Taxes

Five Tax Filing Mistakes To Avoid

SBOCTeam — Thu, 20 Mar 2008 14:45:00 GMT

By Barbara Weltman

One of the least fun things about running a business is filing your annual income tax return and paying what's owed. As you embark on this task, don't make mistakes that can lead to needlessly overpaying your taxes or, even worse, becoming the target of an IRS audit.

1. Recognize your vulnerability. There is a $345 billion tax gap the spread between what the government actually collects and what it thinks it should be collecting. Much of this, in the IRS's view, is attributable to sole proprietors who underreport their income or overstate their deductions. Be prepared: Report your income correctly (for example, report all income that has been reported to you on Form 1099-MISC) and keep great records to back up any deductions you claim.

2. Classify your workers properly. Another hot issue for the IRS is making sure that businesses treat workers as employees, rather than as independent contractors, if sufficient control is exercised over the workers. If you have the right to tell a worker when, where, and how the work is to be done, likely he's your employee and you must pay employment taxes (e.g., withhold income tax and the employee share of FICA from his wages, pay the employer share of FICA, and pay federal and state unemployment taxes). You can't simply label a worker an independent contractor if the situation makes him an employee. If the IRS finds out that you've misclassified a worker, you can owe substantial back taxes and penalties.

3. Don't overlook deductions to which you're entitled. Most of your expenses in running a business are deductible, but you may need special records and/or receipts to claim them. For example, taking a customer to lunch is deductible (up to 50% of the bill), but you need a receipt and a written record in a diary, expense account statement, etc. showing the name of the customer, where and when you ate, and what you discussed. If you were profitable, you can shelter income in a qualified retirement plan. The contribution is deductible up to set limits (e.g., a maximum of $45,000 for contributions to a profit sharing plan or Simplified Employee Pension, or SEP, in 2007), earnings grow on a tax-deferred basis, and you create a retirement nest egg for your future. Even if you didn't set up a plan for 2007, you have until the extended due date of your return to set up and fund an SEP. Factor in the cost of covering employees, where applicable. If you made, constructed, grew, or extracted something in the U.S., you may be eligible for a special deduction, called the domestic production activities deduction. For 2007, this is 6% of your net income from a qualified activity, which can mean substantial savings for you.

4. Don't overlook tax credits. There is an array of tax credits you may claim to reduce your tax bill dollar for dollar
Examples:

If you started a qualified retirement plan, you can claim a credit of $500 per year for the first three years to offset the administrative startup costs (e.g., educating your employees about their participation in the plan).
If you conducted scientific research, you may qualify for a 20% tax credit for these research activities.
If you hired someone from certain targeted groups, such as a disabled veteran or long-time family assistance recipient, you can claim a credit for a portion of their wages.
If you purchased a hybrid vehicle, you may be entitled to a tax credit, the amount of which is fixed by the IRS. However, no credit is allowed for any Toyota or Lexus hybrid purchased after August 31, 2007.

5. Avoid tax penalties. What a waste of your hard earned money if you owe tax penalties that could easily have been avoided.

File your return on time or ask for an automatic six month filing extension by the due date of your return to avoid late filing penalties (which can be 25% or more if taxes are owed). However, a filing extension does not give you more time to pay what you owe. If you request an extension, be sure to pay as much as you can along with your extension to minimize or avoid late payment penalties.
Don't let your inability to pay your tax bill keep you from filing on time. If you file by the due date (including the extension), you won't owe late filing penalties. You can deal with your tax bill by requesting an installment agreement from the IRS (if you pay in full within 10 days, there's no interest or penalties). If you need more time, you can have up to three years if the balance is no more than $10,000 and you meet certain conditions you'll owe interest but the late payment penalties are cut from 0.5% per month to 0.25% per month. You can also charge your tax bill to a major credit card, but you'll pay a 2.49% convenience fee to the IRS approved processor, plus interest on any credit card balance you carry.
Don't fail to pay estimated tax if you need to. Business owners don't have tax withholding on their profits and can't wait until they file their returns to pay what they owe. For sole proprietors, for example, estimated tax must cover the income tax on net earnings from the business as well as "self employment tax" (to cover Social Security and Medicare taxes). Estimated tax is paid in four installments for the year: for 2008, these payments are due April 15, June 16, September 15, and January 15, 2009 (don't include your first installment with your 2007 income tax return).

Being smart about your company's taxes can have a significant impact on your financial bottom line. If you don't have the expertise to handle this on your own, or the time to use software for this purpose, be sure to consult with a tax advisor as soon as possible.

Barbara Weltman is one of the nation's leading authorities on small business. She is a contributing writer for Inc.com, PINK magazine and New York Enterprise Report, and is a sought after media commentator who has been featured in The New York Times, The Wall Street Journal, The Washington Post, Reuters, Forbes.com, Marketwatch.com, WABC-TV, Fox News, CNNRadio and CNBC.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

Changing to the Type of Entity That's Right for You

SBOCTeam — Tue, 19 Feb 2008 01:47:00 GMT

Barbara Weltman

Not all business owners carefully think through the legal and tax ramifications of how they are set up when they begin. An individual starting a business on his or her own may, for example, take the easiest road and operate as a sole proprietor. Or another person may have rushed to incorporate but now thinks that decision was hasty. If you think you may have gotten started on the wrong foot--entity speaking and are seeking to make a change, take heart and remember:

Choose the best type of entity to suit your needs.
Go ahead and change your entity type, but recognize that there may be a tax and other costs for doing so.

Which entity is best for you?

There are five basic entity types: a sole proprietorship, partnership, limited liability company (LLC), S corporation and C (regular) corporation. Each entity has advantages and disadvantages that make it more suitable to certain types of ventures.

Personal liability protection. Companies that are concerned about liability exposure for owners should be set up to give the owners personal liability protection. LLCs and both types of corporations do this, so that if the business is sued, only business assets can be used to satisfy the claims of creditors.

For sole proprietorships and partnerships, owners' personal assets home, car, bank account, etc. are exposed to claims against the business. For certain types of businesses, this may not matter too much. A freelance writer, for example, has minimal liability exposure. Also, owners can be protected from many liabilities by carrying adequate insurance.

General rule: Any business with the potential for claims against it, which includes most businesses with employees as well as those with customers who visit the business premises, should probably opt for an entity type that protects owners' personal assets.

Income tax treatment. Sole proprietorships, partnerships, LLCs, and S corporations are entities that don't pay taxes (there are some exceptions where S corporations are concerned). Instead, owners pay tax on their share of net profits from the business. This is commonly referred as "pass through" tax treatment because the obligation for taxes on earnings is passed through to owners.

C corporations, however, are separate taxpayers-the corporations pay tax on their profits. Their owners pay tax only on distributions to them in the form of salary, dividends, and taxable fringe benefits. C corporations carry the potential of "double taxation" when earnings are taxed first to the corporation and then again to shareholders when they are distributed to them as dividends.

Employment tax treatment. Owners of unincorporated businesses proprietors, partners, and LLC members-pay self employment tax (the employer and employee share of Social Security and Medicare taxes) on their share of net earnings from the business.

In contrast, shareholders in corporations only pay FICA (Social Security and Medicare taxes) on compensation paid to them by their corporations. In other words, owners of unincorporated businesses can pay substantially greater employment taxes than their shareholder counterparts.

Other considerations. There are several other factors to take into account in making an entity choice, including:

Access to tax free fringe benefits for owners only C corporations can offer the broadest range of benefit options.
Audit risk sole proprietorships on average face a greater chance of being audited than other entity types.
State tax issues the rules at the state level vary greatly.

Making a switch in entity selection
Changing from certain entity types to others may be easy and involve minimal cost. For example, if you're a sole proprietor and want to become an LLC or a corporation, the only cost is the state filing fees (and related fees that may be incurred for professional services or online self incorporator services, and publication in legal notices, if required). There are no tax costs to make this change.

However, switching from corporate status to any other entity choice is not that simple. The corporation must be terminated in accordance with the law of the state in which it was set up. Also, there may be tax costs. For example, if a C corporation holding appreciated assets wants to become an LLC, it must first be liquidated this results in tax at both the entity and owner levels.

Combining entity choices
The tax law lets certain entities elect how they'll be taxed, despite the legal way in which they are organized. For example, an LLC is usually taxed like a sole proprietorship if there is one owner or as a partnership if there are two or more owners. However, the LLC can opt to be taxed like a corporation and can even elect to be taxed as an S corporation.

Why would an LLC want to elect S corporation status? There may be state tax advantages. For instance, in California, an LLC pays a higher gross receipts tax than an S corporation on similar income.There may also be an employment tax advantage. Some tax professionals maintain that electing S corporation status limits an owner's employment tax costs to FICA on wages, rather than on all net earnings from the business. Note: The IRS has yet to rule on the concept of an LLC electing S status to limit employment tax exposure.

Bottom line
The choice of entity type is yours to make. If you didn't get it right the first time, consider making a change. But do this carefully and with the advice of an attorney, accountant, or other trusted advisor.

Barbara Weltman is one of the nation's leading authorities on small business. She is a contributing writer for Inc.com, PINK magazine and New York Enterprise Report, and is a sought after media commentator who has been featured in The New York Times, The Wall Street Journal, The Washington Post, Reuters, Forbes.com, Marketwatch.com, WABC-TV, Fox News, CNNRadio and CNBC.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

Do it yourself taxes

SBOCTeam — Wed, 30 Jan 2008 18:45:00 GMT

For many entrepreneurs, the same go it alone spirit that prompted them to start their own company also informs their attitude toward filing their small business' taxes. Who better than me to do it? If you're one of those types willing to take on 1040s, 1065s or 1120s all by yourself, here's some things to consider to make things go a little bit smoother along the way.

Get the timing down
First, you're going to want to invest an ample amount of time into researching and planning out your tax filing, just as you would before any other situation that could significantly affect your small business' cash flow. In fact, the IRS estimates 85 percent of the total time required to prepare the average business tax return is typically devoted to record keeping and planning. (In 2007, this amounts to just over two full days of document gathering and organizing, since the IRS estimates the overall time needed to file now takes 56.9 hours.) In other words, you should have been thinking about and working on your taxes months before this year's filing deadline, if not all year long. And as for that deadline, it's important to remember that the final date to file without penalty depends upon the legal structure of your small business. C and S corporations that require a Form 1120 have an earlier deadline March 17, 2008 whereas unincorporated sole proprietorships as well as most general partnerships and limited liability companies have until April 15 to file 1040s and 1065s. For a handy way to track these deadlines and other milestones, such as quarterly payment dates and extension deadlines, check out the IRS's online month by month tax calendar at http://www.irs.gov/businesses/small/article/0id=176080,00.html.

The No. 2 Pencil Method
Although computer assisted tax filing has grown by leaps and bounds recently between 1993 and 2003, the share of self prepared returns using tax prep software tripled, from 8 to 25 percent of the population not everyone is fond of staring at numbers on a monitor for hours on end. For those who prefer the old fashioned paper and pencil method, there are still plenty of resources out there to help you if you're going it alone.

Foremost is the IRS's Small Business Resource Center www.irs.gov/businesses/small/index.html. Yes, it's online and therefore demands some face time with a computer screen, but it's still a great place to go to get general questions answered and find out which forms you will need to fill out during your handwritten tax preparation. If you'd prefer a human voice or you have a specific question, however, try the IRS's free business tax help line at 1-800-829-4933, which is open 7 a.m. to 10 p.m. Monday through Friday and from 10 a.m. to 3 p.m. on Saturdays (all times local) through early April. Of course, as tax-deadline day approaches, you might experience long waits when calling the IRS so, as an alternative, you might try a local tax help line (often run by the local Chamber of Commerce or your state's Department of Taxation) or reaching out to a tax expert at SCORE to get some free advice. (To find one, search "tax" on the "Ask SCORE" web page: http://counseling.score.org/AvectraScore/Secure/SearchCounselor.aspx.)

Software Jump
As affordable tax prep software has achieved critical mass in the marketplace, more and more small business owners have become converts of its simple, "plug and chug" nature. And with affordable, online versions of these software products now compatible with many of the accounting platforms popular in the small business sector, many entrepreneurs are finding that they can easily tackle what might otherwise be a confounding tax situation without ever having to leave their workstation or fork over much more than $100. In fact, a September 2005 National Tax Journal article concluded, "use of software...is one way that taxpayers have taken advantage of technological change to adjust to an increasingly complex tax law." The two major players in the tax prep software game, however, have come to the market from different directions. For a general review of the various tax prep software products, go here: http://tax-software-review.toptenreviews.com/.

H&R Block, which has long been a market leader in the storefront tax preparation industry, leverages its selling position by integrating its Tax Cut software (http://www.taxcut.com/) with its more retail, people oriented roots. For example, as an added benefit of Tax Cut's "Premium" and "Home and Business" packages, even software only customers can get access to a live H&R Block tax expert in the event that they are audited. The company's new "Online Office" product blurs the line even further, letting customers send their tax documents to H&R Block and fill out a brief online questionnaire and then let one of the company's tax pros prepare your return for you all without ever having to leave your house. (It's worth noting here that while many tax prep software programs, like TaxACT, will not allow you to import financial data from the major accounting software platforms like Microsoft's Money or Intuit's Quicken, H&R Block's Tax Cut will allow it.)

On the other hand, Intuit's Turbo Tax software (http://turbotax.intuit.com/small-business-taxes/) builds upon the company's already strong position in the accounting software market as a result of Intuit's popular Quick Books products. Because of this more robust presence in the small business world, Intuit also offers more software options for the small business owner. For the sole proprietor or single owner LLC, there's a Turbo Tax "Home and Business" tier focused on entrepreneurs whose individual and business tax profiles are still inherently intermingled. For owners of C or S corporations as well as general partnerships and multiple partner LLCs, Turbo Tax provides a "Business" version aimed at those who file their personal and business returns separately.
The third major tax prep software platform, TaxACT (http://www.taxact.com/products/index_business.asp), has rolled out even more narrowly focused products, with six separate, low cost business versions now available.

While using tax prep software is becoming easier every year, comparing pricing among the different brands is anything but. All the major players now bundle their products, combining federal and state returns along with the ability to e-file into the various individual and business tiers. For a rough idea of what an apples to apples price breakdown of the last year's tax-prep software landscape looks like, go here: http://www.gettingfinancesdone.com/blog/archives/2007/02/taxpreparationsoftwarepricingcomparison/.

Still, there are a few general pricing principles to remember if you want to save money: First, printing out and mailing your return is more cost effective because most tax-prep software products charge anywhere from $5 to $20 extra to e-file your tax returns. (Even if they claim e-filing is "included for free," there's generally a hidden mark up. One way to keep your costs down is to use the online rather than the "disc in a box" version of the software as the downloadable editions can cost up to $25 less than software purchased in a store.) Second, state tax returns tend to be priced the highest, but not all states require your business to file. Finally, keep in mind that the paper filing method will mean that any refund you are due to receive could take up to twice as long to receive.

What if you have a change of heart?
Even the staunchest of independent spirits can occasionally run up against a problem that they can't solve alone. If you start down the road of filing your own taxes but then just a few days before the filing deadline, you realize that you just don't feel comfortable with the results, don't panic, there's a way out.

First, you should understand that it's not necessarily a bad thing to have a tax pro prepare your return. In fact, many consumer and business experts note that people with home businesses or complicated financial lives are probably better off going to an accountant or enrolled agent. "If you have a sophisticated tax situation, like you own rental property or you get a Schedule K-1 from a partnership or you have a second home, or if you go through any kind of major lifestyle change, such as starting a business, moving, having a child, or getting a divorce, any of these circumstances mean it will probably pay to have a tax professional handle it," advises Tom Ochsenschlager of the American Institute of Certified Professional Accountants (AICPA). "They're going to know what kind of questions to ask as well as what advice to give for the upcoming tax year that you're just not going to find with software."

Once you've made your decision to hand off your taxes, the next step should be to request a six month extension. Once somewhat difficult to obtain, extensions are automatically granted by IRS nowadays and the process is fairly easy. You can mail in the paper extension request form (4868 for individuals or sole proprietors, 7004 for corporations), call it in (1-888-796-1074), or e-file an extension. Even if you have a month to go before the deadline, getting an extension allows your paid tax preparer sufficient time to dig through your documents from the very beginning. Keep in mind, however, that an extension to file is NOT an extension on payment, so if you owe the IRS, you must at least work up an estimated amount due and pay that to avoid late fees and penalties.

To find a tax pro, the AICPA's Ochsenschlager recommends asking friends and relatives first. In addition you might try looking at a couple of online tax pro locator websites like http://www.naea.org/ or www.aicpa.org/states/info/index.htm. Once you've narrowed down your list of candidates to two or three, sit down with each of them for a brief explanation of your tax situation. "Most CPAs won't charge for this initial visit," Ochsenschlager says, "and from the discussion, you should get a good feel for whether or not you're comfortable with them."

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

Commonly Missed Deductions

SBOCTeam — Wed, 30 Jan 2008 16:26:00 GMT

Don't Leave Money on the Table! Tax time is here, so make sure your small business is getting every dollar you deserve

By Reed Richardson

Every year, millions of small businesses give away billions of dollars to the U.S. government by failing to claim everything they should on their tax return. To ensure you don't make the same mistake, here are some of the most commonly overlooked tax deductions and credits.

Retirement Plans If your small business has a SEP IRA, SIMPLE IRA, or 401(k) retirement plan, you can deduct your employee contributions as well as your own personal contributions from your company's federal taxable income. Also, the IRS allows tax credits to cover the cost of starting up these retirement plans. (For example, a small business could be eligible to claim up to $500 a year in tax credits for the first three years after starting a SEP IRA.) For more on small business retirement plans, check out IRS Publication 560 (irs.gov/publications/p560/index.html).

Sales Taxes If you're a sole proprietor and you only file an individual tax return, you should check the IRS's handy sales tax deduction calculator (http://apps.irs.gov/app/stdc/) before filing. If your small business is incorporated and files a separate tax return, however, you can deduct all sales tax you paid on business property and equipment on Schedules C or F (or E if it involves rental property). In fact, you should treat sales tax in the same manner as you would the rest of that same purchase. So, if a business expense is deductible, so too is the sales tax, and if a purchase involves property or equipment that is depreciable, the cost of the sales tax is also subject to depreciation. Also, any foreign point of sale taxes paid by your small business, such as the European Union's VAT (Value Added Tax), can be tax deductible as well.

Insurance Generally, the premiums you pay on most kinds of insurance for your company are deductible as business expenses. This includes fire, accident, and theft insurance as well as liability, worker's compensation, and malpractice insurance premiums.

Home Office Deduction As a small business owner, it's probably quite common for you to chase the kids off of your home computer so you can run the occasional sales report or P/L statement. And if this sounds familiar, you have, unfortunately, just disqualified yourself from the home office deduction. That's because it is only available to self employed people who meet a "regular and exclusive" test. In other words, you can't mix your business and personal life in your home office even if your home office's use is 99% business and 1% personal and still claim the deduction.
In fact, a September 2006 IRS circular noted that because of the frequent misinterpretation of the home office deduction "compliance is a concern," and that it will be "focusing enforcement efforts, including examinations, on these issues." So, consider yourself warned: If you take the home office deduction, you stand a higher chance of getting audited. (For a quick guide to figuring out if you really do qualify, see page 4 of IRS Publication 587 here: www.irs.gov/pub/irspdf/p587.pdf).
To calculate your home office deduction you must first find the business percentage of your house. (Dividing the square footage of your office by the total area of your home is one way to do this, dividing the number of rooms used for your business by the total number of rooms in your home is another.) Once you've figured out the business percentage you can apply it to general expenses associated with your entire home, such as property taxes and mortgage interest or rent, as well as expenses specific to just your home office, like additional insurance, security systems, repairs, and utilities (like a second, work-only phone line). To see a sample of what a home office deduction for a self employed individual or sole proprietor looks like when filled out, take a look at page 23 of IRS publication 587.

Bad debts and business write offs Unpaid customer accounts that will be written off as worthless debts as well as any documented losses due to theft or fraud (not already covered by insurance) are deductible, but only if the revenue was at one time included in your business's gross income. However, cash based businesses that never recorded the sale or service as income in the first place are not eligible to take this deduction.

Bank fees and finance charges Many of these business costs are deductible from both sides of the transaction equation buyer and seller. So, not only can you typically deduct fees and interest charges on your own business credit cards, you can also deduct service fees charged by the bank for accepting your customer's credit cards.

Advertising A big one that should never be overlooked, as almost all advertising and promotional expenses, even the cost of printing up your business cards or sponsoring a local Little League team, can be deductible.

Mileage deduction For the 2007 tax year, the standard mileage deduction for business related driving rose four cents to 48.5 cents per mile. Keep in mind, this deduction is only available to companies with four or fewer vehicles. One other note, while the standard mileage deduction covers most car-related costs, parking fees and tolls as well as finance charges and insurance premiums on business-owned vehicle loans can be listed as separate deductions.

Upfront Depreciation Commonly known as Section 179 deductions, this provision in the tax code allows small businesses to claim a maximum deduction of up to $125,000 on depreciable property purchased for the business in 2007. Qualified property for this deduction typically includes machinery and equipment, furniture and fixtures, as well as most storage facilities.

Tax Preparation Fees Ironically, the cost of hiring an accountant or tax preparer as well as the cost of purchasing tax preparation software is an often overlooked deductible expense. Don't make that mistake.

Mailing Costs Postage, postal meter rental fees, and shipping costs that your small business pays are tax deductible.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

What To Do With Your Refund?

SBOCTeam — Wed, 30 Jan 2008 16:06:00 GMT

Spend it wisely, and take a closer look at your quarterly payments

By Robert Tie, CFP

Congratulations - you've just received a sizeable check from the IRS! Sure, you knew it was coming and how much it would be. But still your pulse quickens, and you're mildly euphoric. Somehow this feels almost as good as getting cash from a client.
But is a large refund reason to celebrate? "Certainly not," says Eric Rigby, CPA, of RFG, Inc., a New Orleans tax and accounting firm that serves entrepreneurs. "Never give the IRS an interest-free loan." All too often, he says, small business owners do exactly that when they pay too much in estimated taxes. "So resolve to plan better next time," advises Bea L. Nahon, CPA, of Nahon CPA, a Bellevue, Washington firm providing tax and other services to small businesses. "Check in with your CPA at mid-year," she says. "You'll get better at managing your tax payments, and you'll develop a deeper understanding of all your business finances."

First Things First
What's the best way to begin the rest of your life as a taxpayer? The answer is to put your refund to work in the smartest ways possible. In working with their respective clients and also as volunteer advisers with the American Institute of Certified Public Accountants, Nahon and Rigby both recommend three sure-fire ways to get a big bang for your refund buck.

1. Set up an emergency fund
Cash flow is the lifeblood of any enterprise. And yet Rigby encounters enough undercapitalized businesses to make him worry with good reason. "When Hurricane Katrina slammed into New Orleans, a lot of small business owners saw their income plummet and their expenses soar," he says. "So priority number one is an emergency fund. Plan ahead, and you'll weather the storm."
How big a fund do you need? That depends on how long you might reasonably expect to be short of cash. A money market fund or other sufficiently liquid reserve will earn you only a minimal return. So use your refund to help set aside just enough to meet recurring expenses for, say, six months. Then spread your largest risks among highly rated disability, property, business continuity, and other insurers, as appropriate.

2. Pay down your debt.
"Do it now," says Nahon. You can't beat the cost benefit numbers behind this sage advice. Trouble is, spending money is more fun than repaying it. "Don't hesitate," she insists. "This is a perfect opportunity to improve your finances and your peace of mind."

3. Set up a retirement plan.
"It's never too early to start saving for retirement, and there are few better places to invest your refund," Rigby says. So, he advises, find out which type of plan is appropriate for your situation, and set it up.

The two types of retirement plan are:

IRA based plans

Payroll Deduction IRA

Simplified Employee Pension (SEP)

SIMPLE IRA

Safe Harbor 401(k)

Defined Contribution and Defined Benefit plans

Automatic Enrollment Safe Harbor 401(k)

401(k)

Profit Sharing

Defined Benefit

Their characteristics are too complex to usefully summarize here. But IRS Publication 3998, Choosing a Retirement Solution for Your Small Business, concisely explains each plan. Read it through, noting contribution methods, limits, and other plan features that correspond to your needs and preferences, as well as those of your employees. You'll then be well prepared to consult your financial services provider and discuss your options.

Off to a Good Start
"Of course, if you've already addressed those three priorities," says Nahon, "consider using your refund to boost your marketing budget." A large refund, Nahon notes, is usually due to a significant drop in revenue, since small business owners typically try to avoid penalties by basing their current estimated payments on the total tax from their prior year's return. "That means it's time to put some extra money into marketing," she advises. "But first ensure that you've adequately funded your more urgent needs." Once you've fulfilled those goals, you'll really have something to cheer about.

Robert Tie is a Certified Financial Planner and business writer.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

2007 Small Business Tax Changes

SBOCTeam — Wed, 30 Jan 2008 14:32:00 GMT

By Chris Freeburn

For small business owners, there are few headaches like trying to keep up with the ever changing landscape of tax rules. Last year, Congress and the Internal Revenue Service (IRS) made a variety of changes and adjustments to the tax code that will affect almost all businesses. While most changes are minor adjustments, mostly increases in the maximum amount of income or expenses applicable to taxes or deductions, small business owners should take the time to examine the changes in detail to make certain they take full advantage of, and comply fully with, all of the changes.

Here are some of the pertinent changes to federal tax laws applicable to small businesses for the 2007 tax year:

Self-employment Social Security Tax - For 2007, the maximum net self employment earnings subject to social security tax has increased to $97,500 (there remains no limit on income subject to Medicare tax).

Mileage Deduction - The standard mileage deduction for business vehicles has increased to 48.5 cents per mile from 44.5 cents per mile in 2006. Small business owners should also note that toll and parking expenses may also be deducted.

The AMT Lingers - Once again, Congress has sidestepped much needed reform of the Alternative Minimum Tax (AMT), by adopting a simple "patch" that raises the size of deductions for individuals, married couples and children, thus allowing the AMT to endure for yet another year. Created to snare the high income earning taxpayers who used tax credits and deductions to avoid paying virtually any federal tax, the AMT was introduced in the early 1970's. Since Congress failed to index the AMT for inflation, the AMT now threatens to hit many middle class taxpayers particularly those with incomes between $75,000 and $200,000 with additional taxes. Small business owners are particularly vulnerable because many operate their businesses as sole proprietorships or personal corporations. The AMT requires taxpayers to calculate their taxes twice, once under the normal rules and then a second time under complicated AMT rules, and then pay the higher tax. You can calculate the impact of the AMT (if any) on your 2007 taxes by using the AMT calculator at the IRS's website: http://apps.irs.gov/app/amt2007/index.jsp?ck

Employee Parking - Beginning in 2007, firms can spend up to $215 per month tax free for employee parking. The limit on tax-free bus and subway passes increases to $110 per month, up $10 from 2006.

Expense Deduction Increased - The IRS has increased the maximum deduction for business property placed in service for the business in 2007 (Section 179) from $108,000 to $125,000, though this deduction is reduced if the cost of the property exceeds $500,000. For businesses located in a qualifying enterprise zone, the deduction is increased from $143,000 to $160,000.

Husband and Wife owned Business - Married spouses who jointly own or operate a business may choose to be taxed as a joint venture if they qualify.

Domestic Production Activities Deduction - Businesses engaged in engineering, construction, film production, architecture, or the lease, sale, or rental of equipment manufactured in the U.S. can deduct up to six percent of qualifying net income from their federal taxes.

Electric Vehicle Credit - The tax credit previously offered to electric vehicles is not applicable to vehicles entering service after December 31, 2006.

Equipment Purchase Credit - Opting to purchase business equipment, including computers and machinery, instead of leasing it can result in a tax deduction. For 2007, up to $112,000 of equipment purchased for your business can be deducted as an expense, rather than being depreciated over five or seven years (or any other period established by tax law), depending on the equipment claimed for the deduction. This represents a $4,000 increase from the deduction permitted in 2006. The deduction applies to both new and previously owned (used) equipment and is applicable regardless of whether the equipment was purchased with cash, or financed in any way. However, some states have income tax regulations that mandate the depreciation of equipment purchases, which would prevent business owners from taking advantage of this deduction. Check with your state's tax office to determine whether or not your business must depreciate new equipment purchases by law in your state.

For additional information regarding business tax changes for 2007, please visit the IRS's website: http://www.irs.gov/formspubs/article/0id=10987900.html

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

Freelancer or employee?

SBOCTeam — Wed, 09 Jan 2008 16:26:00 GMT

Understanding the difference may help your business avoid a costly headache

By Chris Freeburn

You know who your employees are, right? Of course you do. But are you sure the IRS will agree with you? That, it turns out, might be a problem. Small businesses often give their employees considerable flexibility in terms of hours and working conditions, and many rely on freelancers and independent contractors to perform specific tasks or take on temporary work. Such outside workers aren't considered "employees," right? Be careful: They may be.

Surprisingly, determining whether someone counts as an independent contractor or an employee does not depend on the amount of time that person works for a company, or even how or when that person is paid. The decisive factor is how much control the company exercises over that person's activities for the company. Generally, if you control only the outcome of the work, by accepting or rejecting the finished product, then the person is an independent contractor. However, if you control not only the finished product, but the means and methods by which it is produced, then the person is an employee. So even if a metalworker spends most of his time working in your shop, if he uses his own tools, sets his own hours, and is not under your control and supervision, he continues to function as an independent contractor. If, however, he uses your tools and materials, during hours you set, and is subject to supervision by company managers while he works, then he has become an employee.

Making the determination between independent contractor and employee is an important decision for you as an employer. Employers are required to withhold income taxes from an employee's salary, as well as pay Medicare, unemployment, and social security taxes on each employee. However, employers generally do not have to withhold and pay such taxes on payments to independent contractors. In the event that that you incorrectly classify a worker as an independent contractor, the IRS can hold you liable for that worker's unpaid taxes in addition to penalties and interest. No statute of limitations exists on these taxes. If the IRS decides that your firm has wrongly classified an employee, you will be liable for these back taxes and penalties for every year of that error.

The IRS defines four possible categories of workers: independent contractors, common law employees, statutory employees and statutory non employees. Statutory employees are workers who might otherwise be defined as independent contractors, except that their jobs have been defined as having employee status by law. Such positions include individuals working from home using materials and goods provided by an employer, which must be returned to that employer; delivery drivers (except for milk deliveries); full-time life insurance salespeople who sell life insurance or annuity contracts for one business; and full time traveling or local salespeople who work on one business' behalf. Statutory non employees comprise direct sellers and licensed real estate agents, who are, by law, treated as self employed. Employers must file IRS form 1099 MISC to report payments in excess of $600 made to independent contractors, but generally have no other tax liability, unlike with regular employees.

Ever vigilant for tax errors, the IRS closely examines taxpayers whose income is mostly reported on 1099 MISC forms, with an eye toward catching firms who improperly list employees as independent contractors. If your metalworker receives the majority of his or her income from just one firm, the IRS may choose to investigate whether he or she truly functions as an independent contractor. That can create a considerable hassle for you, especially if the IRS ultimately decides that the metalworker should have been considered an employee.

If you have difficulty determining whether a worker is properly defined as either an employee or independent contractor, or simply don't wish to risk IRS penalties, you can have the IRS decide the matter itself by submitting Form SS-8. The form asks for a complete description of the worker's duties, extent of employer supervision and salary. You can find Form SS-8 and a variety of advisory publications regarding the rules defining employees and independent contractors at www.irs.gov.

Chris Freeburn is an Associate Editor/Writer for Priority magazine

Quick Year-End Tax Tips

SBOCTeam — Tue, 11 Dec 2007 22:59:00 GMT

With just a few weeks left before December 31^st^, these year-end tax tips can help any small business save a few bucks

1. Make a Donation
It is the holiday season, do a charity and yourself some good and make a donation. Not only is making a donation a great thing to do for your community, but you can take a deduction that could lower your taxes. Be sure when you make your charitable donation that you get a receipt from the organization. And also talk to an accountant if you donate a service or time to charities as your time is usually not deemed "deductible".

2. Start a retirement plan:
Making payments to a retirement plan will reduce your taxable income for this year, thus lowering your overall tax bill. If you haven't already started an IRA (Individual Retirement Account) or contributed your maximum amount this year, now is a great time to do so. The maximum you can contribute to a Traditional or Roth IRA is $4,000.00.
A SEP IRA (Simplified Employee Pension) allows small business owners to make IRA contributions for themselves and their employees of up to $45,000.00 in 2007.
A SIMPLE IRA (Savings Incentive Match Plan for Employees) allows employees to contribute up to $10,500 in 2007. (that amount increases to $13,000 for employees 50 and older) The great benefit to business owners with this plan is that you are only required to match if your employee contributes to the fund first.

3. Pay Expenses Early:
Pay for items now that your business may need soon. Pre-paying January and even February bills if your cash flow will allow it can reduce your taxable income, thus lowering your tax bill. Some great examples of what you may want to think about paying early are:

Lease or rent payments - on office space, equipment, tools
Equipment purchases - plan to buy new computers, phones, cars, etc, don't wait until January
Utilities/Bills - pay for your January utilities, internet connection, phone bills, insurance premiums, etc. in December
Bonuses - if you plan to pay your employees bonus or incentive pay, pay them before year end

4. Defer Income:
Depending on your cash flow needs and the structure of your business, you may be able to defer payments made to you over the next few weeks, until January thus lowering your taxable income in 2007.

5. Portfolio Deductions:
If you or you business invest funds in the capital markets, take steps to minimize your capital gains and take full benefits of any capital loses. Capital loses in excess of capital gains can be use to offset up to $3,000.00 in ordinary income for the individual tax payer.

While we can never and should never avoid paying taxes, taking steps over the next few weeks to reduce your 2007 taxable income can save you money on next years tax bill. As always consult your accountant or tax professional to decide which steps may be right for you to take to lower your tax bill.

The Do's and Dont's When Facing An Audit

SBOCTeam — Fri, 19 Oct 2007 23:52:00 GMT

For most small business owners, finding a letter in the mail from the IRS can suddenly unleash a flood of emotions, from fear to anger to guilt to helplessness, and that's even before you even open the envelope. And among all the possible scenarios that can flash through your mind, discovering that you are about to be - gulp - audited, is for most small business owners, far and away the worst. Instead of panicking when the IRS comes calling, arm yourself with the information you need to get through the process:

DO:

Keep ALL of your small business's receipts back seven years.

Let the IRS know whenever you move. (Use IRS Form 8822.) If you don't, an IRS notice could go to your old address and an audit could begin without your being aware of it.

Wait a couple of weeks after receiving your audit notice to call the IRS and schedule an appointment. And then pick a future date that gives you as much time as possible to prepare.

Organize your papers (and thoughts) ahead of time so you can quickly answer questions.

Make copies of all correspondence you send the IRS.

Avoid giving auditors your original documents at all costs. Instead, ask that he either take notes or make a photocopy of them.

Treat the auditor politely and professionally, and expect the same from them. If an auditor is rude or disrespectful, you have the right to speak to his or her supervisor.

Consider hiring a tax professional as a consultant.

Have reasonable expectations. Nearly 90 percent of audits conclude with a higher tax bill, so an attitude aimed at simply minimizing your financial losses is often the best.

DON'T:

Fail to file a tax return. Ordinarily, the IRS can only examine returns going back three years. But if you don't file, the statute of limitations on that year never expires.

Estimate. Round numbers on your return tell the IRS you're not really tracking your cash

Forget to print out receipts or order confirmations for all your business's online purchases.

Let an auditor come into your business and freely interact with your employees and customers.

Volunteer information or answer questions that the auditor hasn't asked.

Be a pushover. Ask the auditor questions during the audit and insist that he explain the legal reasons behind any problems that he's found.

Tape-record the audit. Even though you have the right, this often causes the auditor to be even more stringent and, therefore, most experts caution against it.

File another tax return during an audit. Instead request an extension. If you do file during an audit, the IRS could expand its scope to include it.

Offer anything to the auditor that could even remotely be considered a bribe

Taking these steps, along with a talk with your tax advisor or accountant should aleviate some of the pressure should the IRS come knocking at your door.

Don�t procrastinate�use your tax extension to benefit your business

SBOCTeam — Sun, 29 Jul 2007 23:10:00 GMT

If your small business joined the nearly 10 million taxpayers that received an extension on filing federal taxes this year, there are some important things to consider over the next few months.
By Reed Richardson

Perhaps the most basic of these is to understand that getting an extension on filing your taxes is not an extension on paying your taxes. While most small business owners are savvy enough to recognize this distinction, every year a small minority forget to send in an estimated payment before the spring deadline and end up paying unnecessary penalties. The good news, though, is that even if you did forget to send the IRS an on-time payment, getting an extension on filing means you kept the damage to a minimum (late filing penalties are ten times higher than late payment penalties). Also, remember that the IRS doesn’t care as much about inaccuracy as it does inaction, so if you didn’t pay on time don’t wait six more months just so you can mail the exact amount—get that good faith estimate in the mail as soon as possible.

Next, small business owners should think about why they needed the extension in the first place. “The main reasons small business owners file extensions is that they either don’t have all their records ready or they just didn’t have the time to file,” notes Barbara Weltman, author of Small Business Taxes 2007. “Running their business just gets in the way.” But she points out that the IRS only gives one six-month extension, no matter what your reasons. “For businesses that are seasonal, an extension can work out well since they might have the time to focus on filing their taxes in the fall rather than the spring,” she says. However, year-round small businesses might not have this luxury and so, overworked owners must make a concerted effort to set aside time for filing throughout the summer, or else he or she could end up in repeating the same mistakes six months later. “For some, it will still be crunch time in the fall,” Weltman concedes.

To prevent this, small businesses might want to reconsider how they get their taxes done, particularly if they typically rely on a seasonal tax preparation service. “That tax prep store in the mall will be gone come May—that’s something to think about,” notes Weltman. “You might start thinking about using an accountant instead, someone who’ll be an adviser to you and help you take advantages of the right deductions all year long.”

There are other ways to take advantage of your extension. “For example, you have more time to put money into your retirement plan,” Weltman says. “You have until the extended due date of your return to set and fund things like a SEP plan.” In fact, she says that for most small businesses there are almost no downsides to filing for an extension. It might even be worth making it a part of your annual tax strategy. That is, of course, unless the IRS owes you. “It doesn’t make a lot of sense to do this if you’re getting money back,” Weltman points out. “Because if you are, and your small business is still missing the first deadline, you are doing something wrong.”

Reed Richardson is managing editor for Business 24/7 magazine.