rent or trash the house when they leave isn’t bad enough, landlords will have to begin issuing 1099MISC to any service providers they pay $600 or more over the course of the year.
The new 1099 Requirement you MUST comply with in 2011 – Real estate investors take note: January 1, 2011, is the starting date for new 1099 Reporting rules. Effective January 1st, you must track payments you make to all businesses and individuals that you buy services from. Once you have paid $600 or more to any one business or person in connection with any kind of rental property expense, you’ll need to report those payments to the IRS, and issue each person or business a form 1099-MISC…
Form 1099 repeal fails yet again
While waiting for the Senate to get around to its final vote on the deal to extend the current income tax rates, the chair of the Finance Committee took another shot at repealing the new Form 1099 reporting requirement.
This tax task was devised as a way to help pay for health care reform. Specifically, businesses will have to provide 1099 information returns to each payee that the business pays $600 or more during the year.
How the Price to Earnings Ratio is Calculated – The price to earnings ratio (P/E ratio) represents a company’s current share price compared to its earnings per share. Commonly referred to as the earnings multiple, the P/E is commonly used by investors to compare and analyze stocks, as well as determine if a company is under or overvalued. There are many different versions of the price to earnings ratio which are often used to understand past, present, and future valuations.
TAX BLOGOSPHERE BUDDIES – PROF JAMES MAULE – Friday series of mini-interviews with fellow tax bloggers is Professor James Maule of MAULED AGAIN. A fellow “Wandering Traveler in the Internet Wilderness”, Jim has been a professor at Villanova University School of Law in Pennsylvania since 1983, and has been blogging since 2004. I enjoy reading Jim’s, appropriate for his profession, scholarly posts on tax policy. We have both made the extreme error of disagreeing with a certain multi-initialed blogger.
Social Security by the Numbers
Charge cards vs. credit cards: 3 reasons to charge it – The other day, someone asked me, if given the option, which I preferred: charge cards or credit cards. My answer: “There’s a difference?”
There is. And who knew?
(If you knew, kudos, because I always thought “charge card” was what our ancient ancestors – Mom and Dad – called the plastic we carry around in our wallet.)
Pre-paid credit cards: Why you should give them a second look – Today, it’s often difficult for anyone to get a credit card – whether it’s a zero percent balance transfer card or a best cash back credit card. And if you’re just starting out -or starting over – getting an approval based on your credit score can be even more of a hassle. This is what makes pre-paid cards so attractive if you want to use them for online shopping, travel or even just everyday expenses.
Reminder;
You can go to my company web site Tax Center page where you’ll find this year I have a Free Tax Organizer. You’ll need a .pdf reader to open this 14 page organizer. You can also find my Online Tax Organizer, used mostly by clients and/or those who will be clients.
Enter your email to subscribe to the L & R Tax Preparation monthly newsletter.
Misconceptions Business Owners Have About Their Returns
Regardless of how life changes, one of the biggest hurdles you’ll face in running your own business is to stay on top of your numerous obligations to federal, state, and local tax agencies. A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records.
You can safely assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” claim. The old legal saying that “ignorance of the law is no excuse” is perhaps most often applied in tax settings. On the other hand, it is surprising how many small businesses actually overpay their taxes. They often neglect to take deductions they’re legally entitled to, or just don’t know about certain breaks that can help them lower their tax bill.
Adding to the mayhem, we have tax codes that seem to be in a constant state of flux. Creating exceptions for special groups has resulted in a steady stream of new and revised tax laws, which have lengthened the Internal Revenue Code to over 4,500 pages and rendered it barely understandable to even the most experienced tax professionals. Often one section can run up to several hundred pages. A special tax service used by tax professionals explains the meaning and application of each part of the code. It is contained in another 12 volumes! The harder Congress tries to simplify the code, the more complex it becomes.
Preparing your taxes and strategizing how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, MONEY, and (God forbid) an auditor knocking on your door, is to have a professional accountant handle your taxes. Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code and gain the advantage over the IRS.
Nevertheless, many accountants don’t understand the mammoth tax code and end up being too conservative with your tax deductions. The more conservative they are, the more taxes you end up paying.
Unfortunately, the cryptic and mystifying nature of the tax code generates a lot of folklore and misinformation that also leads to costly mistakes. Here is a list of some common small business tax misconceptions:
All Start-Up Costs Are Immediately Deductible
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.
You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation. You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred in the year that you start a business. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.
The only catch is that in order to take advantage of the immediate deduction you must spread out the remainder of your start-up costs over 15 years (180 months).
Overpaying The IRS Makes You “Audit Proof”
The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.
Being incorporated enables you to take more deductions.
Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are pretty much equivalent to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend $1,000 in legal and accounting fees to set up a corporation, only to determine shortly after that they want to change their name or company direction. Plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.
The home office deduction is a red flag for an audit.
This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.
If you don’t take the home office deduction, business expenses are not deductible.
You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.
Taking an extension on your taxes is an extension to pay taxes.
Extensions enable you to extend your filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date.
Part-time business owners cannot set up self-employed pensions.
If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.
Besides avoiding these pitfalls, possessing basic knowledge of how the tax system works is also beneficial. After all, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If your accountant messes up, you pay the penalty, not him.
Reads from Last week
Yes This post is on top on purpose Don’t Let the Naysayers Get You Down.
From The Wondering Tax Pros WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’ I found “How Will Healthcare Reform Affect MY Taxes?” I would agree with my blogging friend here that it seems to do a good job of answering the question. And seriously if you aren’t reading his twice a week post What’s the Buzz, you missing a lot of great info.
Working from Home: Do You Have a Back-Up Plan? – One of the great things about working from home, and running your own business, is that you have a great deal of flexibility. Your dress code is flexible. Your schedule is largely flexible. The types of jobs you take can be flexible. However, there are some issues that you can run into when you work from home, and these are not so flexible.
This has to be my personal favorite this week.
Education and Wealth: You Don’t Need a College Degree, But You Need an Education – College is overrated. There, I said something you’ve probably suspected since you were in high school and may have confirmed several years after you entered the workforce. You probably know many people who excelled in college and can barely string together a cohesive thought. And you probably know many successful people who never went to college, barely made it through college, or work in a field unrelated to their degree.
THE COST OF TAX RETURN PREPARER REGISTRATION From THWTP is a statement. As I have read it, Robert is pointing out clearly, how little this is going to cost when figured out from a realistic perspective. Yes my friend, as in your practice this will only cost less than $1.00 per client or “set” as you put it. For me in my math I was just over a dollar and I have chosen not to even bother raising prices based on these new Regs. and expenses. I am sure the whole world of Tax preparation is aware (preparers) the cost are minimal. Unfortunately, most in our world will take advantage of the situation. They’ll monopolize on the idea that their cost have gone up and thus must raise their cost to their clients. What I am saying is I agree that the cost is very low per client, but money hungry tax preparers, CPA, Tax Attorneys and the others, I see them raising pricing, beyond their cost.
Shulman Power Grab To Be Paid for by $64.25 Charge Per Practitioner
IRS Announces New Return Preparer Application System and User Fee
The IRS released (IR-2010-91) the new proposed regulations amending Circular 230
“The IRS and the Treasury Department estimate that the total annual costs resulting from these requirements will be $9,880,000 for all affected practitioners and $38,632,500 for all affected continuing education providers.
Estimated total annual record-keeping and reporting burden is 1,710,000 hours
Section 10.3(f) of the proposed regulations establishes a new “registered tax return preparer” designation. A registered tax return preparer is any individual so designated under §10.4(c) who is not currently under suspension or disbarment from practice before the IRS. An individual who is a registered tax return preparer pursuant to this part is a practitioner authorized to practice before the IRS, subject to the limitations identified in these proposed regulations.”
WSJ: Give Away Money to Charity, Not to Foundations
IRS to Audit 6,000 Businesses at Random and Take Back What It’s Owed in Unpaid Employment Taxes – Earlier this year, the Internal Revenue Service began employment tax audits of approximately 6,000 U.S. companies to provide statistical data for the National Research Program study of employment tax compliance.
(Take the lesson.)
Can the Consumer Financial Protection Bureau save us from ourselves?
Please Explain To Me… – What unique internal procedures does a CPA firm that other tax firms don’t have? I really want to know too.
Results are In: You STILL Hate the IRS!
So you hate the IRS? Well, you’re not the only one. Near the end of last week an Internal Revenue Service Office was evacuated after a suspicious envelope arrived.
3 Tips to Maintain Focus on Your Financial Goals
Your 2011 tax burden revised – Late last month Kay Bell reported on the Tax Foundation’s online calculator that will let you compare your 2011 federal income tax liabilities under three possible tax collection scenarios. Not a group to just sit and wait, the Foundation’s numbers crunchers have updated the interactive calculator to include the Democrats’ plan for the expiring Bush-era tax cuts. Read more. . .
Prepare for the crash tax – The taxing possibilities from jurisdictions scrambling for every possible dollar just keep coming.
How to Best Utilize Health Savings Accounts – 2010 and 2011 HSA Limits and Tax Rules
Investor or Business Owner? The Right Structure Makes a HUGE Difference
The IRS’s Dirty Little Trick on Real Estate Investors – Material Participation Rules
Court: Internet Church Is Not a ‘Church’ for Tax Purposes
The U.S. Court of Appeals for the Federal Circuit on Monday ruled that the Foundation of Human Understanding, a 47 year old § 501(c)(3) nonprofit church that conducts weekly Internet and radio services, is not a church for § 170 purposes. Foundation of Human Understanding v. United States, No. 2009-5129 (Fed. Cir. Aug. 16, 2010):
Tax Politics and Economic Uncertainty
“According to Martin Regalia, chief economist of the U.S. Chamber of Commerce, “Uncertainty is the probably the biggest factor retarding economic growth.” He made this comment at an economic summit, at which, according to this report, other participants called for cuts in government spending, reduction of the federal budget deficit, a reduction in government regulation of business, and reform of the tax system, though Regalia, according to another report, also supports extension of the Bush tax cuts.”
What is Stop Loss Pay? Stop loss pay is compensation being paid to those members of the military service who were not allowed to leave the service on time. This pay is on top of all other pay provided to the soldiers. It is specific compensation for not being able to leave the service. How to Claim Stop Loss Pay for Military Personnel
The government is paying $500 for every month that a soldier was stop lossed.
If the average stop loss length of time is 6 months that’s $3,000 due to every single one of those soldiers (on average). That’s a significant amount of money in my eyes. Enough money to propel your savings goals forward. Enough money to fund 60% of an IRA this year.
4 Ways to Maximize Your Stop Loss Pay – The government is giving a specific set of soldiers, on average, $3,000 in stop loss pay. Hopefully these men and women of our armed forces have a plan for a couple thousand dollars falling in their laps. If not, then read this post.
My two post from last week The Pulse of Your Business, and Planning Retirement Withdrawals kind of stayed from the tax info, but the information is good information for those who it was written for. Both these post are from my August Newsletter. If you’d like to sign up to receive this kind of information you can do so from the Newsletter page. For those of you who like there is an RSS link as well.
Do you want to not worry about money all the time? Or do you ever wish that you were never in debt? Here are 5 great ways to save money fast! 5 Easy Tips to Save Money.
I wish I had wrote this. Car Finance How to Decide on Whether to Lease Or Buy a New Car I have a lot of clients that would need to use this information.
Business Car Leasing The Most Economical and Smart Thing to Go For
Refinancing Myth: Looking Beyond the Monthly Payment and Calculating the True Cost of Your Refinance – Mortgage lenders often attract homeowners seeking to lower their mortgage interest rate with some simple math, usually presented in one of two ways:
1) Comparing the nominal closing costs to the total savings from 30 years of a lower monthly payment, or
2) How few months it will take before you break even with your refinancing closing costs due to lowering the monthly payment
Either way, the refinance looks very attractive: for a little cash up front, you can save far more money over the term of the loan. But don’t be fooled by the numbers – a lower monthly payment does not always mean saving more money, and it has little to do with the closing costs. The paradox can be explained easily by calculating the true total cost refinancing the loan.. . .
From L & R Tax Prep Web site refinance calculator
Other useful Calculators
Rent vs. Buy
Should you rent or should you buy your home? It takes more than looking at your mortgage payment to answer this question. This calculator helps you weed through the fees, taxes, and monthly payments to help you make a good financial decision.Mortgage Qualifier
The first step in buying a house is determining your budget. This interactive problem solver steps you through the process of finding out how much you can borrow.Mortgage Refinance Analyzer
Should you refinance your mortgage? Find out how much money you’ll save and how long it will take to breakeven on a mortgage refinance?Mortgage Reduction Analyzer
Save thousands of dollars in interest by increasing your monthly payment. Find out how much sooner you will pay off your mortgage by making extra payments?Mortgage Comparison: 15 years vs. 30 years
Determining which mortgage term is right for you can be a challenge. Use this calculator to compare these two mortgage terms, and let us help you decide which term better for you.Mortgage Points Evaluator
Should you pay points? This calculator helps you determine if you should pay for points, or use the money to increase your down payment.
Waking up sick Friday morning was just bad timing. I had a lot of things to do, where people depended on me. The work got done, but in part, no thanks to me. Saturday wasn’t much better. I was able to at least get some work done yesterday; it wasn’t near as much as I would have hoped.
In Closing this long list, I would like to point out that I have added some new links to my Blog rolls.
Angell EYE is an application development company that has been providing custom integration and web services for over 5 years. We deliver web site design and development, custom web application development and advanced web programming, FileMaker development, and more.
Over the past 5 years, Angell EYE has been specializing in custom eBay integration and PayPal Payments Pro solutions. 1 of only 12 PayPal Certified Ace Developers, we have had the pleasure of integrating PayPal for numerous happy clients. L & R client also
The Best Credit Card Processing System For Your Business. Unleash The Power of PayPal & Turn Your Laptop or Desktop PC Into a Fully Functional Credit Card Processing System! Credit Card Processing for Fixed Locations or Wireless Freedom,
Accept Major Credit Cards with one low FLAT RATE – L & R client also
a non-profit that connects organizations involved with aging research, facilitate the exchange of information, provide publications and bring people together to understand why aging research is requiring their full attention.- L & R client also
The Top 10 Highest State Income Taxes: All Obama Blue States
Forbes, States (And Bill Gates Sr.) Look to Soak the Rich, by Ashlea Ebeling:
- Hawaii: 11% (income over $400,000 (couple), $200,000 (single))
- Oregon: 11% (income over $500,000 (couple), $250,000 (single))
- California: 10.55% (income over $1 million)
- Rhode Island: 9.9% (income over $373,650)
- Iowa: 8.98% (income over $64,261)
- New Jersey 8.97% (income over $500,000)
- New York: 8.97% (income over $500,000)
- Vermont: 8.95% (income over $373,650)
- Maine: 8.5% (income over $39,549 (couple), $19,749 (single))
- Washington, D.C.: 8.5% (income over $40,000)
Prepare your taxes on-line With L & R Tax Preparation
L & R Tax Preparation
Tax Preparation, Payroll, and Accounting,
Including online services.
E=MC2 or use QuickBooks
