Mid-Year Tax Planning Ideas by Karla Hopkins

As summer comes to a close and autum approaches the end of the year gets that much closer.  Now is a great time to consider fine tuning your tax plans for 2013.  Here are a few ideas to consider:

·       Harvest Capital Losses.  Don't get stuck at the last minute in December.  Review your portfolio position now and realize those capital losses to offset current or future capital gains plus up to $3,000 in losses against ordinary income.  Under the new tax law, the maximum long term capital gain rate increased to 20% for certain upper-income taxpayers.

·       Are you cleaning out the attic and garage this fall? You can write off donated items that are in good conditiion.  Many organizations including the Salvation Army provide guidelines on the donation value so don't forget to get a receipt when you donate. 

·       The residential energy credit was extended through 2013 so if you haven't done that much desired upgrade to your heating and air conditioning system, this may be the year to do so and benefit for a tax credit.

·       For employees, make sure you are taking advantage of any and all employer tax free benefits.  Take advantage of a tuition reimbursement plan to expand your skills and job performance; fully fund your 401(k) at least up to the employer match; take advantage of the retirement catch up provisions if you are over 50; take advantage of any benefit that you can pay with pre-tax dollars such as child care, tranporation, medical and health costs through a Health Savings Account.

·       Remember that your dependent can earn up to $6,100 tax free.  If you can employ them in your business it's a great way to teach responsibility and to save for college.  Consider also having them contribute to a ROTH IRA.  It is one of the most tax-advantaged savings that the government currently offers.

·       If you are not subject to Alternative Minimum Tax, consider prepaying deductible items such as real estate tax, state income tax estimates and personal property tax.  This could save you as much as 39.6% in taxes.

·       Review your W-4 exemptions and withholdings to date.  Ensure that your are neither overwithholding or under withholdings.  By reviewing them now, you have time to react over the next 5 months instead of just at the end of the year.

·       For businesses who are considered making purchases of equipment, the tax laws consider to be favorable in terms of allowing a deduction of the full amount in the year you acquire the assets.  Don't forget to consider the tax benefit when you are calculating the cost of the equipment.

·       The Work Opportunity Tax Credit is available for certain "target groups" when you hire from the group.  The maximum credit is generally $2,400.  Consider searching for new employees that might meet the requirements for this credit.

·       Contact your accountant just to check in on any transaction or life changes you may have had or are contemplating so that they can advise you on how they might impact your tax returns before the year is over.

How should entrepreneurs and business owners use their accountants - by Karla Hopkins

 

Generally entrepreneurs are constantly driving to perfect a business model and adapt to changes in their industry, economy and market demands.  Data is readily available and everywhere on any subject however, financial data that accountants can read and interpret is often overlooked. 

You may only think of your accountant at tax time, but just maybe they have more value all during the year.  Accountants generally amass a huge amount of financial data and can almost instantly identify strengths and weaknesses of a business.  They see a variety of scenarios from a wide range of clients and can use that information to help with your specific needs.

 

Are your margins where they should be for the industry?  Are your pricing policies in line with your competition?  Are your employees productive?  A good accountant can offer good insights into these types of questions.  Business owners often manage based on their "gut instinct" which is invaluable but having a professional support them with hard and fast facts can also be priceless.

 

So, how best to use your accountant you ask?  When you receive financial information from them, request a written or verbal explanation.  Don't assume you will understand the information yourself, ask the accountant to dig into the details with you.  When you talk to your accountant, focus on how the numbers you are going over affect your bottom line.  Relate everything to the two things that are critical to every company, its profit and cash flow.

 

Know your company's mission and strategic plan.  Managing a company looks like a complete circle.  Numbers tell a story.  They either move you towards your plan or away from it.  In a circle every function of a company impacts another function of a company in some way.  It's a ripple affect.  Your accountant can help you manage your company but only if you see their role and function intertwined with your company's goals, a part of the circle. 

 

Areas like strategy, competition, and data analysis are critical to a business.  Accounting firms often have a background to provide these expertise to their clients, don't be afraid to ask!

 

Five Important Factors in a Strategic Plan Design - By Karla Hopkins

 

 

Create a Leadership Culture.   Leadership focuses on producing change and forward movement.  Leaders are able to clearly communicate their vision and can inspire others to be successful.  Any personality can be a leader, people just need someone to give them the room and support for taking charge of anything from their own job, to a department, to a business model.

One size doesn't work for all companies.  In additon to size, a company's position on its life cycle is an important factor.  For example a new company with a virtual business model would approach their strategic plan differently than a single shop third generation business.

 

Create a culture of shared accountability and personal responsibility.  Leaders who inspire trust and share their vision with their employees generally can create a team that supports them and their vision.  Their workforce becomes engaged in the overall goals of the company and these company goals become their personal goals.
 
Execute and implement timely.  Create a sense of urgency by getting senior leaders on board, communicate exhaustively, and reward incremental success in the strategic plan development.  Garner commitment and once you have employees who understand the vision, are involved with its process, own the future success, and believe in it, you can execute effectively.

Measure your success factors.  What are the metrics for measuring the success, are there rewards for stages in the plan, is the strategy clear, how is every level of the company benefitted from the plan.   According to Peter Dricker, management consultant, "what gets measured gets done"

The Massachusetts Small Employer Wellness Program
Tax Credit by Karla Hopkins, CPA



 

For most, taking care of our health is just as important as saving money on taxes.  To support this, the Massachusetts Department of Public Health has created an annual tax credit (up to $10,000 per year) equal to 25% of the costs associated with implementing an employer-sponsored certified wellness program.

The employer's wellness program must provide for things such as:

·       A work environment that supports physical and mental health

·        A process for identifying and addressing specific needs and health risks of  employees

·        Offering awareness and education programs for health information

·        Offering behavior and change programs for the employees seeking to change their lifestyle.

The program must be certified by the Massachusetts Department of Public Health in advance of filing for the tax credit.  The business must have fewer than 200 employees.  The business must offer health benefits to its employees and not have recent OSHA violations.

A minimum of 33% of the employees must participate in at least one element of the wellness program to qualify for the credit.

This credit is available for 2013 through 2017 on an annual basis and employers must submit their plan for approval each year to be eligible for the credit.  Preference for approval is given to employers with fewer than 100 employees.

The following link provides detailed information on the process for creating a qualifying plan.  In a day where taxes are taking more and more of company profits and employee disposable income, this may be one way to become a healthy company both physically and financially.

http://www.mass.gov/eohhs/docs/eohhs/wellness-tax-credit/obtaining-a-wellness-tax-credit-cert.pdf

PAYROLL TAX AND WAGE COMPLIANCE RULES

by Karla Hopkins, CPA

Outsourcing your payroll to a service company has the potential to cause compliance issues. Whether you pay your payroll taxes yourself or rely on a service company to remit them for you, you are ultimately and always responsible - even if the payroll company makes errors. 
 
Regularly assure yourself that all payroll taxes are being paid with the following steps:

1. Hire only bonded service companies

2. Do not allow the payroll service company to sign tax returns

3. Always confirm that the payroll company has deposited your payroll taxes by

    logging into the IRS website yourself

4. Do not allow tax correspondence to be sent to the payroll company have it

    sent to you

5. Request that the IRS provide you with a transcript of the company's tax accounts

    on a regular basis

Final Wages - When must you pay them to a terminated employee? 
While state laws vary, the best strategy is always to deliver the final paycheck at the time of termination. It is much easier to reconcile a manually prepared final check than to fight over the check in court. Disgruntled employees will often put in the time and effort to take you to court over noncompliance.

Basic rules for New England states are as follows:

                                                  If an employee quits                     If fired or laid off 
    Massachusetts                            Next Payday                                Immediately
    Maine                                         Next Payday                               Next Payday     
    New Hampshire                         Next Payday                               Next Payday or

                                                                                                           within 72 hours
    Rhode Island                              Next Payday                               Next Payday

When does the workday begin and end?
Technology now allows employees to do work at remote locations in small increments, but is this compensable time? Is every response from your smart phone to an employer, customer or vendor time that should be paid? Regulations allow employers to disregard insubstantial or insignificant periods of time beyond the employees' regular work day if it is not practical for this time to be recorded for payroll purposes.

When you log in to your workday via your computer, what about the time it takes for your computer to wake up in the morning, is this compensable time? The FLSA says “yes”.

 

Filing an Amended Tax Return by Carolyn Flaherty

So you got a jump on things, filed your return early… and then received an unexpected Form 1099 that should be reported. Maybe your investment advisor found a mistake and mailed you a corrected Form 1099 after you filed your return? You filed as married filing jointly and realized later that this year married filing separately generates a lower tax liability. Perhaps you found a mistake when you did the spring cleaning of your finances? Regardless of how the error occurred you need to know how and when to file an amended tax return.

First, you do not typically need to file an amended return for math errors. The IRS automatically corrects the errors and changes your refund or liability for you. Neither do you need to file an amended return if you neglected to attach required forms. The IRS will contact you to request forms if they need them. However, you should consider an amendment if filing status, income, deductions or credits require adjustment.

Amendments generally must be filed by the later of three years from the date you originally filed the tax return or two years from the date the tax was paid. You must prepare a Form 1040X to amend your return. As you compile your amended return, consider the following:

1.       You cannot correct a prior year error on your current year return. You must go back and properly report the item in question in the year that generated the error.

2.       If corrections are necessary for more than one year, you should prepare a Form 1040X for each year and mail them to the IRS separately.

3.       Include support for your changes with Form 1040X. For example the corrected or additional 1099, W2 or other forms should be attached and mailed with the amendment.

4.       Form 1040X cannot be filed electronically.

5.       If you are filing an amended return to claim an additional refund: file after receiving your initial refund. You may utilize the original refund: the IRS will remit the differential after the amendment is processed.

6.       If you are filing an amended return that results in additional tax liability: remit payment with the filing so that penalties and interest can be minimized.

7.       Amended returns will take up to twelve weeks to process.

Mistakes can occur whether you prepare your own return or consult with a CPA to do so. Our blog posted February 19, 2011 “Should I prepare my own tax return,” (direct link: http://www.prrllc.blogspot.com/2011/02/should-i-prepare-my-own-tax-return-by.html), may help you decide how to proceed. As stated in that blog, regardless of whether or not you are confident in your ability to prepare your own returns; we strongly recommend that about every three years you go for a financial “checkup.” If a professional finds missing deductions or mistakes during their review; you will have the ability to amend during the three year period.

In addition, sometimes an IRS Notice will be the catalyst for an amended return. The most important thing to remember upon receiving a notice form the IRS is not to panic. Review our blog published January 19, 2012 “What to do if you receive an IRS Notice,” (direct link: http://www.prrllc.blogspot.com/2012/01/accounting-news-has-been-reporting.html), and consult your tax advisor so they may review your return and properly advise you.

Taxpayer's Burden of Proof by Carolyn Flaherty

Most US citizens understand the concept of criminal law that provides a person is innocent until proven guilty. However, many fail to grasp that the same is not true in tax court. To the contrary, in general, the IRS commissioner’s determinations are presumed to be correct and the taxpayer bears the burden of proving that the positions are erroneous.

The IRS is allowed to reconstruct income using various manners including the commonly used method of bank account analysis. The IRS reconstruction of income is simply required to be reasonable in light of the surrounding facts and circumstances. As established by case law, all bank deposits constitute evidence of income and as such the IRS can simply assert that all deposits made to bank accounts are taxable income. If deposits represent loans, contributions from the owner of a business or transfers between accounts; it is the responsibility of the taxpayer to prove this fact. The Tax Court will not reconcile accounts to match transfers nor attempt to gather evidence to support the source of funds to an account. The substantiation must be efficiently and concisely supported by documentation provided by the taxpayer.

Furthermore, Tax Court Rule 142(a) states that deductions are a matter of “legislative grace” and the taxpayer therefore must prove that they are eligible for the deduction and also substantiate the deduction claimed with appropriate receipts and documentation. If the taxpayer is unable or unwilling to prove eligibility or substantiate the deduction, it will be denied.

Business income and expenses reported on Schedule C are increasingly scrutinized by the IRS. Ordinary and necessary expenses incurred in a trade or business are normally deductible. However, taxpayers should note that banks statements or tables of expenses generated from bank statements are not considered sufficient evidence of eligibility for deduction. The court asserts that the tables do nothing more than summarize purchases and therefore do not prove that they were ordinary and necessary business costs as opposed to personal or other non-deductible business expenditures.  In addition, a memo notation in a check is not necessarily enough to substantiate a payment as a legitimate business expense if it could also be presumed a personal expense.

The IRS may impose a 20% accuracy-related penalty when there is a substantial understatement of tax. Substantial understatement is considered to exist when it exceeds 10% of the tax required to be shown on the return (unless the understatement is less than $5,000). The penalty will not be imposed on any portion of the understatement which resulted due to reasonable cause and in good faith. To establish reasonable cause and good faith, the most important factor is the extent of effort the taxpayer has taken to arrive at the correct tax liability.

Therefore, careful record keeping and documentation are imperative. Moreover, business and personal expenditures should be maintained independently through separate bank accounts and credit cards. For more information on how to document and defend your tax position, contact a tax advisor.