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Were You One of the Unlucky Ones?

Author: Keith Huggett

It was a tough year for the IRS in 2012. They underwent budget cuts, computer problems and they even took on the court system. And yet they maintained their service and enforcement priorities despite these challenges.

In the enforcement area, audits of individuals topped 1 million for the sixth year in a row, with a 1.03% coverage rate out of all tax returns filed.  Audits in the upper income ranges remained substantially higher than other categories. 

The IRS increased examinations across all categories of business returns by more than 12% in FY 2012, with the largest increases coming in audits of flow-through entities, which include partnerships and Subchapter S corporations. Rates exceeded 20% for the largest corporations.

The IRS collected more than $50 billion in enforcement revenue in FY 2012, the third year in a row topping that figure.  This was lower than 2011 and 2010, but is still quite a bit in revenue. The Fiscal Year 2012 Enforcement and Service Results tables detail the audit, collection and taxpayer service numbers.

With statistics such as these, it stands to reason that either your business or your personal return may be selected for audit this year. You also should consider, if you haven't already, investing in an audit defense plan, so that you have someone to go to bat for you with the IRS, should you get audited.  If an audit does occur, remember that it does not reflect upon you in any way. It does not mean that there is anything wrong with your return. It can be as simple as the IRS focusing on something, like a credit or deduction, which, though you honestly qualify for it, when they put in their data for audit selection, flagging your file. If you receive a notice from the IRS, and you have some questions, please feel free to contact us, we're always here for you.  There is also some free helpful information on our website about personal and business audits.

Keeping Your Corporation Records Correctly

Author: Keith Huggett

What is a Corporate Record book? To maintain your legal corporate status, as a corporation you are required to compile a Corporate Record Book, a book of organizational and other documents which need to be stored at your primary place of business.  The book is made up of five sections, with each one containing specific information. Think back to your school days when you put together notebooks with dividers. It is really much the same. Or, if your happen to be more into scrapbooking, you could go that way, but it's a little over the top

Section One

1. Make sure the original filing of the corporation, date of filing, and payment have all been recorded. These are first few pages in your Corporation Record Book (CRB).
2. Request a Certificate in Good Standing from the state. Include this, along with your Articles of Incorporation and any amendments in your CRB.
3. Write your Bylaws and place a copy of these in your book. Formally write out every action you take as a corporation. Document every act the corporation takes and record it in your CRB.

Section Two

1. Write out the minutes of the initial meeting to form the corporation. Also include the election of officers and Board of Directors.
2. Write out the initial resolutions to form the corporation. Also include any initial agreements between the corporation, lawyers, and accountants for services.
3. Keep this section open to hold all documentation of meeting and minutes while the corporation is functioning. Keep any future elections or resignations here as well.

Section Three

1. Place all stock certificates issued in this section. Ownership of each certificate must be recorded with the sate of issue, who received it, and their personal information (age, residence, individual or corporate entity).
2. Write out shareholder rights and voting agreement and include  the resolution which approves these documents. These are also included in this section.
3. Keep any shareholder or stock transactions of the corporation here as well. Also record here the amount of shares each person or entity has in the corporation. Any changes in shares will go here.

Section Four

1. Include any loans or grants made by members, officers, or directors to the corporation. This applies especially to money first given to the corporation startup. Resolutions and contracts for loans and their acceptance must be recorded here.
2. Write out the location of the corporation accountants, legal representation, insurance agents, and other professional people which the corporation uses to carry out business.
3. Include the location of legal and insurance documents as well as their date of purchase and receipt of payment for retainers and binders.

Section Five

1. Make sure you write out any decisions as resolutions. Write out any agreements or discussions of resolutions as well. Include all documentation of these here. Any major purchase, sale, policy creation or change, expansion or termination must be written out as a resolution of the corporation officers and included in this section.
2. Use your corporate seal or a notary to formalize any agreements between the corporation and other persons or entities.
3. Include any documents with these seals in this section as well.

Keep this record book at your main place of business. Once you have these records put together, you will use them in many ways. You can refer to them to determine your company goals, your company direction and mission.

The specialists at The Tax Office, Inc. can answer any questions you may have on entity selection, corporate compliance, corporate tax, or new business start-ups. We're here to provide you with the answers you need. Please, contact us, should you have any questions.

Which Entity is Right for You?

Author: Keith Huggett

When forming a new company, you want to get it right the first time. This is why it's so important to select the right type of entity. If you have decided that a corporation is the right path, you need to determine which type of corporation makes the most sense: S Corporation or C Corporation.

A C Corporation is basically the designation the IRS gives to regular corporations. The profits of these corporations are taxed, as well as the dividends to shareholders, sometimes resulting in double taxation. If you want to avoid this situation, an S Corporation may be a better option. In an S Corporation, the business itself is not taxed, but the shareholders are. 

In addition to avoiding double taxation, there are several other advantages to this type of business entity:

• Lower taxes: Unlike an LLC, which taxes the members based on the total net income of the business, shareholders of an S Corp are taxed solely on their wages. However, it is important to be aware of the requirement that shareholders must be compensated reasonably; excessively low wages are a red flag for the IRS.

• Business expenses: Shareholders can claim certain business expense deductions on their tax returns. However benefits such as health insurance are considered taxable income if the shareholder has 2 percent or more shares.

• Business protection: Because an S Corporation is an entity separate from its shareholders, the business can continue to operate smoothly even if shares are sold. This independence also protects shareholders from liability claims related to the business.

In order to become an S Corporation, you must first create a C Corporation. The IRS places restrictions on when a company can change its designation to an S Corporation, so it's important to work with a qualified professional who can help you maintain compliance.

If you need help forming a new business entity or changing your existing designation, contact the professionals at The Tax Office, Inc. We'll help you determine which designation makes the most sense for your company. We also provide corporate tax services, bookkeeping and dissolution's.

New Businesses Have Options for Structures

Author: Keith Huggett

When starting a new company, you have several business structures from which to choose. Making the right choice can mean saving on taxes, protecting your personal finances and ensuring smart growth. Review the following descriptions and work with a qualified tax professional or business adviser to help you decide which type is right for you.

There are five primary types of business structures:

• Sole proprietorship: If you are the sole owner of a business you can set it up as a sole proprietorship. All income generated by the business is included in your personal income taxes, and you are personally liable for any debts incurred on behalf of the business.

• Partnership: A partnership is similar to a sole proprietorship with the exception that the business has multiple owners. Again, the income generated is claimed on personal income tax returns.

• Corporation: Unlike a sole proprietorship or partnership, a corporation is treated as a separate entity and is taxed as such. This means that profits generated by the business are taxed, and any income you generate from the business is also taxed. Corporations also have more stringent filing requirements.

• S corporation: Companies that want to avoid double taxation sometimes opt for an S Corporation, which passes all the profits and losses of the company through to the shareholders. Certain criteria must be met in order to qualify. For example, no more than 100 shareholders are allowed.

• Limited liability company (LLC): An LLC is also a pass-through entity, meaning the owners claim profits on their personal income tax returns. However, unlike a sole proprietorship or partnership, any financial losses are the responsibility of the company, not its owners. This provides a certain amount of financial protection for the member owners while still allowing a lot of flexibility. When filing taxes, an LLC has the option to file as an individual, a partnership or a corporation.
  

If you're not sure which of these business structures is right for your company, let the professionals at The Tax Office, Inc. help. We can evaluate your business and make recommendations to help you save money and grow wisely. Contact us today to learn more.

An Enterprising Endeavor!

Author: Keith Huggett

Starting a new company is exciting, but business taxes can sneak up on you if you don't plan ahead. It's easy to get caught up in the enthusiasm of launching a new company, but keeping your books in order from day one can save you a lot of money in the long run.

Follow these tips to help you stay on top of your business taxes:

• Work with a tax expert. If you do not already have experience with business taxes, work with a financial professional who does. Tax mistakes can be costly and these expensive errors are entirely avoidable if you know what you are doing.
• Select the right business entity. There are several types of business entities and the one that makes the most sense for your company will depend on a variety of factors. This is the type of decision that your tax adviser can help you with.
• Set your books up properly. Depending on the type of business you have, you will have to set up your chart of accounts to account for certain contributions or expenses. For example, if you invest in the company, it is important to categorize this amount as a capital contribution and not as taxable income for the business.  You can also choose to outsource your accounting services entirely. Your tax adviser can provide information about this services as well.
• Don't forget about estimated quarterly tax payments. As a business owner, you have to make quarterly payments based on your estimated earnings. Your tax adviser can help you estimate this amount. Underpaying can result in penalties, while overpaying takes cash out of your pocket unnecessarily.
• Take the home office deduction. If you work exclusively from a home office you are eligible to take a tax deduction on the associated expenses. Your tax adviser can help you calculate the correct amount so you do not overestimate -- or underestimate -- the deductions you are entitled to.

Simple Steps To Pay Less

Author:

When you own or manages a small business you are often called upon to handle many different jobs all at the same time, the most import of which is to keep money flowing smoothly into the coffers.  One way to accomplish this is to pay out less in taxes. Here are a few simple strategies that may help:

1. When first forming your business, give careful consideration to the business structure you choose. The tax ramifications can be significant. You have the choice between a sole proprietorship, a partnership, corporation, or a limited liability company.
2. When purchasing equipment for your business, remember that you are allowed to deduct the entire cost of certain depreciable equipment in the year it is purchased. While most business equipment is depreciated over several years, small businesses are allowed this Section 179 deduction each year, with certain dollar limits. If your total equipment purchases exceed a certain amount for the year, the expensing option phases out, and the deduction is also limited to the amount of your taxable income for the year.
3. Because sel employed taxpayers are required to pay taxes through estimated payments, you want to be certain that you are sending timely payments in adequate sums. Late or inadequate payments mean that you will be assessed penalties and interest charges.
4. Knowing the difference between an "employee" and an "independent contractor" means avoiding penalties from the IRS too. Outsourcing your payroll can alleviate this all too common headache.
5. Remember that the IRS is not your bank. When cashflow runs tight, that skimping on your payroll taxes is not an option. If you pay your suppliers and then your employees, and you leave off the payroll taxes, the IRS will take steps to minimize the liability as quickly as possible. Whether or not you own the company, you could be determined to be a "responsible person." This means that the IRS can hold you 100% responsible for the payroll deficiency. 

Taxpayers Who Buy Into Tax Scams Can Pay the Price

Author: Keith Huggett 

According to the IRS, tax scams tend to peak right around now, at the apex of tax season.  If a taxpayer gets caught up in an illegal tax scam, the taxpayer may end up facing significant penalties and interest and can even face criminal prosecution. As the cliche goes, if it sounds too good to be true, it usually is.  Please be aware, and be on the lookout for the following:

• Identity Theft - The IRS is doing it's best to combat identity theft. The IRS’s ID theft strategy focuses on prevention, detection and victim assistance. If you believe you  are at risk of identity theft due to lost or stolen personal information should immediately contact the IRS so the agency can take action to secure their tax account. If you have received a notice from the IRS, call the phone number on the notice. You may also call the IRS’s Identity Protection Specialized Unit at 800-908-4490800-908-4490 FREE.
• Phishing.  Phishing typically involves an unsolicited email or a fake website that seems legitimate but lures victims into providing personal and financial information. Once scammers obtain that information, they can commit identity theft or financial theft.
  
• Tax Scams Involving Social Security.  Beware of scammers who prey on people with low income, the elderly and church members around the country. Scammers use flyers and ads with bogus promises of refunds that don’t exist. The schemes target people who have little or no income and normally don’t have to file a tax return.
  
• Impersonating a Charitable Organization.  Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. 
  
• Frivolous Arguments.  Promoters of frivolous schemes advise taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These are false arguments that the courts have consistently thrown out. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.
  
• Disguised Corporate Ownership.  Scammers improperly use third parties to form corporations that hide the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.
  
• Misuse of Trusts.  There are legitimate uses of trusts in tax and estate planning. But some questionable transactions promise to reduce the amount of income that is subject to tax, offer deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits. They primarily help avoid taxes and hide assets from creditors, including the IRS.
  

There are other scams out there that can also get the taxpayer into trouble. If you are uncertain about something, you can always contact your tax preparer and ask. It is always better to ask a question and get a proper answer than to take a risk on a sketchy proposition.

As always, the professionals at The Tax Office, Inc. are here to answer any questions you might have, whether they are about taxes, scams, accounting, or tax representation. We are always here for you.

Being Ready for Anything in Today's Economy is a Safe Bet

Author: Keith Huggett

2013 is a third of the way gone and business budgeting season is well underway. Hopefully, you have a budget for your business, but if you don't, it's time to get started on creating a clear plan for your revenue.

Here are four reasons why you should take a careful look at how you budget your operations throughout year:

1. Budgets can be strategic documents: Many businesses allocate funds based on arbitrary criteria, like what a department spent last year. The best business budgeting processes take your business plan into account and allocate funds to ensure that your business has the right money in the right place to execute your strategy. This might require spending significantly more money in some areas while you have significant cuts in other areas. Simply increasing each department's budget line by a few percentage points won't accomplish this.
2. Budgets can include outside information: At the most basic level, you or your CFO should be sitting down with your department heads to review their budgets and their fund requirements. You can go even further by using outside cost data to compare your spending expectations with what other similar businesses spend on an aggregate basis.
3. Budgets help you manage your cash flow: With a budget that takes into account the natural seasonal ebbs and flows of many businesses, you can plan for crucial expenses like payroll and taxes, and not get caught short.
4. Budgets have limitations, too: Business budgeting can help you do a number of things, but it is not a panacea. No matter how perfect your budget is, it may need to be updated periodically to better reflect your business' reality. Budgets are also not useful as performance measures for compensation since many managers can game their numbers to meet the budget without actually meeting broader company objectives.

Don't be Like the White Rabbit: Late for a Very Important Date!

Author: Jenny Shilling

Many small business owners are afraid to file for a tax extension because they think that it will increase their risk of an audit. This is one of the biggest tax preparation myths out there. The benefits of filing for an extension significantly outweigh any potential downside.

The IRS makes it easy for you or your tax preparation service to file for an extension. By submitting Form 4868 either online or through the mail, you can get up to six additional months to file your return. The key thing to keep in mind is that you do not get extra time to pay any taxes that are due -- you will need to pay those by April 15 to avoid being subject to IRS collections.

Filing for an extension has three key advantages:

1. It gives you additional time to get your information together and ensures that you not only file a complete return but also that you have time to review it so that you file an accurate return.
2. It moves tax preparation out of the first quarter. Many businesses have a lot of work to do during the first three months of the year, and with an extension, you can move all of that accounting work to a quieter period of the year.
3. It gives you more time to fund some retirement plans, such as SEPs and IRAs. These plans let you put money away on a tax-advantaged basis, but to shelter your contributions from taxes, you have to have funded them for the tax year before you file that year's return.

While the tax experts at The Tax Office, Inc can get your return filed before April 15, they can also help you take advantage of the IRS's liberal extension policies. Talk to them to find out how to make the IRS work around your schedule instead of the other way around.

IRS Estimates 984,400 People Did NOT File Their 2009 Return - Did You?

Author: Keith Huggett 

The IRS is estimating that there are refunds totaling just over $917 million waiting for 984,400 people who did not file their 2009 federal tax return. In order to claim your refund you must file your return before April 15, 2013.  The IRS believes that over half of the refunds will total over $500.  If the money remains unclaimed, it becomes the property of the U.S. Treasury.

In order to receive your refund, however, you will need to be up to date for 2010 and 2011 also. The IRS will also apply your refund to any outstanding tax debt, unpaid child support or past due federal debts such as student loans, before sending it to you.

When you do not file a return, you stand to lose more than just a refund during 2009. In addition, you may have been eligible to claim the Earned Income Tax Credit (EITC). For 2009, the credit is worth as much as $5,657. The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2009 were:

$43,279 ($48,279 if married filing jointly) for those with three or more qualifying children,

$40,295 ($45,295 if married filing jointly) for people with two qualifying children,

$35,463 ($40,463 if married filing jointly) for those with one qualifying child, and

$13,440 ($18,440 if married filing jointly) for people without qualifying children.

In California alone, the number of unfiled returns with a potential refunds is 100,700 returns, totalling an estimated $92,590, excluding the EITC and other potential credits.  Now would be a great time to catch up on filing your unfiled back tax returns. Contact us today.