Friday, May 28, 2010

Major S change?

There currently is a bill wending its way through the House called the American Jobs and Closing Tax Loopholes Act. Wait a minute - why don't they ever label one the "We're going to stick it to you act"? What happened to truth in advertising? Sorry. I digress. Anyway, this bill has a lot of tax stuff in it, something for (or against) almost everyone. One item that sticks out is a change in the way S corporation dividends are taxed.

S corporations do not pay tax. They are treated similar to partnerships in that the net income of the corporation is taxed directly to the shareholder. There are certain circumstances where this is preferable to the standard “C” corporation treatment of paying tax at the corporate level first and then paying taxes on any dividends received at the shareholder level. Whether this is advantageous or not depends on a lot of factors. S corporations are by definition closely held, and are commonly used by small businesses, particularly in the start up years.

Congress is attempting to take away some of the potential benefits for S corporations by adding a layer of tax to the shareholders of S corporations engaged in service type businesses. This legislation provides that the earnings of S corporations that engage in professional services will be subject to Self Employment (FICA and Medicare) taxes. This has historically been a major advantage when considering S status, and its elimination will probably be the death knell for a lot of small S corps that will no longer have an incentive to maintain S status.

The bill hasn’t left the House as of today and will be taken up by the Senate when it does. Given all the revenue raising provisions in it (read: tax increases), its probably guaranteed to pass in some form soon.

Friday, May 14, 2010

Wow – How bad was it?

In Dayton, Ohio a man who was upset at being audited by IRS fired several gunshots at an H&R Block employee whom he blamed for the audit. He approached her car in a parking lot outside a bar last Sunday morning and opened fire.

Thankfully she managed to escape with just a few new holes in her car.

There’s a better way to react to an IRS audit. If you prepare and keep good records prior to doing your taxes, an IRS letter will be nothing more than an inconvenience, and you won’t need to resort to mortal combat to make your point. Further, many government inquiries don’t rise to the level of an audit and can be handled quickly with a minimum of correspondence, if you have the proper backup documentation and are prepared.

However, the best defense for a tax return is always a good offense. Whatever you do, don’t hire a preparer who can be found outside of bars on a Sunday morning!

Friday, May 7, 2010

Who slid this in?

As reported at CNN yesterday, Buried deep within the Obamacare law is a change in rules that have a huge impact on 1099 reporting for all businesses. Currently only noncorporate vendors receive 1099 forms for amounts paid for services. However, starting January 2012, businesses will need to issue 1099 forms to all vendors that were paid over $600 in a year FOR ALL GOODS AND SERVICES.

This means that if you are an independent contractor, or landlord, or any other form of business, you will issue 1099 forms annually to every vendor (ie Office Depot, Verizon, etc.) for any amounts you paid totaling over $600, including purchases of supplies, equipment, and inventory. Corporate vendors will no longer be excluded.

This will result in a massive increase in 1099 filings, as well as a massive increase in related correspondence with IRS for all businesses. If you run a business you will need to obtain addresses and Federal ID #’s for every company you do business with and keep them on file for end of the year reporting. Further, if you are a corporation, be prepared to receive an avalanche of 1099 forms each year and be able to demonstrate to IRS how they were all reported.

Questions that should be asked: What has all this have to do with Health Care? (nothing), Who pays the hidden cost of all this record gathering, keeping and correspondence? (we do), Why was this written into the law?

To answer the last question, consider this: Once a system is set up to report to the government every business transaction that occurs, how difficult would it be to tweak it and add a VAT tax?

Thursday, May 6, 2010

Banana Republic status!

Recently, a survey of the nations CEO’s that ranked all states in terms of their business environments listed California dead last. Actually, we came in 51st out of the 50 states since they included the District of Columbia. According to Chief Executive Magazine, California has become “the Venezuela of North America”. Maybe that’s why Governor Arnold wears white suits in his TV spots promoting the state.

The reason this is tax newsworthy is because previously I wrote (see previous blog entry California Tax Freebie dtd Jan 7, 2010) about an obscure tax credit available to California businesses who hired new employees in 2009. The credit reduces California income taxes and is calculated based on a formula that compares hours worked for new hires in 2009. The credit is only available on a first come, first served basis until allocated funding is used up. Funding allocated for this employer subsidy was $400 million, and it was expected that credit applications would far exceed that amount. As a result we encouraged many of our clients to file tax returns early so as not to miss out on this giveaway.

Well, it turns out that due to our almost highest in the nation unemployment rate, there apparently haven’t been enough new hires to make a dent in this credit. As of March 20th the state had only allocated about $14 million of the $400 million available. The good news is that you probably have till at least June 30 to file 2009 tax returns and still claim this credit. The bad news is that due to our business climate there probably aren’t many of you that had new hires in 2009 anyway.