Archive for SF Bay Area Bookkeeping

2010 Brings Increased Deduction for Domestic Production Activities

Posted by: Holly | Comments (1)
Thursday, March 25th, 2010

The domestic production deduction was created to encourage manufacturing and production within the U.S., and it provides a substantial business deduction equal to 9% (up from 6% in 2009) of the lesser of:

  1. the taxpayer’s net income from qualified production activities or
  2. the taxable income (modified adjusted gross income for individual taxpayers) without regard to this deduction for the tax year.

The deduction is further limited to 50% of the W-2 wages of the employer for the tax year allocable to the activities eligible for the deduction.

Domestic Production Activities – Although the definition of “domestic production activity” is a little elusive, it generally does not include retail sales or purely service activities. Among the more common eligible activities are:

  • manufacturing and production activities in whole or in significant part within the U.S.,
  • construction of real property in the U.S., and
  • performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

The following example, one that was used in a Congressional hearing, does a good job of defining what is and is not a qualified domestic production activity: Suppose you are a baker and in the business of producing donuts. Some of the donuts you sell retail directly to the consumers, and some you sell in bulk to hotels and restaurants. The production costs of the donuts sold at retail do not qualify for the deduction, while the costs associated with the wholesale sales to the hotels and restaurants do.

Computing the Deduction – The following is an example of how this deduction works: Suppose your business manufactures a product that you wholesale to retailers. Your net income from sales of that product for the year is $800,000, and the wages you paid to your employees to manufacture that product totaled $200,000. Your deduction for 2010 would be the lesser of 9% of the $800,000 in revenue or 50% of the $200,000 wages. Thus, the domestic production activities deduction for your business would be $72,000 (.09 x $800,000). The deduction is allowed for both regular and alternative minimum tax purposes.

Who Gets the Deduction – This deduction is allowed to all taxpayers, including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is allowed to partners and owners of S corporations (not to partnerships or the S corporations themselves) and may be passed by farming cooperatives to their patrons. And, despite the deduction’s history, it is fully available to taxpayers who do not export.
The foregoing is only an overview of this deduction. If you have questions related to how the domestic production deduction might apply to your specific circumstances, please give this office a call at 888-564-5777.

Categories : Tax Information
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Substantial Penalty for Late Partnership and S-Corporation Returns

Posted by: Holly | Comments (0)
Thursday, March 18th, 2010

Income from both partnership and S corporation returns passes through to the partners or stockholders. Therefore, filing these returns late creates hardships for the partners or stockholders to timely meet their own filing obligations. As a result, the government has imposed some substantial penalties for failure to timely file partnership and S corporation returns.

The penalty is a statutory dollar amount times the number of partners or shareholders for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months. The base amount on which a penalty is computed is $195 per partner or shareholder for returns due for tax years starting in 2010. This is a substantial increase from the previous amount of $89 per partner or shareholder that applies if the entity’s tax year began in 2009. As an example, if your partnership files its 2010 return late and has four partners, the penalty will be $780 ($195 x 4) per month. The IRS may waive the penalty if there is reasonable cause for the late filing.

If you have questions relating to the above, please give this office a call at 888-564-5777

Categories : Tax Information
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Many Business Tax Breaks Expired at the End of 2009

Posted by: Holly | Comments (0)
Tuesday, March 16th, 2010

Although there is some talk of extension, unless Congress acts to retroactively restore them, the following business tax breaks that expired on December 31, 2009 will not be available in 2010:

  • The additional first-year 50% bonus depreciation for qualified property, generally equipment, machinery, electronics, etc.
  • The $8,000 increase in the first-year depreciation limit for passenger automobiles used in business
  • The Sec 179 expense deduction for 2010 is substantially reduced. The maximum amount that may be expensed is $134,000 (down from $250,000 for 2009). The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of property placed in service during the tax year in excess of $530,000 (down from $800,000 in 2009).
  • The five-year depreciation for farming business machinery and equipment
  • The fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • The credit for construction of new energy-efficient homes (this provided a credit up to $2,000 for site-built homes and $1,000 to $2,000 for manufactured homes)
  • The enhanced (greater than cost) charitable deduction for contributions of food inventory by a non-corporate taxpayer from its trade or business of apparently wholesome food inventory for the care of the ill, needy, or infants
  • The enhanced charitable deduction for contributions of book inventories to public schools
  • The enhanced deduction for corporate contributions of computer equipment for educational purposes
  • The seven-year straight-line cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes
  • The film and television producers’ election to expense the first $15 million of production costs incurred in the U.S. ($20 million if the costs are incurred in economically depressed areas in the U.S.)
  • The credit for eligible small business employers equal to 20% of the sum of differential wage payments to activated military reservists

If you have questions relating to any of the above, please give this office a call at 888-564-5777

Categories : Tax Information
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Little-Known – But Important – Credit Card Rules for Merchants

Posted by: Holly | Comments (0)
Thursday, March 11th, 2010

Businesses that accept credit and debit cards must comply with privacy laws that aim to protect customer identity.  There are regulations that even the most seasoned of merchants aren’t always aware of.  It’s important for merchants, as well as consumers, to be aware of these little-known credit card rules to protect themselves and their information.

Stay Compliant with Federal Laws – The Fair Credit Reporting Act is the federal law that establishes the foundation of consumer credit rights. This law regulates the collection and use of consumer credit information by merchants.

Passed as an amendment to the Fair Credit Report Act, the Fair and Accurate Credit Transaction Act prohibits merchants from showing credit card numbers on receipts.  To comply with this law, businesses must truncate credit card information on electronically printed receipts.  Merchants can include no more than the last five digits of the card number and must delete the card’s expiration date.

Example: ACCT: **********00714
Exp: **-**

The law does not apply to imprinted or handwritten receipts; however, merchants using these are also required to protect customer identity. For more information, check out the Federal Trade Commission’s guide Slip Showing?

Comply with State Laws
After complying with the Fair Credit Reporting and Accurate Credit Transaction Act, be sure to familiarize yourself with your state’s laws on the use of consumer credit information.

Many states have laws that establish what kind of information merchants can and cannot ask for or write down when a customer uses a credit card. For example, California prohibits merchants from requesting or requiring that a consumer write any personal information (like their address or telephone number) on any form associated with their credit card transaction.

Not all states have additional laws that specifically regulate credit card practices.  For more information, read more about state merchant laws, or check with a small business expert in your state.

Beyond the Law – Merchant Contracts
Beyond these government regulations, credit card practices are also policed by the credit card companies themselves through terms of service or rules manuals.  These agreements details how transactions using their cards should be carried out.

Interestingly, many merchants cannot require a customer to provide identification as a requirement for accepting a credit card.  Although a merchant is allowed to ask for identification, customers can refuse without suffering a penalty.  The rules manual for popular cards like Visa or MasterCard state that a merchant must accept their card regardless of whether or not the customer provides personal identification. Note: If a customer prefers to be asked for identification, they can write “See I.D.” or “Ask for I.D.” on the back of their card. Although merchants are not required to follow this request, many happily comply.

Another little-known, but common, rule is that credit card companies generally prohibit merchants from establishing a “minimum purchase amount” when processing transactions with their cards. It is very common to walk into a store and see a sign stating that credit card transactions require a $10 minimum purchase.  Credit card companies want to promote the use of their cards and usually include rules that prohibit merchants from making these statements. More often than not, these merchants are violating their processing agreement with their card companies. Official rules vary from card to card but it is safe to say that it is either strongly discouraged or explicitly prohibited in many agreements. Unfortunately, for small businesses, transaction fees often mean that a small purchase made on a credit card hurts their profits.

It is not uncommon for merchants to ignore aspects of their rules manuals, usually because many are unaware the rules even exist.  Businesses should be sure to review the rules manuals for each company whose card they accept as payment.  Consumers should do the same to be aware of the rights they have for each card they carry.

If you have questions, please call this office at 888-564-5777.

Categories : Bookkeeping
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Taxes & Worker Status: Employee vs. Independent Contractor?

Posted by: Holly | Comments (0)
Thursday, February 18th, 2010

If you are a small business owner, whether you hire people as independent contractors or as employees will impact the amount of taxes you withhold from their paychecks, as well as the amount and types of taxes you pay.  Furthermore, it will affect how much additional cost your business must bear, what documents and information must be provided to you, and what tax documents must be given to the individuals you are hiring.
The obvious advantage to treating an individual as an independent contractor is avoiding the added expense of payroll taxes and employee benefits.  Unfortunately, the decision is not an optional one, and employers must be careful when making the decision, lest they set themselves up for a payroll audit and back taxes, penalties and interest.
According to industry sources, the IRS will begin auditing companies in early 2010, focusing their efforts on businesses failing to pay taxes on fringe benefits and misclassifying workers as independent contractors instead of W-2 employees.

Here are some things every business owner should know about hiring people as independent contractors versus hiring them as employees.

  • Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
  • Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
  • Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
  • The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
  • If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
  • If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.
  • Employers who misclassify workers as independent contractors can end up with substantial tax bills.  Additionally, they can face penalties for failing to pay employment taxes and not filing required tax forms.
  • Workers can avoid higher tax bills and lost benefits if they know their proper status.
  • Employers can request the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. A worker may also file Form SS-8, requesting an IRS determination. IRS does not issue determinations for proposed or hypothetical situations.

If you need more information about the critical determination of a worker’s status as an independent contractor or employee, please give this office a call at 888-564-5777.

Categories : Payroll, Tax Information
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What to Do If You Haven’t Filed a Prior Year’s Return

Posted by: Holly | Comments (0)
Monday, February 8th, 2010

The failure to file a federal tax return can be costly — whether you end up owing more or missing out on a refund.

There are several reasons taxpayers don’t file their taxes. Perhaps you didn’t know you were required to file. Maybe, you just kept putting it off and simply forgot. Whatever the reason, it’s best to file your return as soon as possible. If you need help, even with a late return, the IRS is ready to assist you.

Here are some things to consider:

  • Failure to File Penalty - If you owe taxes, a delay in filing may result in a “failure to file” penalty, also known as the “late filing” penalty and interest charges. The longer you delay, the larger these charges grow.
  • Losing Your Refund - There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. The federal deadline for claiming refunds is three years after the return due date. For example, the last day for claiming a federal refund for your 2004 tax return will be April 15, 2008.
  • EITC - Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file.

Whether or not you must file a tax return will depend upon a number of factors, including your filing status, age and gross income. Please call for assistance at 888-564-5777.

Categories : Tax Information
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Are You Recording Information for 1099s?

Posted by: Holly | Comments (0)
Monday, February 1st, 2010

If you use independent contractors to perform services for your business or rental and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses.  (This requirement generally does not apply for payments made to a corporation.)

Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize they have not collected the required documentation. Often it is difficult to acquire the contractor’s information after the fact, especially from those contractors with no intention of reporting the income.

As example, you have a repairman out early in the year, pay him less than $600, then use his services again later, and as a result, the total you’ve paid him for the year exceeds the $600 limit.  You realize you overlooked getting the information needed to file the 1099s for the year, and so will have to spend your valuable time contacting the repairman to obtain the information.  Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services.  Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

IRS Form W-9, “Request for Taxpayer Identification Number and Certification” is provided by the government as a means for you to obtain the data required from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her.

If you have questions or need copies of the Form W-9, please call this office at 888-564-5777.  We can also assist you with your 1099 filing requirements next January.

Categories : Bookkeeping, Tax Information
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Tax Facts about Summertime Child Care Expenses

Posted by: Holly | Comments (0)
Thursday, January 28th, 2010

Many parents who work or are looking for work must arrange for the care of their children during the school vacation.  If you are one of those parents, and your children requiring care are under 13 years of age, you may qualify for a child care tax credit.

Here are some facts that you need to know about the tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent to qualify to claim the credit (but there is an exception for divorced or separated parents).

  1. Day Camps – The costs of day camp generally count as expenses towards the child and dependent care credit.  A day camp or similar program may qualify, even though the camp specializes in a particular activity, such as soccer or computers. The rule that a dependent care center must comply with applicable state and local laws also applies to a day camp where more than six persons are cared for in return for a fee.
  2. Overnight Camp or Tutoring – No portion of the cost of an overnight camp or a tutoring program is a qualified expense.
  3. School Expenses – Only school expenses for a child below the level of kindergarten will qualify for the credit.
  4. Day Care Facility – The expenses paid for a day care center qualify.  If the day care center cares for more than six persons, it must comply with applicable state and local laws.
  5. In Home Care – If your child care provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns.
  6. Credit Percentage – The actual credit can be between 20 and 35 percent of your qualifying expenses, depending upon your income.  The higher your income, the lower the credit percentage.
  7. Maximum Qualifying Expenses – You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit. This will provide a tax credit of between $600 and $1,050 for one child and $1,200 and $2,100 for two or more, depending upon your income.  If the expenses exceed your work earnings, use the earnings to figure the credit.  Dependent care benefits received through your employer will also affect the computation of the credit, and could result in no credit being allowed.
  8. Records Required – To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number.  No credit is allowed without that information.  Where you have more than one child, you must also show the expenses paid for each child, up to the $3,000 maximum per child.  If your state allows a childcare credit, additional information, such as the care provider’s phone number, may be required.

For more information about how this credit will affect your particular circumstances, or for information about claiming this credit for your spouse or a dependent age 13 or over who is not able to care for him or herself, please call this office at 888-564-5777

Categories : Tax Information
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