Our Taxing Times

Freebies

I earn my living preparing taxes. I guess you already had that figured out. I get paid for my knowledge on tax issues and applying that information to the taxpayer’s individual situation.

Yet I’m regularly asked to do work for free or for a reduced price. I’m not talking about price shoppers. I have a firm policy against pricing over the phone. But if the client will come into the office and let me start the return, I will give them a fairly accurate price quote and a good idea how the return will come out. If they aren’t comfortable with my price, I will give them all their paperwork back. No charge.

The problem is those who let me completely prepare the return and then start with their hard luck story and ask for a free return or a significantly reduced price. Some seem surprised that I would expect them to pay before I will file the return. But that’s one of the things you have to deal with when you run a business.

For taxpayers who really can’t afford to pay to have their tax return prepared but can’t do it themselves, I would suggest VITA or TCE. VITA and TCE are IRS programs which provide tax return preparation help to taxpayers. These are volunteer programs so they can provide free help. VITA can help with returns for taxpayers making under $51,000 a year. TCE volunteers focus on helping taxpayers 60 years old or older. For more info about the programs and how to find a location near you, please check the IRS website.

Our Taxing Times has increased the number of taxpayers seeking free tax help. These are not readers or potential clients who are asking for clarification on an issue or with a general question. These are people who want me to make a decision about a specific issue that affects their return. A return that I’m not going to prepare. Too often they already have an opinion from their tax pro but they don’t like what they are hearing and want me to tell them what they want to hear. Sorry! If you want advice specific to your situation, we need to talk about you becoming a client.

FYI, I also don’t know anything about Turbo Tax or other box or online tax software so I can’t answer your questions about those programs.

I do some pro bono work and make payment and pricing arrangements but that needs to be discussed before I preparer the return. The bottom line is that you don’t work for free so you shouldn’t expect that I or any tax pro will prepare your return for free.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Shorting Deductions

Dear Client – I know what you’re thinking. Since Gov. Romney didn’t claim all his charitable deductions so that he could hit his target tax rate, you’re thinking about not taking all your business (farm) deductions so that you can manipulate your income tax. I’m sorry to break the news to you but you can’t do that. Business deductions are not the same as charitable deductions.

If you spent the money on your business and have the documentation to prove it, you are required to take the expense off against your business income. I understand that you need to show a higher income for a bank loan or for Social Security but shorting your legitimate deductions is not a good idea. And don’t even think about manipulating your expenses for Earned Income Credit purposes. That is a good way to find yourself in deep trouble with the IRS. So don’t even try!

All taxpayers have to option to take their standard deduction (based on their filing status) or itemized deduction which includes their charitable deductions. Generally they will take the one that results in the least amount of tax. But it’s their choice. Not so with business income and deductions. The IRS expects a business to report all their income and take the ordinary and necessary expenses they paid.

Taking charitable deductions are a taxpayer decision. Correctly reporting your business income is the law.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Oklahoma Intangibles

Taxes will be a big part of the November election. Not just in the campaigns of those running for office but in tax issues up for a vote. Oklahoma has a doozy of one they will be voting on. State Question 766 will ask voters to expand the exemption from taxation to include more intangible assets.

A quick explanation; all assets can be broken down into 2 basic categories. The first is the tangible property you can touch and see. Intangible properties are assets that are not physical (and that is a little simplistic.) In my office, I have a lot of tangible assets. They include the desks, computers and all the furniture and equipment. But I also have intangible assets such as my client list and the goodwill my business has built up in almost 10 years. The intangible assets won’t come into play until I sell the business. Then they become a factor in negotiating the sale price. If I buy a business with intangible assets, those assets are amortized just like the tangible assets I buy are depreciated. For most businesses, amortization is the only tax treatment you have to worry about for intangibles. But not in Oklahoma.

Intangible assets are subject to property tax (ad valorem tax) in Oklahoma. In 1968, a constitutional amendment specifically exempted some intangibles from the property tax. That list includes cash, gold/silver, bank drafts/checks/accounts, receivables, stocks/bonds and brokerage accounts. It didn’t include intangibles like customer lists, goodwill, patents, trademarks, and a wide variety of other assets. Since then, AT&T has been fighting the issue. The way they interpreted the rules, more assets actually fell under the exempted intangible assets listing and shouldn’t be taxed. In 2009, the Oklahoma Supreme Court ruled against AT&T. Since then, the company has been working Oklahoma lawmakers to change the law.

Here’s the twist, the law hasn’t really been enforced. But if the list of intangible assets isn’t expanded, county assessors will have to start valuing, and taxing, intangibles. They will have to decide what intangibles each business has and how much it’s worth

Estimates are if State Question 766 passes, it will cost Oklahoma up to $50 million in 2013. Most of this money would come out of monies targeted for county governments and schools. Wait! How can that be?  After all, if those intangibles aren’t being taxed now, how can the state lose tax money? Well in the case of public service companies like AT&T and the Oklahoma Gas and Electric Co, intangibles are taxed. The property taxes for these companies are based on the unit value of the company. That valuation includes intangible assets which other businesses aren’t paying tax on, yet. So, if the bill passes, they can exclude assets from their valuation and pay less ad valorem tax.

So if State Question 766 passes in November the state will lose a lot of tax money from a few businesses. If it fails, local assessors will have to enforce the law and most other businesses will have to pay more taxes. It’s really a no win situation.

 NewOK

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Profile in Taxing Subjects

I’m very excited and flattered. I have been profiled in Taxing Subjects!

Taxing Subjects is an online publication for tax pros from Drake Software. It’s gone from a hard copy to more of a blog format over the last few years. But besides articles on licensing and other trends in the tax preparation business, they have always profiled 3 to 4 customers a year. You can find my profile here.

I’ve been using Drake Software for over 20 year; first as an employee and once I opened my own office it was the logical tax software choice. I have tested other tax software but I’ve never found anything that comes close (for me.) Beside their tax prep software, Drake has developed a write-up program, a document manager (makes going paperless much easier) and a tax planner which are part of their software package. They have also partnered with other companies to provide their customers with the best in new trends like cloud file transfer and research materials.

I don’t know why I was selected from all the great tax pros that use Drake but I’m very flattered and proud. It's a great way to start the week.

 McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Tips vs. Service Charge

My first job was waiting tables at a local restaurant for the summer. I made about  $0.50 an hour plus tips (this was a while back). The paychecks went into the bank for college but the tips were my spending money. Waitressing was something I did to earn school and spending money several times. I liked the job.

Recently, the IRS has released guidance on what to do about service charges a restaurant adds to the customer’s bill. These service charges could include extra charges for room service or large parties, delivery charges, bottle charges and luggage assistance charges. These charges are to be considered wages to the employees to whom they are distributed. They are not tips. Tips are under the control of the customer. The customer decides who will get the tip and how much they choose to give not give. A required charge added to the bill is a service charge and a gift decided on by the customer is a tip.

This distinction is not subject to negotiation by the employee and employer. The IRS has issued Rev. Rul. 2012-18 to explain all the procedures in regards to FICA and reporting.

So when you get a bill that includes a service charge, remember that your waiter/waitress doesn't get all that money. If the service warrants it, you should still leave a tip for them.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Medicare B and the Self-Employed

When you’re self-employed, filing a Schedule C or F with your 1040 or as partner in a partnership or qualified S-corporation employee, you have the ability to take health insurance premiums as an adjustment to income. Most taxpayers have to include their out of pocket health insurance premiums with their other medical expenses on the Schedule A. These expenses are first limited by 7.5% of the adjusted gross income and then what are above this “floor” are added to the other itemized deductions. The total of these deductions are compares to the return’s standard deduction and generally the taxpayer takes the higher amount. Medicare premiums have always qualified as a medical expense on the Schedule A.

A self-employed taxpayer has another option to deduct their health insurance as long as the insurance is bought under the business name or, in the case of the sole proprietor, under their name. But before 2010, they could not include the Medicare B premiums which are deducted from their Social Security. In 2010, the IRS changed the 1040 instructions and Pub 535 to allow Medicare B but they didn’t provide any explanation as to why the change.

The Office of the Chief Counsel has now clarified their position in CCA 201228037. The argument against Medicare B was that it wasn’t a plan established under a trade or business. It’s a Federal program not the taxpayer’s insurance. But the Chief Counsel has ruled that Medicare B is a qualified insurance under Sec 162(l) and qualifies for the Self-Employed Health Insurance (SEHI) deduction. Medicare D (the drug plan) has always qualified for the special deduction.

Talk to your tax pro to see if you meet the qualifications for the SEHI. You can amend any open tax years to take advantage of the new rules.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Office in Home Deduction

A lot of small businesses don’t have an office or storefront, they work from their homes. For them, the IRS has created a special business tax deduction called the Office in Home Deduction. As part of a full disclosure, I do want to point out that a variation of this deduction is also available to employees who are required to work from home. If you think you might qualify after reading this post, please talk to your tax professional about the special guidelines and handling for employees. Also, for non-sole proprietors (partnerships and S-corps), check with your tax professional for specifics on how this needs to be handled.

The Office in Home (OIH) deduction allows the business owner to take a deduction against their business income for a percentage of the costs of operating their home. There are a few special requirements which have to be met. First, the office must be used exclusively for business. A spare bedroom that is not used for anything but the business meets the requirement. But if the bedroom is used by guests or when the grandkids sleep over, then the room doesn’t meet the exclusive test and there is no deduction. The key is to be a “special identifiable space.” So, a screened off end of the family room could qualify if the other requirements are met but not the den where you work on the business, pay personal bills and handle your investments. Next, the area must be the principle place of business for the business. Specifically, it is the place where the administrative and management functions take place. If you have an office at your shop and also have a set up to bring work home, that doesn’t qualify for OIH. But, if your shop doesn’t have an office space and all paperwork is done at home, the home space many qualify. The area must be used regularly. A dedicated business office still isn’t deductible if it’s only used occasionally. You also need to have a business that has a profit making objective. Hobby and investment activities do not qualify for OIH.

There are a couple of exceptions to these rules, after all this is taxes we’re talking about. The exclusivity test does not apply to in home day care facilities. A licensed day care can factor in the business hours the home is used into the calculations for the deduction. Also, storage areas for inventory or demonstration materials have a little looser exclusivity requirement. A few shelves in the garage or part of a closet will quality for OIH. Finally, if the home business area is a separate building from the home, it might qualify for an exception to the principle place of business test. A retail shop owner might keep season decorations and extra racks and shelves in a separate building at home and still qualify for OIH although no business takes place there.

The actual Office in Home for a business is calculated on Form 8829 and then carries to the Schedule C or F. The first issue is to determine the use percentage. This is the square footage of the qualifying “office” divided by the square footage of the whole building. This is further modified by hours actually used if the area is used for daycare or if usage began during the year. OIH expenses types are direct and indirect. Direct expenses are those which only apply to the area used by the business. The storage shed with a business’ inventory has a broken window; the repair cost is a direct cost. But most OIH expenses are indirect costs. These include mortgage interest, qualified mortgage insurance premiums and real estate taxes. The balance after the office in home deduction is subtracted can be used on the taxpayer’s Schedule A. Other OIH expenses are home insurance, rent, utilities, repairs and maintenance to the whole property and depreciation.

The catch? The Office in Home for a business can only be used to offset income from the business. Sort of.  OIH expenses don’t come into play until all other business expenses are deducted from the business income. A tentative profit/loss is created and the OIH deduction can be taken into consideration. Form 8829 breaks the home expenses into three categories. The first are the mortgage interest, house taxes and mortgage insurance premiums. Since these are potentially deductible expenses on the Schedule A, they can create or increase a loss on the Schedule C or F. But other operating expenses (like insurance or rent) and the depreciation can’t cause or increase a loss. In that case, the unused expense deduction is carried forward to the next year. The other catch is if you own the home, the depreciation on the OIH area may have to be recaptured and taxed when the rest of the home meets the sale of personal residence exclusion.

If a small business qualifies, the Office in Home deduction can be a great benefit to the business owner. It allows him/her to deduct for the use of their home. But even better is the effect it has on commuting miles. Without the OIH, the miles to the first job or errand are commuting and not deductible. A valid OIH allows the business owner to log and deduct the miles they drive for business when they leave their home. Their commute is a very short walk.

Office in Home can be very confusing and as mentioned in this post, there several sets of rules for different situations. So, please check with your tax professional to see if you qualify for one of them.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Bye-Bye, So Long, Farewell...

Okay, I’m really not going any where but I’ll be posting a lot less the next several weeks. I’ll try to do quick posts when I hear about something that needs to be shared. It just depends what I can do between clients or late at night.

Don’t forget you can search Our Taxing Times by using the Google search box to the right and marking to search the blog And the Facebook and Google+ are office pages where I try to post tips.

I will be back.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Income and Their Forms

As you’re waiting patiently for all your tax forms to arrive, it might be a good idea to review.

Wages – If you worked in 2011, you will get one of 2 forms. The most common is the W-2 that lists your wages and withholding. There is no minimum. Even if you worked a few hours, you should get a W-2. On the other hand, if your employer treated you like a contract labor, you will get a 1099MISC from them. There is a minimum on the 1099MISC. If they paid you under $600, they aren’t required to send you a form. They can send you a 1099MISC if they choose and you are required to include what they paid you whether or not you get the form.

Interest – You will get a 1099INT from the bank or other payer if you earned over $10 of interest for the year. If your interest is under $10, they are not required to send the form but you are required to report it. And it doesn’t matter if you actually received the cash or left it into the account, it’s taxable.

Dividends – These are reported on a 1099DIV and the same rules apply as for interest.

Retirement – Pensions and IRA distributions are reported on 1099R. Don’t rely on a check stub. The 1099R provides more info than just the amount you received.

Social Security – The SSA-1099 shows the total benefits paid to you and for you. This is the amount that is reported on your tax return.

Prior Year State Refund – If you itemized deductions the previous year you should get a 1099G from the state. This may not be the correct amount to report. There is a calculation that might reduce the taxable amount. This is why a new preparer would want a copy of your prior year return.

Unemployment – A 1099G is also used to report any unemployment you received in 2011.

Sales – Sales of stock and mutual funds will be reported on a 1099B. This will be adjusted to create a gain or lost that eventually makes it way to the 1040. If you sale property, that will be reported on a 1099S. The exception is if you sold your personal residence and the reporting agent knows you qualify for the exclusion for sale of personal residence. It’s also possible to sell something and not receive a form for it. Check with your preparer about you specific situation.

Business Income – This also includes farming. While you might get a 1099MISC for some of your business income, it’s up to you to keep track of your income and report it.

Rental Income -  If a business is paying you rents for property or equipment, you should get a 1099MISC if the amount is over $600. Individuals are not required to provide the forms and you are required to report all the income whether you get a 1099MISC or not.

Alimony – Since they are payments from an individual, they aren’t reported on a form. But, they are taxable and need to make it on your return.

Gambling - If your gambling income is from winning, you may be given a W-2G. This form has several minimums depending on how the money is won. A 1099MISC might be used if you won a tournament or prize. And yes, even if you don’t get a W-2G or 1099MISC, you report any gambling income.

Share of another entity – If you are a partner in a partnership, shareholder in a S-Corp, or beneficiary of an estate or trust, you should receive a K-1 breaking down your part of taxable income.

There you are- the most common sources of income and their forms (if they have one.) If you have income from a source I haven’t mentions, ask your preparer. Remember, just because you didn’t receive a form reporting the income, you are still responsible for including it on your return. The minimums are for the convenience of the payer not the recipient.

 McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Tax Interview Checklist

You’ve made your appointment to get your tax return prepared but are you ready for that appointment? Here’s a quick list of what I would love that you bring with you. Every preparer is different so check with them. And none of these will apply to everyone. My idea is to get you thinking.

• W-2s and 1099s (and 1098s)- this sounds like a no brainer but I have had clients forget them. And don’t get in a hurry and think you can guess unemployment or Social Security benefits.
• IDs and Social Security cards for yourself and spouse (if you are a new client).
• Social Security cards for dependents unless I have them on file already.
• Past year tax return if you are a new client or I didn’t do your return last year.
• If you have a business, farm or rental, I will need income and expenses for that. I don’t need to see the receipts but keep them handy in case I have questions. Also don’t lump expenses into one number. Totals for supplies, repairs, mileage, etc. are great.
• And while we’re talking businesses, please list any equipment or major repairs separately with when you bought/paid for it. Those may be treated differently.
• If you sold any investment or property in 2011, I will need to have the info on when you bought it and any increases in basis. For investments, that could be dividends that were re-invested. (This might be on the broker statement.) Property improvements should also be noted.
• Do you have any K-1s from a partnership, S-Corp or fiduciary? Bring them in.
• Gambling winning and any losses you can support with documentation.
• Did you make an IRA contribution? What about a Sep/Simple? (Withdrawals should have a 1099R)
• State and local taxes might be deductable. This would include taxes on your properties and sales tax.
• Charitable Contributions could be deductible if you have receipts or checks for them. If you made non-cash donations, bring your list of what you gave and any documentation and, if necessary, the appraisals you had made.
• If you paid a lot of medical expenses or insurance out of pocket, you may qualify for a deduction, so bring them in just in case.
• Your mortgage interest should be on a 1098 but if not, bring in that info too.
• Was there an adoption in 2011? Bring in your documents for that.
• Did you have education expense for yourself or dependent? Bring those records in with the 1098T and any statement the school provides.
• Is there a possibility for child care credit? Then I’ll need the amount of the day care expenses and name, SSN/EIN and address for the provider?
• Did you make any estimated payments during 2011 (or January 2012)? Please bring dates and amounts for those.
• And for Kansas full year residents, if you qualify for Homestead (or thing you might) please bring in your landlord and rent info or the tax bill you received in Nov/Dec 2011.

A quick checklist. If you have a question about something I might have missed or you need more info, ask  your preparer. I always tell clients, when in doubt, bring it in.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.