If You Want to Change Your Tax, Change Your Facts

One of the most powerful ways to make the tax rules work for you is to change your facts. This concept applies in most developed countries because the tax law is written to favor specific facts. 

Do you know someone who is always sharing the write-off of their most recent meal (trip, vehicle, cell phone, gadget, etc.)? Do you wonder if what they are doing is cheating or legal? 

With the right set of facts, any of those items can be legal tax deductions. 

That's why when I meet with a new client, I want to know their facts first. Then, I can determine how to change their facts to reduce their tax.

What are these facts?

The facts I'm referring to here are usually surrounding where your money comes from and where it goes.

• Do you own a business?
• Do you own investment real estate?
• Are you an employee?
• Are you self-employed?
• How much time do you spend in your business?
• How much time do you spend in your investing?
• What is your role in your business?
• What is your role in your investing?
• What investments do you have? 
• What expenses do you pay personally? 
• What expenses are paid by your business or investing activity? 

What is deductible for one person may not be deductible for another person. This is because one person's facts can support a particular deduction whereas another person's may not. 

If you don't like your tax, change your facts.

A few years ago, a client asked me if he could deduct his travel to a particular state. He and his family enjoyed spending time and traveling there frequently. At that time, he didn't have a business reason to travel to that state and his business was not set up to conduct business in that particular area. 

I went over the specific rules with my client that covered what he needed to do in order to meet the requirements to deduct the travel in his business. I also shared with him how he could deduct the travel expenses for his spouse and children. 

A few months later, my client tells me about a very profitable deal he now has in the state and he provided me with all of the documentation we discussed to support his deductions. 

My client jumped in and changed his facts. It led to increasing his deductions, reducing his taxes and making more money! In order to meet the rules, he had to conduct legitimate business in the state. He did and he was very successful at it.

How can you change your facts?

Any time you have cash come in or go out, there's an opportunity to change your facts. 

Should you receive the income personally or should your business receive the income? 

Are your investments helping your tax situation or should you explore new investment strategies?

Are your expenses personal or do they meet the rules specific to your situation that make them deductible?

Are you willing to change your facts?

If you have any questions about changing your fact, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

IRS Goes Where The Money Is

The outlaw Willie Sutton stole an estimated $2 million over a 40-year career robbing banks -- and scored the ultimate "success" in his business, living long enough to die of natural causes. Sutton always carried a pistol or Tommy gun with him on jobs, declaring "you can't rob a bank on charm and personality." But the gun was neverloaded, because, as he said, someone might have gotten hurt! And he became legendary, ironically, for something he never actually said. According to the story, Sutton was asked why he robbed banks -- and replied "because that's where the money is." But in his 1976 autobiography, Where the Money Was: The Memoirs of a Bank Robber, he confessed that credit for the line belongs to "some enterprising reporter who apparently felt a need to fill out his copy."

What does a depression-era bank robber have to do with taxes? Well, the IRS estimates that outlaw taxpayers cost the Treasury $385 billion per year in uncollected taxes -- roughly 15% of the amount they believe is due under current law. So they work hard to close that gap. In FY 2011, the IRS employed over 22,000 revenue officers, revenue agents, and special agents. They conducted 391,621 "field" audits and 1,173,069 less-intensive "correspondence" audits. They filed levies on 3.7 million taxpayers and filed over a million liens. But they can't turn over every rock. So how do they case their targets?

Earlier this month, the IRS released their FY 2011Enforcement and Service Results revealing how likely you are to be audited. And even Willie Sutton would have appreciated the IRS's "M.O.":

• If you make less than $200,000, your overall audit risk is only about one in a hundred. (Of course, that average encompasses a range of possibilities. If you run a sole proprietorship in a cash-heavy business like takeout pizza, your risk may be far higher.)
• If you make over $200,000, your overall audit risk rises to about one in twenty-five. Obviously, the IRS sees more opportunity in chasing higher income earners.
• If you pull down over $1 million, your audit risk rises again to one in eight. Welcome to the 1%!

The IRS likes targeting entertainers, athletes, and other celebrities, too. Sure, it sets a high-profile example for the rest of us. But it's also (spoiler alert) where the money is. Take Hollywood trainwreck Lindsay Lohan, for example. Google her name, and you'll usually find it followed by "failed another breathalyzer test" or "missed her court-appointed community service." But last week, Lohan made a different kind of headline. That's right, the IRS filed a lien against her home seeking $93,701.57 in upaid taxes from 2009.

Where does that all leave us as we move into this year's tax season? Our job is to help you pay the minimum tax allowed by law. But we know the IRS is out to challenge us. So we don't cut corners. We give you good, solidplanning. That way, even if you do lose the "audit lottery," you'll feel safe knowing your savings are court-tested and IRS-approved.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Valuing Rental Property

When you're buying a house the appraiser may use several methods, but the selling price of comparables in the area is usually the one that determines the value. That's not true for investment properties such as apartment buildings, office buildings, etc. For these properties the cash flow from the property is what generally determines the value. While location and certain other factors go far in determining the cash flow, management can be a critical factor. A good manager can buy a property cheaply and turn it into a cash cow by getting the building fully leased, increasing rents, cutting costs, etc.

IRS Payment Arrangements - Installment Agreement

The Internal Revenue Service (“IRS”) is authorized to allow the full payment of a taxpayers unpaid tax debt in small and manageable monthly payment amounts.  This revolving credit arrangement is called an “installment agreement.”

 The taxpayer must satisfy the following conditions before the IRS agrees to an installment agreement:

• Taxpayer filed all tax returns;
• Taxpayer filed all employment tax returns;
• Taxpayer paid all payroll taxes for the current tax quarter;
• Taxpayer filed a financial statement (Form 433) if the tax due exceeds $25,000; and
• Taxpayer (self employed) made estimated tax payments for the current tax year.

A one-time user fee is charged by the IRS to process an installment agreement.  Another cost associated with an installment agreement is a user fee.  The fee is currently $52 for direct debit agreements and $105 for non-direct debit agreements.

Eligible low-income taxpayers (based on the Department of Health and Human Services poverty guidelines) will be charged a $43 fee.  If taxpayers fail to meet the terms of the agreement during the life of the agreement, the IRS will charge an additional $45 fee to reinstate the agreement.  

If you arrange to pay your taxes through an installment agreement, you can pay in various ways: 

• Personal or business checks, money orders, or certified funds (all made payable to the U.S. Treasury);
• Payroll deductions your employer takes from your salary and regularly sends to IRS; 
• Electronic transfers from your bank account or other similar means; or
• Direct debit from your bank account.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Are you in business? Can you deduct business expenses?

One answer is once you start generating revenue. In Michael S. Oros (T.C. Memo. 2012-4) the taxpayer traveled to South America, Asia, Africa, and Australia with the intention of writing a book. He took some 4,500 photographs and maintained a contemporaneous journal in which he wrote about his different experiences. But some four years later he had not published or completed a book about his trip. On his 2006 tax return he deducted travel, meal, and telephone expenses for a total loss of $19,140. The Court noted that to be engaged in a trade or business a taxpayer must me regularly and actively involved in the activity. The Court said that while some of the facts in the record suggested the taxpayer was engaged in a trade or business (business plan, journal, etc.), it went on to say the taxpayer failed to present any evidence of continuous or repeated activity as an author, and he was a full-time employee. The Court denied a deduction for the claimed expenses.

In Javier L. Gaitan et al. (T.C. Memo. 2012-3) the taxpayer had a business exporting clothing. The IRS disallowed a subtraction for cost of goods sold amounting to $134,575. The taxpayer attempted to prove the amount by (1) receipts and (2) an American Express card, claiming such evidence substantiated $70,275 of the amount disallowed. The Court found four problems with the receipts:

 They did not indicated which purchases were for export and which were for the taxpayers' personal use.

• Many of the receipts were illegible.
• Many of the receipts did not clearly identify the purchaser.
• Some of the receipts show the purchases were made for another business the taxpayers' owned.

The Court noted that the production of the American Express credit card statements was also flawed. The Court sided with the IRS in disallowing the cost of goods sold deduction.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

IRA Required Minimum Distributions

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Business Expenses - Substantiation Requirements

In order to claim any deduction, a taxpayer must be able to prove, if the return is audited, that the expenses were in fact paid or incurred. Small expenses and those which are clearly related to the business may be substantiated by the taxpayer's statement or by keeping receipts, sales slips, invoices, canceled checks, or other evidence of payments.

 The following expenses, which are deemed by the IRS as particularly susceptible to abuse, must generally be substantiated by adequate records or sufficient evidence corroborating the taxpayer's own statement: expenses with respect to travel away from home, including meals and lodging, entertainment expenses, business gifts, and expenses in connection with the use of “listed property”.

 The expenses must be substantiated as to the amount, time and place, and business purpose. For entertainment and gift expenses, the business relationship of the person being entertained or receiving the gift must also be substantiated (Temp. Reg. §1.274-5T(a)-(c)). See “Auto Expenses Allowed when Loss of Mileage Log Wasn't the Taxpayers' Fault “

 If you have employees, and you reimburse your employees for their business related expenses under an accountable reimbursement plan, you must require your employees to satisfy the foregoing substantiation requirements in order to be treated as an accountable plan.

If you have any questions about the substantiation requirements or what is an accountable reimbursement plan, please contact us.

Will Bank of America Need To Sell Branches?

Headline from the Chicago Tribune Beaking Business News;  "Bank of America told Fed it could sell branches in emergency: Source".

You can read the story here.

If you bank with Bank of America, ensure your accounts are below the FDIC insurance limits of $250,000.

Credit Card Reporting for Tax Purposes Debuts This Month

Yep, there’s a new form from the IRS out this year and one might be landing in your mailbox soon. The federal form 1099-K, Merchant Card and Third Party Network Payments, will debut early this year: forms 1099-K are due to merchants by January 31, 2012. Electronically filed 1099-Ks are due to the IRS April 2, 2012 (normally March 31), while paper 1099-Ks are due February 28, 2012.

So what is the new form 1099-K? It looks like this (downloads as a pdf and yep, no longer in draft form!).

And here’s how it will work: certain payments for goods and services paid by credit card or third party merchants will be reported to the IRS via the form 1099-K. A reportable payment transaction is a transaction in which a payment card (such as a credit card or gift card) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. It does not include ATM withdrawals, cash advances against a credit card, a check issued in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the card.

In plain talk, this means that taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider. That would include professionals like lawyers and architects who accept online or credit card payments for services, freelancers compensated via PayPal and etsy sellers, affiliates, eBay merchants and other small businesses who accept credit cards, debit card or PayPal as payment for their wares.

But not every dollar will count. Reporting is only required when gross payments to an individual payee exceed $20,000 for the year and when there are more than 200 transactions with the participating payee. So the occasional sale of a crocheted toilet paper roll cover over the internet? Not likely to merit the issuance of a 1099-K. But a successful online store? That’s another story.

Continue reading at Credit Card Reporting.

Tax Tips for the Newly Self-Employed

With more than 14 million Americans currently unemployed, many have become self-employed. Starting a new business is pretty intense with entrepreneurs having to wear different hats to get the business off the ground. The financial and tax side of owning a business is a common area that most entrepreneurs need help with.

Here are some tips that will help self-employed workers get their business off the ground without running into tax problems down the road.  

Hire a Tax Pro and an Attorney. It’s part of the cost of doing business and is highly recommended by many experts, not just us tax pros and attorneys. Richard Kiyosaki, in his book, “Rich Dad, Poor Dad” stresses the importance of having a team of legal and accounting/tax experts to guide you through the process. Pound for pound, their advice will save you money in the long run. Tax planning, entity selection, financial analysis, and setting up accurate books are integral to your success.

Read more: http://smallbusiness.foxbusiness.com/legal-hr/2011/11/18/tax-tips-for-newly-self-employed/#ixzz1jP7xhIow

Are you newly self-employed?  Contact us so the IRS does not contact you.