Archive - Small Businesses Taxes RSS Feed

Small Business Health Insurance Credit, Part 2

March 13, 2013 in Small Businesses Taxes with 1 Comment

This is part 2 of my series on the small business health insurance credit. This post will discuss the basic mechanics of calculating a “full-time equivalent employee” and average wages for purposes of the credit.

First, some ground rules:

  • Owners of a business, and any employees who are family members of owner(s) don’t count as employees for purposes of this credit. This applies to: sole proprietors, partners in a partnership, more than 2% owners of an S-corporation, and more than 5% owners of a C-corporation. This is true even in corporations, where the owner draws a salary and receives a W-2.
Also, if you are a business owner, insurance premiums paid for your insurance will NEVER qualify for this credit. Ditto for premiums paid for any employees who are your family members.

For all other employees, you calculate the number of full-time equivalent employees by:

  • Counting up the hours worked by each employee (up to 2,080 hours per employee), and then
  • Dividing the total hours worked by 2,080.

EXAMPLE 1:

ABC, Inc. employs 10 full-time employees who work 2,080 hours during the year (so a total of 20,800 hours) and 5 employees who work a total of 4,000 hours during the year. To calculate the number of full-time equivalent employees it has, ABC adds 20,800 and 4,000, which equals 24,800, and then divides 24,800 by 2,080, which equals 11.92. That number is then rounded down to the nearest whole number, which would be 11. ABC, Inc. is considered to have 11 full-time equivalent employees for purposes of the health insurance tax credit.

To calculate average wages, you take the wages paid to the employees counted in the employee count, and then divide by the full-time equivalent number.

EXAMPLE 2:

The 10 full-time employees in Example 1 are paid $20/hour, for total wages of $416,000. The 5 part-time employees are paid $10/hour for total wages of $40,000. In total, the amount of wages paid to the 15 employees is $456,000. The average wage for purposes of this credit is $456,000 / 11 = $41,455, which is rounded down to the nearest $1,000 (so rounded down to $41,000).

In Part 3, the fun and games continue, as I’ll discuss the requirement that the employer must pay at least 50% of the premiums.

Home Office Deduction: IRS Offers a Simplified Calculation Option, But the Qualifying Rules Haven’t Changed

January 23, 2013 in Small Businesses Taxes with 4 Comments

ID-10067211The IRS recently announced a new “standard deduction”  option for people claiming the home office deduction. People claiming the deduction will have the option (starting with tax returns for 2013) of taking a flat $5/square foot of office space (up to a maximum deduction of $1,500), or calculating the deduction based on actual expenses. It appears that taxpayers will have the option of choosing from year-to-year which method to use.

This is all well and good, I suppose. It seems like a taxpayer-friendly move. Rather than having to pro-rate your utility bills, mortgage and property taxes, you can just take a flat dollar amount per square foot.

But my concern is, people will be led astray into thinking that it’s now “easier” to qualify for the deduction. Take the misleading headline to this article in Business Week: “Why You Might (Finally) Take the Home Office Deduction.” The implication is, more people will qualify. This is not true.

Already, I’ve talked to taxpayers who have said “I heard about the IRS’s home office ruling. That’s good news for me – I can finally write off my office, right?”

Let me shout this from the highest hill:

THE IRS HAS UNVEILED A SIMPLIFIED CALCULATION OPTION, BUT THE RULES TO QUALIFY FOR A DEDUCTION REMAIN THE SAME. IF YOU DIDN’T QUALIFY FOR THE DEDUCTION BEFORE, YOU WON’T QUALIFY NOW.

We all have some part of our house or apartment that we call a “home office.” But for tax purposes, you only have a true “home office” if you have an area used regularly and exclusively (as in, 100%) for business purposes. If you’re an employee, you have to be using the space “for the convenience of your employer.” These rules have not changed.

You can read the specifics of the home office rules in IRS Publication 587.

So, is this standard deduction a good thing? Yes, it might be, from a simplification standpoint. But it’s not some sort of miracle “new” deduction available for all to take. You have to qualify for the deduction in order to take it, and those rules have not changed.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Beware of Depreciation Recapture on Home Office Deduction

April 4, 2012 in Small Businesses Taxes with 2 Comments

Kay Bell at the Don’t Mess with Taxes blog reminds us that there can be an unexpected, negative tax consequence to taking the home office deduction on a tax return. Someday when the house is sold, any depreciation that a taxpayer has taken through the home-office deduction gets taxed at a 25% rate.

What about just not claiming the depreciation when taking the home-office deduction? Unfortunately, that doesn’t work, as Kay explains:

The IRS is going to make you pay for the home office depreciation when you sell your house even if you didn’t claim it.

That’s right. The law says that you must depreciate your home office to claim all the other home office deduction benefits. And that means that if you claimed all expenses except depreciation, you would still have to account for depreciation when you sell.

I still recommend that people should generally take the home-office deduction if they qualify for it. But it’s also important to know what will happen someday when you sell the property.

You can read all of Kay’s article here.

Taxability of IRAs; Reporting a 1099-K; Deductions for Payments to Consultants — Ask Jason

January 20, 2012 in Ask Jason, Family Taxes, Small Businesses Taxes with 0 Comments

 

Have a tax question burning in your mind? E-mail me at dinesentax@gmail.com. (Ask Jason has been discontinued)

DISCLAIMER: The answers to questions in this segment are intended to be general in nature and do NOT constitute tax advice. Please contact a tax advisor to discuss your unique situation.

Q: My mother had an IRA of $15,000. Do we have to pay tax on $3,700?

A: This is a tough question to answer without more information. I am not sure where you are getting $3,700 from ($3,700 is 24.7% of $15,000; not sure where the 24.7% is coming from). If you are a beneficiary of your mother’s IRA, you have two options: take a cash distribution now and be taxed on it at your regular tax rate, or roll it into a beneficiary IRA and start taking required minimum distributions (RMD) each year based on your life expectancy. The RMD would be taxable income each year. I suggest you contact a tax advisor to discuss these options more fully.

Q: What happens if I don’t report a 2011 Form 1099-K?

A: You still need to report the amounts that were reported to you on the 1099-K. You just don’t put the amounts on the line marked “1099-K” on the Schedule C or Form 1065/1120/1120S. Instead, you put it with your other receipts on the “Other Receipts” line. For example on a Schedule C, Line 1(a) is for 1099-K amounts. You put $0 there this year. Line 1(b) is for other receipts, which is where amounts from a 1099-K go this year.

(Before anyone else sends an e-mail about Form 1099-K, please read this post.)

Q: Can I take payments to an unlicensed consultant as a writeoff?

A: Yes, if they performed work for you. Remember to issue a 1099-MISC if they are unincorporated and you paid them more than $600.

Beware of Passive Activity Losses on Side Businesses

January 19, 2012 in Small Businesses Taxes with 0 Comments

Section 469 of the Internal Revenue Code is a minefield for taxpayers with business or investment endeavors. The “passive activity” rules can turn seemingly deductible business losses into non-deductible losses. And, the rules for determining whether an activity is passive or not can be cumbersome.

Joe Kristan at the Tax Update Blog tells the story of a Minnesota man who owned a ranch in Colorado in addition to a successful manufacturing business. The IRS and Tax Court both disallowed losses sustained in the ranch because it was a passive activity. As Joe explains:

The regulations say you achieve “material participation” in non-real estate activities for a tax year if:

-You participate at least 500 hours; or
-You participate at least 100 hours and at least 500 hours in that and other “100 hour” activities; or
-You participate at least 100 hours and more than anybody else, or
-You are the only participant; or
-You materially participated in five of the past ten years )or in any three years for a service activity).

There is also a “facts and circumstances” test, but don’t count on it.

You can find Joe’s story here.

Is Section 179 for 2012 $125,000 or $139,000?

January 18, 2012 in Small Businesses Taxes with 0 Comments

UPDATE 1/3/13: The “fiscal cliff” deal passed on 1/1/13 sets the 2012 Section 179 limit at $500,000. See this article from the Farm CPA Today for more details. 

The article below is now obsolete.

—–

A question from a website visitor prompts me to make this post. The visitor, while reading this story, notes that I say the 2012 Section 179 limit is $139,000, but he has read other sources that say the limit is $125,000. He wondered what’s going on.

We can trace the confusion to the ”Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” TRUIRJCA (I’m not sure which is worse, the mouthful of the full name or the weird-looking acronym!) called for the 179 limit to be rolled back to $125,000 for 2012. However, the bill also said the $125,000 amount is to be inflation-adjusted back to 2006. For 2012, that inflation-adjusted amount is $139,000.

See IRS Revenue Procedure 2011-52, bullet-point 20 on Page 15, which says $139,000 is the amount for 2012.

Barring further legislation, TRUIRJCA calls for the Section 179 limit to drop to $25,000 for 2013.

Taxation of Aspiring Authors: Sometimes It’s Taxing

January 11, 2012 in Small Businesses Taxes with 0 Comments

Are you thinking about writing a book? These days it’s easier than ever to self-publish, especially with the advent of e-books. What are the tax consequences? I’ll explore this issue in a series of blog posts. I want to start with a recent Tax Court case that shows that taxes can be painful for aspiring authors.

The case involved an aspiring author who took a 4-month sabbatical from his job at Intel to travel the world in late 2006 and early 2007. He planned to write and self-publish a book about his travels. He traveled to South America, Asia, Africa and Australia and took more than 4,500 pictures for possible inclusion in his book.

On his 2006 tax return, he reported self-employment income of $0 from being an author, and $19,000 of business expenses relating to his travels. This naturally caused the IRS to go “hmmm.”

The IRS challenged the deductions, and last week the Tax Court sided with the IRS and said that the $19,000 of expenses are not deductible because the man was not in the business of writing.

Problems?

On the surface, the man seemed to have a solid case for claiming he was in the business of being an author.

  • He had a business plan that he created before going on his journey.
  • He did have a “day job” at Intel, but the Tax Court has ruled before that having a day job doesn’t mean you can’t also be self-employed at something else.
  • He took a lot of pictures on his trip and kept a journal of his experiences.
  • He kept good records and was able to produce receipts of his expenses.
  • The IRS agreed that the man had a profit motive. This is usually the key hurdle that side businesses need to clear. BUT IT’S NOT THE ONLY HURDLE.

Other Hurdles

Even though he had a profit motive, there are two other hurdles to clear: 1) a taxpayer must be regularly and actively involved in the activity; and 2) the activity must actually have commenced.

The “regularly and actively involved” hurdle is what brought the man down. According to the Court report, the man still hasn’t finished the book, and in fact only has 100-150 pages of a rough draft completed so far. The Court said the man failed to show that he intended to continue to engage in or produce income from being an author. From the Court report:

In Hawkins v. Commissioner … we noted that the taxpayer’s published book of poetry “could just as easily be an isolated venture for the personal satisfaction of … [the taxpayer] seeing … [her] poetry in print as it could be a product of trade or business….” The same could be said of petitioner; his planned travel book could just as easily be an isolated venture for the personal satisfaction of taking a worldwide trip and seeing his travel adventures in print as it could be a product of a trade or business.

I think he would have had a shot in this case if his project had progressed further. But the fact that he has never received a dime of income from writing and hasn’t even finished a draft 5 years after starting makes it hard to argue that he’s consistently engaged in the business of being an author.

Image: digitalart / FreeDigitalPhotos.net
Image: renjith krishnan / FreeDigitalPhotos.net

Real Estate Broker’s Deduction for Flight Lessons Fails to Take Flight in Tax Court

January 4, 2012 in Small Businesses Taxes with 1 Comment

A real estate broker’s attempt at deducting the cost of flight lessons as a business expense crashed and burned in Tax Court on Tuesday.

The broker, from Louisiana, evaluates properties and creates sales materials to present to potential buyers. Part of his evaluation process involves taking aerial pictures of the property. Up through 2007, he would charter a plane and pay a pilot to fly while he took pictures.

In late 2007 the broker decided he wanted to fly the plane himself, so he started taking flight lessons and he deducted the cost of those lessons as a business expense. The cost of education expenses, such as flight lessons, is deductible as a business expense if it maintains or improves skills needed in the taxpayer’s business.

The IRS disallowed the deduction on the grounds that the flight lessons were personal expenses. The Tax Court agreed. While the flight lessons were helpful to his business, they were not essential to his business. From the Court ruling:

Admittedly, evaluating properties from the air and placing aerial photographs in marketing brochures may be helpful to petitioner’s business. However, in 2005, 2006, and 2007, petitioner was able to evaluate properties and acquire aerial photographs without piloting a plane. Petitioner presented no evidence to explain why flying lessons were now required in order for him to view properties or obtain aerial photographs. Although the correlation need not be precise, petitioner has failed to persuade us that a direct or proximate relationship exists between the flight lessons he received and the skills required to be a commercial realtor.

Click here for a link to the Court ruling.

Image: Tim Beach / FreeDigitalPhotos.net

Iowa Section 179 Expense Limits for 2011

December 29, 2011 in Small Businesses Taxes, State Taxes with 0 Comments

A reminder that Iowa lawmakers finally came to their senses earlier this year and decided to couple with federal law on Section 179 expensing for 2011 and 2012. This means the Iowa Section 179 limit is the same as the federal limit: $500,000 for 2011 and $139,000 for 2012.

But remember, Iowa is NOT coupling with federal bonus depreciation. There is no bonus depreciation in Iowa. If you claim bonus depreciation on your federal return, you’ll have to recalculate the deduction on your Iowa return.

Further Dinesen Tax Times coverage: Section 179 and Bonus Depreciation Limits Expire December 31

Current Section 179 and Bonus Depreciation Limits Expire December 31

December 28, 2011 in Small Businesses Taxes with 1 Comment

Joe Kristan at the Tax Update Blog reminds small business owners that current Section 179 and bonus depreciation limits expire on December 31:

The last tax bill of 2011, the 2-month payroll tax cut extension, has no provision to extend the 2011 tax treatment for fixed assets. As things now stand, 100-percent bonus depreciation and the $500,000 Section 179 deduction limit go away after Saturday. Starting Sunday, January 1, taxpayers placing assets in service will have 50-percent bonus depreciation available. The maximum Section 179 deduction will fall to $139,000.

That means taxpayers dawdling on fixed asset decisions in hopes these provisions would be extended need to get busy.

Click here to read more of Joe’s story.

Page 1 of 712345»...Last »