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Year-end Tax Essentials for Small Business Owners

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Expert: Edward S. Karl
Year-end Tax Essentials for Small Business Owners

Edward S. Karl

Vice President of Taxation for the American Institute of Certified Public Accountants (AICPA)

Thursday, December 9, 2010 6:00 PM

Edward S. Karl, CPA, is vice president of Taxation for the American Institute of Certified Public Accountants (AICPA). He is responsible for the review, formulation, and submission to Congress, the Treasury Department, and the Internal Revenue Service of technical and policy recommendations for improvement of the federal tax process. Karl serves as a principal liaison for the AICPA with the Internal Revenue Service. He is also responsible for tax ethical issues including management of the AICPA's tax standards, the Statements on Standards for Tax Services. Karl also oversees the Tax Division's delivery of services to members which focuses on helping AICPA members provide the highest quality professional tax services.

Karl was previously employed in the tax department of a large, national CPA firm where he established their tax department. He was a frequent contributor to The Certificate, a publication of the Greater Washington Society of CPAs, of which he was an editor for fifteen years. He has also spoken at numerous tax institutes, state CPA society meetings and IRS programs.

Karl is a member of the AICPA, the American Society of Association Executives, the Maryland Association of CPAs, and the Greater Washington Society of CPAs where he has also served on their Federal Tax Committee and Board of Governors.

As the end of 2010 draws near, business owners can learn more about year-end tax savings to help them prepare for the coming tax filing season. Did you know that there are tax deductions and credits you can use to reduce your taxes?

Chat participants can get valuable information on how to prepare now with useful tax savings tips and mistakes to avoid. Karl will answer questions on how to get the most out of year-end tax planning.

Note: There is not an audio format for the online chat, and no broadcast capability. SBA moderators retain editorial control over the online discussions and choose the most relevant questions for chat participants and hosts. Chat hosts may decline to answer questions.

From the AICPA: We are providing our answers in the context of a web chat without having full knowledge of all the details of the taxpayer's circumstances and an opportunity to conduct in-depth research. The AICPA and its employees cannot assume liability for tax advice being given in this web chat, and before acting on any advice we provide, you should consult a CPA or other competent professional. Also, we are required by the IRS to provide the following notice: Any tax information in this web chat is not intended to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Chat Transcript

From : U.S. Small Business Administration
Location : Washington , D.C.
Question :

 

Reply :
Welcome to SBA’s year-end tax chat! It looks like we have some great questions and our staff is excited about the opportunity to help you. We hope you will find the chat informative. Let’s get started! Ed Karl
From : Zekarias
Location : denver , , colorado
Question :
I am resident in USA and have my own business outside USA which is overseas ,thus , I kindly request you how to handle tax return for 2010 , Please note that i din't have any work report here in USA sofar. Thanks

 

Reply :
If you are a citizen of the USA or a permanent resident (green card holder) or if you have substantial presence here over the last few years and thus qualify as a tax resident, you are subject to taxation on your worldwide income and you accordingly must file a US tax return related to your overseas business. What forms you file depend on how your business is organized and where it is legally registered. If, for example, you have not incorporated or established a limited liability company in any of the United States but you simply travelled to the location where the business is operating and began organizing and operating with no formalities in either country, than you would simply report income and expense items as a sole proprietor on Schedule C of Form 1040. Note that you will likely also have to report your taxable business activities to the other country and you may have to pay tax to both countries, at least initially. To prevent a certain amount of double taxation, you would then be eligible for either a credit for foreign taxes paid to the other country, an exclusion from US taxable income, or exclusion of certain income if a bilateral tax treaty between the two countries covers the type of taxable earnings that you have. There are many factors regarding international taxation to consider and some can be quite complex. If your business is conducted over the internet and you have no established place of business in the other country, than the above discussion could be a bit simpler. If, on the other hand, your business is organized in the other country as the equivalent of a corporation or other separate entity, than the analysis becomes more complicated and you will need to seek professional advice on how to best structure your overseas business.
From : D G Smith
Location : Enid , OK
Question :
I am a sole proprietor. My wife has a job where she earns over the social security limit. My Business is located on land owned by my wife, where I store my inventory and park the company vehicles. Would it be acceptable to pay my wife rent for my use of her land? This would shift my self employment income to my wife to be taxed as rental income.

 

Reply :
What type of property does your wife own? Is it the family house? Is it separate business property that she purchased on your behalf specifically for use by your business? Clearly, if the transaction is truly at “arm’s length” – meaning at fair market prices for rent, legitimate as to purpose meaning that it makes sense that you should be paying rent for what is otherwise “free” business-use property - than yes, your business can legitimately pay your wife rent, deduct it as an expense and your wife must report it as rental income.
From : Todd Smith
Location : Lakewood , WA
Question :
Recently I went to a SBA Small Business Jobs Act on 2010 meeting. The bill provide zero capital gains taxes for those who invest in small businesses. What is a small business defined by this Act? It expires 1.01.2011 how does one take advantage of it.

 

Reply :
Thanks for the question. The 100% capital gains exclusion is for equity investors in a small business if the business is less than $100 million in assets. You would have to find a business of that size willing to have an outside equity investor. I am not aware of any listing of these companies but you may want to start with local banks.
From : Blake
Location : Burke , VA
Question :
What are the 2-3 most important things a small business owner should before end of tax year?

 

Reply :
Great question. The most important advice that I can offer is that you contact your CPA as soon as possible. Most year-end tax planning must occur prior to December 31st. Do not wait too late in the year to understand how to minimize your tax consequences. Another important thing to consider is whether you need to pay any estimated tax payments. Many small business owners are unaware that they may be subject to underpayment penalties if they do not pay a sufficient amount of estimated tax payments. It surprises many taxpayers because most taxpayers are used to having federal income taxes withheld from their paychecks.
From : Martrice Caldwell
Location : Chicago , Illinois
Question :
There are three more weeks in the year, woudl you recommend a IRA contribution to potentially reduce tax liability?

 

Reply :
IRAs are available to employees and self-employed persons who are not active participants in an employer plan. The maximum IRA deduction is $5000 for 2010.
From : Todd Smith
Location : Lakewood , WA
Question :
Recently I went to a SBA Small Business Jobs Act on 2010 meeting. The bill provide zero capital gains taxes for those who invest in small businesses. What is a small business defined by this Act? It expires 1.01.2011 how does one take advantage of it.

 

Reply :
Sect. 2011 of the SBJA of 2010 contains a Temporary exclusion of 100% of gain on certain small business stock. Expanding on the provisions of Internal Revenue Code Section 1202 and the American Recovery and Reinvestment Act, the Small Business Jobs Act provides an additional incentive for investment in qualified small businesses. Under this Act, investors in qualified small business stock can exclude 100% of the capital gain upon sale of the stock. The exclusion under this provision is not an item of tax preference for purposes of the alternative minimum tax. In order to claim the capital gain exclusion, the qualified small business stock must be: Acquired after September 27, 2010, and before Jan. 1, 2011, and Held for at least five years before the stock is sold. For gain on its stock to qualify for the exclusion, a corporation must be a C corporation other than a 1.Disc 2.A regulated investment company 3.A real estate investment trust; 4.A real estate mortgage investment conduit; 5.A financial asset securitization investment trust; 6.A cooperative; or 7.A corporation electing the Puerto Rico and possessions tax credit. Stock issued to a taxpayer cannot qualify for the exclusion if the issuing corporation purchases (directly or indirectly) any of its own stock from the taxpayer or persons related to the taxpayer, with the four-year period beginning two years before the issue date. A 'safe-harbor' de minimis amount can be redeemed without rendering the stock ineligible for the exclusion. The aggregate amount paid for the stock by the issuing corporation in such redemptions cannot exceed $10,000 or more than 2 percent of the stock held by the taxpayer and all related persons. Stock will also not qualify for the exclusion if the issuing corporation engages in a 'significant redemption'. A redemption is significant if the corporation, within a two year period beginning one year before the issuance of the stock, redeems stock with an aggregate value exceeding 5 percent of the aggregate value of all the corporation stock. A de minimis exception applies if either the aggregate amount paid for all stock redeemed during the two year period does not exceed $10,000 or no more than 2 percent of all outstanding stock. For more information on the what qualifies as a small business, see Internal Revenue Code section 1202 for what qualifies. Under current law, the earliest tax year for which this 100% capital gain exclusion can be claimed is 2015. Additional limitations, qualifications and requirements may apply. Capital Gains and Losses has information on reporting capital gains. For more information, see http://www.irs.gov/businesses/small/article/0,,id=230307,00.html and http://www.sba.gov/jobsact/ and http://tax.cchgroup.com/legislation/Small-Business-Jobs-Act-7-23-10.pdf
From : Bruce Larsen
Location : Leominster , MA
Question :
My partnership just purchased real estate which will house our own business (separate corp) and lease to another business. There were a lot of closing costs (appraisal, 21E, legal, points etc) . Are these fees deductable to the partnership next year, and will the property be eligible for depreciation?

 

Reply :
Thanks for your question; Most expenses associated with the purchase of the property should be deductible as a business expense but some need to be amortized over the life of the asset or loan. You need to be able to research each deduction separately or you can look at the IRS publication on this issue. The building will be depreciable but you will have to allocate the depreciation between outside renters and your own use.
From : Miriam
Location : Dover , Delaware
Question :
What do you do if you have an LLC treated as partnership and one of the partners was a manager and one was doing the actual work and you have been paying them as an employee submitting Federal Deposits and 941 instead of as owner draws. How do you go about correcting this?

 

Reply :
As you know partners can not be treated as employees and if they were, there may be consequences in terms of whether enough tax was withheld to wipe out estimated filing underpayments, whether benefit plans, unemployment tax or worker's compensation rules were violated, and penalties could be imposed for these and other violations. The main thing is to determine what rules were violated if any (other than the simple reporting differential) and then start doing it correctly in the future. Corrections can and should be made for open years by filing corrected Forms W-2 and W-3 showing zeros for the partners and then by amending the Schedules K-1 (and if necessary the Form 1065) to reflect the guaranteed payments for services (or other partner draws).
From : Jorge Osorio
Location : Franklin Square NY , NY
Question :
Mr. Karl, I would like to know if we can deduct the cost of taking the CPA exam and/ CPA review corse for my wife and myself, We are the owner and director of a small bookkeeing corporation

 

Reply :
In general, the IRS could make an argument that you are "qualifying for a new trade or business." In that case, the cost of taking the CPA exam and a review course would not be deductible. It would be hard to argue that owing a small bookkeeping corporation is the same as operating a CPA firm.
From : Miriam
Location : Dover , Delaware
Question :
How do you report your year-end tax returns of an LLC which consist of a husband and wife as owners?

 

Reply :
Good afternoon Miriam - If your LLC is a disregarded entity, you will not have a separate tax return to file. You will report the income, expenses, deductions, etc. on Schedule C (Profit or Loss from Business). This schedule will be filed along with your Form 1040 and due by April 15th (unless you extend).
From : Roy
Location : Dallas , TX
Question :
My wife started a new business (an LLC) in 2011. She is the only LLC membr. We will be reporting the loss on our joint personal tax return. Is the loss fully deductible against other joint income or will it be carried forward to a year in which the business makes a profit? Thank you.

 

Reply :
The question talks about a business formed in 2011. We assume that the question refers to a 2010 business. In general, a single member (owned) LLC is treated as a sole-proprietorship. The business would be reported on Schedule C of Form 1040 and is potentially deductible against other income reported on a joint (Form 1040) return.
From : Miriam
Location : Dover , Delaware
Question :
Can you elect to be treated as an S-Corp for an LLC with 6 members if you're in your 2nd year of business?

 

Reply :
Yes, you can file the election at any time. However to make the switch effective for a particular year, you must make the election no later than the first 2.5 months of the taable year. Therefore, it would be too late to make an S election for a 2010 calendar year partnership.
From : Zekarias
Location : denver , colorado
Question :
I am resident in USA and have my own business outside USA which is overseas ,thus , I kindly request you how to handle tax return for 2010 , Please note that i didn't have any work report here in USA sofar. Thanks

 

Reply :
If you are a citizen of the USA or a permanent resident (green card holder) or if you have substantial presence here over the last few years and thus qualify as a tax resident, you are subject to taxation on your worldwide income and you accordingly must file a US tax return related to your overseas business. What forms you file depend on how your business is organized and where it is legally registered. If, for example, you have not incorporated or established a limited liability company in any of the United States but you simply travelled to the location where the business is operating and began organizing and operating with no formalities in either country, than you would simply report income and expense items as a sole proprietor on Schedule C of Form 1040. Note that you will likely also have to report your taxable business activities to the other country and you may have to pay tax to both countries, at least initially. To prevent a certain amount of double taxation, you would then be eligible for either a credit for foreign taxes paid to the other country, an exclusion from US taxable income, or exclusion of certain income if a bilateral tax treaty between the two countries covers the type of taxable earnings that you have. There are many factors regarding international taxation to consider and some can be quite complex. If your business is conducted over the internet and you have no established place of business in the other country, than the above discussion could be a bit simpler. If, on the other hand, your business is organized in the other country as the equivalent of a corporation or other separate entity, than the analysis becomes more complicated and you will need to seek professional advice on how to best structure your overseas business.
From : aurelija
Location : aurora , IL
Question :
My dad heard on TV that small new business opened in 2010 will be exempt from taxes? is it true?

 

Reply :
I am unaware of any such broad provision. I would recommend that you consult with a CPA about specific tax incentives for new and small businesses.
From : Troy Carrigan
Location : Grand Rapids , MI
Question :
I have heard that even using QuickBooks online I may not meet all of the current regulations. Is this true? How can I be sure that I am in full compliance? Thank you.

 

Reply :
I am unaware of QuickBooks limitations, if any. I would recommend that you contact a CPA to assure that you are in full compliance with state, local and federal requirements.
From : Chase Randall
Location : Atlanta , GA
Question :
What free accounting software do you suggest for start-up or relatively new businesses?

 

Reply :
I am unaware of any free accounting software. However, you can download tax forms, publications and general guidance from the IRS website at irs.gov
From : Joe
Location : Chicago , Illinois
Question :
What are the guidelines for Schedule 176 items on equipment purchase deductions? What's the valume limit and deadline?

 

Reply :
I think you are referring to Section 179 expense deduction on equipment purchases. For the IRS guidelines, see http://www.irs.gov/formspubs/article/0,,id=177054,00.html, and http://www.irs.gov/publications/p3991/ch05.html#d0e1126 as well as IRS Pub. 946 at http://www.irs.gov/pub/irs-pdf/p946.pdf. The limits and rules for 2010 and 2011 are noted below and in the above mentioned IRS resources. SBJA and Section 179 Deduction A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property. The Small Business Jobs Act (SBJA) of 2010 increases the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years. Under SBJA, qualifying businesses can now expense up to $500,000 of section 179 property for tax years beginning in 2010 and 2011. Without SBJA, the expensing limit for section 179 property would have been $250,000 for 2010 and $25,000 for 2011. The $500,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2,000,000. The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011. SBJA also removes cellular telephones and similar telecommunications equipment from the definition of listed property for tax years beginning in 2010. Depreciation limits on business vehicles. The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2010 is increased to $3,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2010 is increased to $3,160. Caution. These limits are reduced if the business use of the vehicle is less than 100%.
From : Bruce Hudson
Location : Lovelock , Nevada
Question :
What tax benefits are available to businesses that perform energy saving upgrades on their place of business?

 

Reply :
Some tax benefits that are available to businesses that perform energy saving upgrades on their place of business include: Tax Credits for Home Builders - Eligible contractors need to fill out IRS Form 8908 to get the tax credit. Tax Credits for Manufacturers - While not directly affecting consumers, manufacturers of energy efficient clothes washers, dishwashers and refrigerators are eligible for tax breaks themselves, which may lead to increased availability and a reduction in prices for these energy-saving appliances: ENERGY STAR qualified dishwashers that meet ENERGY STAR's 2007 specification. ENERGY STAR qualified clothes washers that meet ENERGY STAR's 2007 specifications. Refrigerators that are more efficient than 2001 federal energy conservation standards Tax Deductions for Commercial Buildings - IRS Notice 2006-52 (6/2/2006) provides guidance on deduction for energy efficient commercial buildings Qualified Software for Calculating Energy Savings ENERGY STAR Brochure for Commercial Tax Deductions Commercial Building Tax Deduction Coalition For more info, see http://www.business.gov/manage/green-business/energy-efficiency/get-star... and IRS Notice 2006-27 and IRS Notice 2006-28.
From : JR
Location : Portland , OR
Question :
I started a small sole-proprietership last year, it's a multi-media production company, so far I haven't earned any money, do I have to file a return?

 

Reply :
Generally businesses with even $1 of income must file a return. However, if all you have are start-up, organizational and operational expenses but have not yet either accrued or collected any income, you probably still want to file a return in order to preserve the tax benefit of these amortizable and otherwise deductible expense items. If you don’t report the expenses in the year they are incurred, in most cases, you will be unable to deduct them against future income.
From : Jerry
Location : New Orleans , Louisiana
Question :
Are Insurance proceeds from a rental property wich was damaged by fire, considered taxable. And I sold the property in its damaged condition for less than it cost me to aqcuire and renovate the property, do i have any tax consequences.

 

Reply :
Yes, it is certainly possible to have a gain from a fire if the insurance proceeds you receive are more than your “adjusted basis” in the property. You may need a CPA to assist you in determining your adjusted basis. It addition to the cost for acquiring and renovating the property, you need to reduce your basis for depreciation expenses (allowed or allowable). You will also have tax consequences upon a sale of the property. Again, it will depend on your adjusted basis at the time of sale, which will reflect, among other items, the receipt of the insurance proceeds. Many taxpayers are surprised that they have income upon the sale of rental property because of the “depreciation recapture.” Given you unique tax situation this year, I would recommend that you consult with a CPA
From : Rebecca
Location : Brooklyn , NY
Question :
For a self-employed small business who files as a corporation and has no other employees, is it acceptable that he/she take their salary using a 1099 form at the end of the year instead of a W2?

 

Reply :
No. If your business is organized as a corporation, than services performed by you as an officer of the corporation are treated by statute as that of an employee. A Form W-2 is required along with all the other “trappings” of employee status.
From : Jeff McGowan
Location : South Bend , IN
Question :
the president's recent proposal discussed 100% write-off of assets in 2011. would this be like a 100% bonus depreciation. I guess the difference between 100% bonus and 179 would be that the 100% bonus could only be it item if new, vs. 179 could be on used.

 

Reply :
Based on the information available currently, it appears that the president’s recent proposal would call for an increase in bonus depreciation to 100% but there is no information regarding whether there would be any limitations on its availability. Based on current rules for bonus depreciation and section 179 expensing, you are correct that bonus depreciation is only available for new (original use) property but section 179 expensing is available for both new and used property.
From : Lisa
Location : ,
Question :
Can expenses be accrued on year end financials, for expenses you know will be coming up? For example legal, accounting, insurance etc.

 

Reply :
This is a tax chat. You should consult more fully with your financial accountant for assistance with the financial accounting rules that are applicable to your business to determine which expenses may or may not be accrued and deducted in 2010 on your financial statements. Keep in mind that there are different rules for determining when an expenditure is deductible for tax purposes (as opposed to the rules governing when an expenditure is deductible for financial accounting purposes). Thus, the timing of the tax deduction will not always match up with the timing for financial accounting purposes for the same expenditure. You may have expenditures that are accrued on the financials in 2010 that are not deductible in 2010 for federal income tax purposes. Conversely, you may have expenditures that are deductible in 2010 for federal income tax purposes, but for which you may not be able to accrue in your 2010 financial statements. For some general information regarding deductible business expenses and the timing as to when they are deductible for tax purposes, see IRS Publication 535 – Business Expenses. Note however, that the IRS website does not yet have the 2010 version available quite yet, so the hyperlink is to the 2009 version.
From : Maureen Miller
Location : Brookfield , WI
Question :
What happened with Capital Gains Tax? We have RE built up and are wondering if we should dividend it out while rates ar elower.

 

Reply :
There is currently no deal on Capitol Hill regarding the expiring tax provisions. The 0/10/15% brackets may expire on 12/31/10 if an agreement is not reached and dividends would return to full ordinary rates. You may wait until a few days prior to 12/31 to wait and see if a deal will be reached, but you should prepare to make distributions in the event nothing is announced IF making such distributions makes business sense aside from the tax consequences. Clearly there is potential for a large rate differential between dividends received in 2010 versus 2011 so it should be one consideration when deciding whether to distribute earnings. As an aside, I’m assuming we are talking about a C corporation here and not an S corporation, which rarely makes actual dividend distributions unless it has a C corporation history and has accumulated earnings and profits.
From : Paula
Location : Houston , TX
Question :
Can I set up quarterly tax payments for my small business? If so, what is a good resource with steps on how to do it?

 

Reply :
Yes, quarterly estimated tax payments for your small business should be paid. A good resource with steps on how to do it at the IRS website at http://www.irs.gov/businesses/small/article/0,,id=110413,00.html and IRS Publication 505, Tax Withholding and Estimated Tax. For example, it says: Sole proprietors, partners, and S corporation shareholders - You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax. Corporations - You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Use Form 1120-W, Estimated Tax for Corporations (PDF), to figure the estimated tax. You must deposit the payments. For additional information, refer to Publication 542, Corporations.
From : Paul
Location : Arlington , VA
Question :
I started researching a new business idea this year and had some associated expenses, such as purchasing a web domain name as well as travel to do initial feasibility research and meet with officials in another state. I'm thinking of forming as an LLC next year and am wondering what I need to do to claim these expenses as a sole proprietor this year. Can I even do that?

 

Reply :
No, you can’t deduct expenses incurred before the trade or business becomes active – in other words, before you start selling. Such “start-up” expenses must be capitalized and amortized over 180 months starting with the month in which the business becomes active. There is an alternative to the amortization – an election to expense a limited amount of start-up but also in the year in which the business becomes active.
From : Jamie
Location : ,
Question :
Will there be any tax credits for businesses when they purchase new energy/eco-friendly heating systems? I know that there are tax-credits for homeowners but do these tax credits apply to small businesses?

 

Reply :
Good question. As you mentioned, the energy efficient property credit applies to residential property. I am unaware of a similar provision for businesses.
From : Mary
Location : Littleton , CO
Question :
Is there a way to contest my worker's comp increase? We are a small land survey business (3-6 people depending on season). Also, what tax software would you recommend? We use Quickbooks for our accounting.

 

Reply :
Hi Mary - I am unfamiliar with the steps necessary to contest a worker's compensation increase. As for software, a lot of small businesses tend to use QuickBooks. I think it is the most common software used for accounting. With regards to tax software, there are a lot of quality vendors. I think it is more important to make sure you consult with a CPA so that you can receive income tax and cash flow planning advice.
From : Ruchi
Location : Irvine , CA
Question :
I run an S corp and want to find how to deduct meal expenses when you take clients out for lunch

 

Reply :
Thanks for your question; If you own an S corporation and you have a business need to entertain a client the rules are exactly the same in that you need to maintain documentation of the expense and keep a record of the business purpose. If there is any personal benefit that could be taxable to you as the business owner. The IRS publication on Business entertainment expenses provides all the rules you need to be aware of.
From : Cornelius
Location : ,
Question :
I don't have a specific question. I'm just hear to gather whatever information I can.

 

Reply :
Thanks for joining Cornelius. Hope you find this informative.
From : Jamie
Location : ,
Question :
This is starting at 11:00 a/m MST. Where do I go from here. It appears that there is no on-line video or live speakers so I have to conference call is that correct?

 

Reply :
You are correct. There is no video or audio.
From : Baskar Subbarao
Location : Chesterfield , MO
Question :
Currently we use CASH basis Accounting. Is there a preferred time of the year to make a change to accrual basis. Is there any tax requirements to use Accrual basis for consulting companies. We are a small consulting service company (4 employees).

 

Reply :
Once you have adopted an accounting method, such as the cash basis, you need IRS permission to change methods. This is done with the filing of a special form (Form 3115) and meeting numerous requirements and conditions. In some situations, such method change can be done "automatically". You still have to file the request, but you are deemed to automatically have permission. Other method changes require IRS prior approval - meaning you file the request and wait to hear back whether the IRS will grant permission for the change ro not. The due date for the application for the method change varies based on those and other facts. Consult your tax advisor about your specific facts to determine what guidance you can file under, and what the due date would be. A good place to look for some general information on this before talking with your advisor is IRS Publication 538 at http://www.irs.gov/pub/irs-pdf/p538.pdf.
From : Janet Ceddia
Location : Hudson , MA
Question :
What other tax credits are available for businesses that hire new employees?

 

Reply :
Hi Janet - Have you heard about the Hiring Incentives to Restore Employment (HIRE) Act? Check out a summary of the law on our website at: http://www.aicpa.org/InterestAreas/Tax/Resources/Individual/Pages/HIREAc...
From : Lori
Location : , NV
Question :
No audio?? So how do we listen to the live Chat meeting?????

 

Reply :
There is no audio format for today's online web Tax Chat.
From : Jim
Location : Philadelphia ,
Question :
Are you familiar with a tax credit offered to employers who hire Veterans? How is it applied to a business?

 

Reply :
As part of the Work Opportunity Credit, an employer that hires a "qualified veteran" is entitled to a $12,000 credit per hiree. But the veteran must be be entitled to compensation for a service-related disability AND either hired within one year of discharge from active duty OR been unemployed for at least 6 months prior to hire. Please see Ineternal Revenue Code section 51 for more information.
From : Baskar Subbarao
Location : Chesterfield , MO
Question :
HIRE ACT. Other than adjustements in Payroll Form 941, is there any Tax Forms relevant to HIRE ACT

 

Reply :
Hi Baskar, In addition to changes on Form 941, there is a new form, Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit. The new law requires that employers get a statement from each eligible new hire, certifying under penalties of perjury, that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for anyone during the 60-day period. You can use Form W-11 to meet this requirement. In addition to payroll savings, businesses may claim a new hire retention credit of up to $1,000 per worker. This will be an issue on 2011 income tax returns.
From : Kevin
Location : Salisbury , MD
Question :
My wife and I have an LLC partnership with S-Corp tax status. From a tax perspective, is it better to take a draw from the company or to leave it in the company - or is there no difference because it's all reported as income anyway?

 

Reply :
Sounds like you have an LLC that elected corporation status and then elected S corporation tax treatment. You will be taxed on the businesses’ net income regardless of the amount of distributions. However, distributions have varying tax impacts. For example, if you have no “earnings and profits,” the amount distributed reduces your “basis” and could possibly create a capital gain. Other distributions could be treated as dividends. I’d also recommend that you consider taking a “salary” from the business. I would suggest you consult with a tax professional, such as a CPA, to analyze your specific facts and circumstances.
From : Tom
Location : , CA
Question :
How will likely changes to tax law affect small business next year?

 

Reply :
Thanks for the question. Congress is still continuing negotiations on a final tax package that will probably include incentives for small business owners in 2011. The details will be made public after Congress acts so you will need to keep up with the news.
From : Adriana
Location : El Paso , Texas
Question :
What prevented measurements can small business begin to take in case that they need to comply with the new tax rules by January?

 

Reply :
Hi Adriana - First, I would recommend that you stay tuned. Although the President announced his proposed compromise, we do not have any legislation yet. The best way to prepare for changes in tax rules is to keep good records on all of your income and expenses.
From : Sue
Location : Detroit , MI
Question :
Why would an S corp owe taxes in a year when our profit and loss statement show a loss?

 

Reply :
Typically an S-corp. does not owe taxes directly, except for some special taxes. Rather, the shareholders of the S-corp. generally pay taxes on any taxable income from the business. There can be taxes owe by the shareholders, even though the financial statements show a loss. You don't say what basis is used for the financial statements, but unless they are "tax basis" financial statements, there will be different rules that govern when to recognize revenue or deduct expenses under financial accounting rules versus the tax laws.
From : Sonja Santana
Location : Cutler Bay , Florida
Question :
My partner and I opened our business on March 31, 2009. We are an LLC and would like to know how taxes on a LLC are calculated. Do we pay taxes on the income from the company through the company or do we pay them through our own personal taxes?

 

Reply :
An LLC with two or more owners is taxed as a partnership by default and accordingly a Form 1065 would have to be filed to report the revenue, expenses, capital and many other items of the partnership. A Schedule K-1 would need to be prepared for you and your partner to show the allocations of each item made to both of you. A partnership (and an LLC treated as a partnership) is a flow-through entity where the taxes are paid generally by the partners, but which is treated as a separate entity for federal and most state filing purposes. Your state may also have additional requirements and may require the payment of an LLC organizational and/or annual filing or gross receipts fee. While the default federal treatment is that you are a partnership, you may elect on Form 8832 to be treated as a corporation in which case you would have to file a Form 1120 (C corporation) or a Form 1120S (S corporation). S corps are also flow-through entities that primarily pay taxes at teh personal level but must still file an entity-level return.
From : Inquisitive Entrepenuer
Location : , MD
Question :
If a business owner relocated from another state in 2009 and was unable to register their business in the new state of residence for 2010, would they pay taxes in their former or current state...even though unregistered during 2010?

 

Reply :
Thanks for your question. If you move to a new state during the year you are typically taxed in each state based on the number of days you did business in each state. It is likely that if you moved your business in the middle of the year that you have to file a part year return in each state. You will need to look at the form instructions for each states return to get the best information.
From : Todd Smith
Location : Lakewood , WA
Question :
As an LLC the IRS default is partnership, what are the criterias in determining to choose to be treated as an S corporation? When is it better to remain a partnership?

 

Reply :
This is a difficult question to answer on a web chat as there are many reasons a business would choose one form over the other. Remember that the LLC default to partnership is when there are two or more owners. A single member LLC is treated as a sole proprietor and files on Schedule C of Form 1040. A single owner can be an S corp. A single or multiple owner LLC can also be treated as a corporation (C or S) by simply electing such treatment on Form 8832. This way, you would still be an LLC for state law purposes but an S corporation for federal tax (and possibly state tax) purposes. A partnership allows more flexibility, for example, in terms of special allocations of items of income and deductions to partners, however, it is MUCH for complex to administer and for that reason, unless you have a compelling reason to offer allocation incentives to partners, an S corp will often be easier (and cheaper) to prepare tax returns.
From : Kevin
Location : Salisbury , MD
Question :
I have heard about next year's requirements to track all expenses and produce the equivalent of 1099's for all vendors for all purchases. What are the tracking requirements that we will be held to (so that we can implement those procedural changes now)? For example, we have a corporate credit card and enter into our accounting system the combined amounts (Office Expensees or M&E) as a single line item for the bill. It seems we now need to track every vendor individually?

 

Reply :
The new Form 1099 measure is effective for expenses incurred in 2012 -- not for expenses incurred in 2011. The IRS is currently drafting regulations to implement the new law.
From : Lori
Location : , NV
Question :
I converted my personal residence to rental property in Dec 2008. It has lost substantial value in 2009 with the real estate crash. If I sell the propert next year at $175K and my basis is $250K (after depreciation). Would I be able to offset my ordinary income with the $75K loss.

 

Reply :
Hi Lori - This is a difficult issue to address in four minutes. However, the IRS has a great publication regarding rental properties. I recommend that you review Publication 527 on the IRS' website - IRS.gov.
From : Adriana
Location : El Paso , Texas
Question :
Habe there been any amendments to the propose legislation and can we expect it to pass any time soon?

 

Reply :
The specifics of the proposed legislation currently being discussed in the tax press are still being drafted. Unfortunately, what will be passed and when is an unknown.
From : Sondra Rowland
Location : Fort Mill , SC
Question :
My client leased his auto for a few years and then purchased it outright in 2010. How is that handled in tax reporting? Thanks!

 

Reply :
Thanks for your question; If your client leased the auto he probably was treating the lease payments as a business expense except to the extent that there was any personal use. If the auto is then purchased and the lease payments cease from that point you would be able to depreciate the vehicle for business purposes. However, to begin depreciation you would need an appraisal of the vehicle on the date it is purchased to be able to determine the depreciation base. From there it would be normal depreciation deduction. However, to the extent there is any personal use the depreciation deduction is limited and the owner is required to treat that value as income.
From : Sandra
Location : , nj
Question :
how do you pick which fiscal year is good for your business

 

Reply :
Each taxpayer (whether an individual or an entity) must figure taxable income on an annual accounting period. Many taxpayers use a calendar year. However, there can be situations where a taxpayer is permitted to adopt a fiscal year (i.e., a year that ends on the last day of any month except December). There also may be situations where a 52 – 53 week tax year may be permissible. Note that some types of entities have required tax years, and cannot select their own fiscal year (i.e., generally partnerships, S-corporations and personal service corporations). For those that can select a fiscal year of their own choosing, some of the deciding factors may include: when the entity anticipates its slowest time of the year will typically be, when the entity expects to have a low inventory value (which is often shortly after its highest sales months), the owners desires, etc. An entity adopts a tax year by filing its first income tax return using that tax year, even if the entity was not in existence for the entire year.
From : Marie Sampson
Location : Upper Darby , PA
Question :
I participated in the "Way to Work" Program with the Dept of Welfare and hired 5 employees over the summer and did not deduct the federal taxes, medicare and etc......What can I do?

 

Reply :
If you already had an existing business with employees, I’m sure you are aware of the need to file Form 941 and related returns to report and pay employment taxes. Your question mentions simply that you failed to deduct the payroll taxes and if that is the only issue (meaning that you reported and deposited the appropriate funds but simply failed to deduct these amounts on your schedule C or corporate return (as the case may be), than your main focus should be on amending the appropriate returns to reflect payment of these taxes. If, on the other hand, you failed to withhold, deposit and/or report the required employment taxes for your summer 2010 employees, than you have a potentially greater problem with a likely accumulation of significant penalties and interest for failure to file and deposit. In that case, you should immediately calculate the correct amount of taxes, file the returns, make the deposits and request abatement of penalties if you can argue reasonable cause (first time employer, etc). Hiring a competent CPA in this case would be advisable.
From : Nayo
Location : Baltimore , MD
Question :
Can you make an IRA contribution in 2011 to reduce 2010 tax liability?

 

Reply :
Yes, you can make an IRA contribution in 2011 to reduce your 2010 taxes. However, you must generally make your IRA contribution by or prior to April 15.
From : Baskar Subbarao
Location : Chesterfield , MO
Question :
Sale of Stocks: Stocks we own have lost 20% of the value. They have been held for over 18 months. Cash from sale of Stock may be required in Feb 2011. Is there an advantage to selling the stock in Dec vs selling in Feb 2011.

 

Reply :
If you sell the stock in December, the capital loss is deductible against 2010 taxes. Conversely, if you sell in February 2011 (and assuming the loss remains 20 percent of the value), the capital loss is deductible against 2011 taxes. In either case, the maximum loss is $3,000 ($1,500 for married individuals filing separate returns).
From : Hayley
Location : Benton Harbor , MI
Question :
Regarding tax deductible contributions is there a difference between donating (to a non profit) cash or donating items with a cash value? Is one better than the other?

 

Reply :
Thanks for the question; The difference is not in the tax benefit but in what documentation you have to provide the IRS to prove the value of the contribution. For example, if you donate cash the cancelled check and a statement from the charity are adequate. However, if you are going to donate property with a value greater than $250 you must be able to demonstrate that the Fair Market Value of the donated property is what you stated. This is usually done by obtaining an independent appraisal of the property. In addition you will need to obtain a letter from the charitable organization acknowledging the gift and the amount of the gift. There are additional rules depending on the type of property, like stocks or real estate.
From : Michael
Location : Panama City Beach , Florida
Question :
I just started an LLC but havent yet started doing business but I have spent about 2200 on the business. I am using a business credit building company so I have the fees for that, also the state filing fees, and Im using my home for my office for the moment. My question is what I would be able to write off for this year?

 

Reply :
Start-up expentitures fall under Internal Revenue Code section 195 and organization expenditures under section 248. The latter would include the filing fees and the like. The former includes expenses in connection with investigating the creation or acquisition of a business or an activity engaged in for profit prior to beginning of the business. I'm not sure what a business credit building company is, but if the fees fall into these categories, than you are allowed a maximum $10,000 deduction in 2010 ($5000 in all other years)IF the active trade or business actually began in that year for the expenses that qualify as start-up and a similar amount for organizational expenses. If you've spent more than this amount, than there are limits on these deductions after reaching $60,000 in 2010 ($50,000 in all other years).
From : Nimish Patel
Location : New york , New York
Question :
Hello Sir, I am a small business owner. what are my Tax liablities if my business fails due to recession?

 

Reply :
Hi Nimish, I do not know what type of business entity that you have, but generally, no income means no taxes are due. The question is whether you can get any tax breaks or offset other income. I would recommend that you contact a CPA for further advice.
From : Jeannine
Location : Bigfork , MT
Question :
What is a common mistake you see small business owners make? What advice do you offer for a sole proprietorship with no employees for tax savings?

 

Reply :
The most common mistake is poor recordkeeping. Also, a small business needs to be mindful to treat tax withholding from employees as trust fund taxes, and not the business owners money. Proper withholding and remittance of payroll taxes is extremely important. One important tax incentive available to small businesses is the direct expensing of property (under Internal Revenue Code 179).
From : U.S. Small Business Administration
Location : Washington , D.C.
Question :

 

Reply :
Wow – you had a lot of terrific questions! Thanks so much for taking the time share them with us. I hope our feedback was useful to you. I wish you a happy holiday season, a healthy new year, and a very successful year ahead for your business. Ed Karl