Tax Filing Deadline Rapidly Approaching

Just a reminder to those who have not yet filed their 2010 tax return that April 18, 2011 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due.  Normally the deadline is April 15, but when a due date falls on a weekend or holiday, the due date is extended until the next business day.  Thus, since April 15 is a legal holiday in Washington, D.C. (Emancipation Day), the due date for 2010 tax returns is extended until Monday, April 18, 2011. 

In addition, the April 18, 2011 deadline also applies to the following:

• Tax year 2010 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due.  Late payment penalties and interest will be assessed on any balance due, even for returns on extension.  Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
  
  
• Tax year 2010 contributions to a Roth or traditional IRA – April 18 is the last day contributions can be made to either a Roth or traditional IRA, even if an extension is filed.
  
  
• Individual estimated tax payments for the first quarter of 2011 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2011 estimated taxes are due on April 18.  If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date.  Please call this office for any questions.
  
  
• Individual refund claims for tax year 2007 – The regular three-year statute of limitations expires on April 18 for the 2007 tax return.  Thus, no refund will be granted for a 2007 original or amended return that is filed after April 18. Caution: The statute does not apply to balances due for unfiled 2007 returns. 

If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 18 deadline.  Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute.  If it is apparent that the information will not be available in time for the April 18 deadline, then let the office know right away so that an extension request may be prepared and estimate tax vouchers if needed.

If your returns have not yet been filed, please call right away so that we can schedule an appointment and/or file an extension if necessary.

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Tax Tips about Tip Income

If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes: 

• Tips are taxable - Tips are subject to federal income, Social Security and Medicare taxes.  The value of non–cash tips, such as tickets, passes or other items of value, is also income and subject to tax.
  
  
• Include tips on your tax return - You must include in gross income all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip–splitting arrangement with fellow employees.
  
  
• Tip-splitting and cover charges - Tips given to others under the “splitting” arrangement are not subject to the reporting requirement by the employee who initially receives them.  That employee should report to the employer only the net tips received.  Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements.  The employer should add the employee’s share of service charges to the employee’s wages.
  
  
• Report tips to your employer - If you receive $20 or more in tips in any one month, you should report all of your tips to your employer.  Your employer is required to withhold federal income, Social Security and Medicare taxes.  If the tips received are less than $20 in any one month, they need not be reported to the employer.  However, those tips are still taxable and must be reported on your tax return and subject to both income and Social Security taxes.
  
  
• Employer allocation of tips - Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and have ten or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport”.  Underreporting occurs if an employee reports tips which are less than 8% of the employee’s applicable share of the employer’s gross sale.  The employer must allocate to those underreported employees the difference between what the employee reported and the 8%.  The allocation amount is noted on the employee’s W-2 but does not have to be reported as additional income if the employee has adequate records to show that the amount is incorrect.  Note that the allocated tips are not included in the total wages shown on the employees’ W-2.  The IRS frequently issues inquiries where the taxpayer’s W-2 showed an allocation of tips and a lesser amount is reported on the tax return.
  
  
• Keep a running daily log of tip income - Tips are a frequently audited item and it is good practice to keep a daily log of your tips.  The IRS provides a log in their Publication 1244, which includes an Employee's Daily Record of Tips and Report to Employer to record your tip income. 

If you are receiving tips and have any questions, please give this office a call.

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100 Percent Write-Off for Qualified Leasehold Improvements

In an effort to get the economy back on the rails again, the 2010 Tax Relief Act permits businesses to claim a 100% depreciation deduction (100% bonus depreciation allowance) in the year that qualifying assets are placed in service. Qualified leasehold improvements clearly are eligible for this special 100% write-off.  

Bonus depreciation basics - In general, a leasehold improvement qualifies for the 100% bonus depreciation allowance if it is acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and the original use of the improvement commences with the taxpayer.  

Qualified leasehold improvement property - Generally, qualified leasehold improvement property includes interior improvements to a building which is nonresidential real property if: 

(1) The improvement is real property;

(2) The improvement is made to leased property. A lease for this purpose is defined as any grant of a right to use property, either by the lessee, sublessee or lessor of the building portion;

(3) The leased portion of the building is occupied exclusively by the lessee (or sublessee); and

(4) The improvement is placed in service more than 3 years after the date the building was first placed in service. 

The following expenditures, however, do not qualify: amounts paid for the enlargement of a building, a structural component that benefits a common area, an elevator or escalator, or the internal structural framework of the building.

Whether you have already made leasehold improvements or are contemplating in doing so, and have questions on how this special write-off can fit into your business planning for 2011, please give this office a call.

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Did You Take an Early Distribution from Your Retirement Plan?

In today’s economy, some taxpayers may need to take money out of their retirement plans to make ends meet. If you have or are contemplating on taking a distribution, there are some very important and unexpected tax issues you need to be aware of. 

1. Withdrawals from tax-deferred retirement accounts, such as Traditional IRAs are generally taxable and will be added to your other income for the year and taxed at your highest marginal rate.
2. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.  Be aware that all distributions for an account that contains both deductible and nondeductible contributions is distributed ratably based between the deductible and nondeductible balances in the account.
3. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
4. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
5. Taxable distributions that are received from your retirement plans before you reach age 59½ are generally considered early or premature distributions and subject to an additional 10 percent penalty tax. 
6. Distributions that are rolled over to another IRA or qualified retirement plan are not subject to the additional 10 percent tax.  However, you must complete the rollover within 60 days after the day the distribution is received.
7. There are several limited exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain unreimbursed medical or educational expenses, or if you are disabled.  Call for additional information and limitations. 

Taking money from your retirement plan can not only affect your current year taxes, it can have a profound impact on your future retirement nest egg.  You are encouraged to carefully consider the overall impact before making a withdrawal.  If you have questions or need assistance, please give this office a call.

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Two Tax Credits to Help Pay Higher Education Costs

There are two federal tax credits available to help individuals offset the costs of higher education for themselves or their dependents.  They are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, a taxpayer must pay post-secondary tuition and fees for themselves, their spouse or their dependent.  The credit is claimed by the individual who claims the student as a dependent, even if someone else pays the tuition including the student.  However, if the student is not claimed as a dependent of another, then the student will claim the credit.

For each student, only one of the credits can be claimed in a single tax year.  For example, the American Opportunity Credit cannot be claimed to pay for part of a student’s tuition charges and then the Lifetime Learning Credit claimed for $2,000 more of the school costs.

However, if college expenses are paid for two or more students in the same year, a taxpayer can choose to take credits on a per-student, per-year basis.  Thus, for example, the American Opportunity Credit can be claimed for one child and the Lifetime Learning Credit for the other.

Here are some key facts you should know about these valuable education credits:

American Opportunity Credit 

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that a claimant may be able to receive up to $1,000, even if they owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half-time for at least one academic period.
• Qualified expenses include tuition and fees, course-related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.  Above those amounts, the credit quickly begins to phase out.

Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of post-secondary education and for courses to acquire or improve job skills.
• The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course-related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.  Above those amounts, the credit quickly begins to phase out.

There is also an above-the-line tuition and fees tax deduction available, but you cannot claim the tuition and fees tax deduction in the same year the American Opportunity Tax Credit or the Lifetime Learning Credit is claimed.  Choose to take either the credit or the deduction and consider which is more beneficial for you. Generally, the credits provide the greater benefit.

Please call this office if you have any questions related to education credits.

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Can You Benefit From the Expanded Adoption Credit?

You may be able to take a tax credit in 2011 of up to $13,360 ($13,170 in 2010) for qualified expenses paid to adopt an eligible child. The Affordable Care Act increased the amount of the credit and made it refundable, which means it can increase the amount of your refund.  Here are several things you to know about the expanded adoption credit.

1. For tax years 2010 and 2011, the credit is refundable, meaning that you can get it even if you owe no tax.

2. If you claimed the adoption credit in a prior year and have a carryover to 2010, that carryover is also fully refundable in 2010.

3. When claiming the credit, it cannot be e-filed and documents supporting the adoption must be attached.  Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. If your modified adjusted gross income is more than $182,520, your credit is reduced. If your modified AGI is $222,520 or more, you cannot take the credit.

7. Without Congressional action, this credit will no longer be available after 2011.

If you have questions about this credit and how it might fit into your adoption plans, please give this office a call.

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Need Help Paying Your Taxes by the April Due Date?

The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who have received a tax bill?  What do you do if you owe money to the IRS and can’t pay?

The IRS encourages you to pay the full amount of your tax liability on time.  If you get a bill for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest.  It is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.  You can also pay the bill with your credit card.  The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.

You can pay the balance owed by credit card, electronic funds transfer, check, money order, cashier’s check, or cash.  Visit the IRS website for information on how to pay by credit card.   To pay using electronic funds transfer, you can take advantage of the Electronic Federal Tax Payment System (EFTPS).

An installment agreement may be requested if you cannot pay the liability in full.  This is an agreement between you and the IRS for the collection of the amount due in monthly installment payments.  To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments.  If you are an employer, you must be current with your federal tax deposits.

If you owe $25,000 or less in combined tax, penalties, and interest, you can request an installment agreement using the web-based application, Online Payment Agreement (OPA), found on the Internet at IRS.gov.  Or, you can complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS.  The IRS will inform you within 30 days whether your request is approved, denied, or if additional information is needed.  

You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, may need to be completed.

If an agreement is approved, a one-time user fee will be charged.  The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account.  For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged.

If you have questions related to paying your tax liabilities, please give this office a call.  The worst thing you can do is to ignore the problem and allow it to escalate to the IRS collection’s department.   

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Plan Your Withholding & Estimates for 2011

April 18 is the due date for the first estimated tax installment for the 2011 tax year and only a couple of weeks away.  

You may not realize it, but taking a few minutes to plan your estimated tax payments and/or proper withholding amounts for the year can actually insulate you from underpayment penalties in 2012.    

Congress considers our tax system as a "pay-as-you-go" system.  To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the "pay-as-you-go" requirement.  These include: 

• Payroll withholding for employers;  
• Pension withholding for retirees; and  
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty.  This nondeductible interest penalty is higher than what might be earned from a bank and is computed on a quarter-by-quarter basis. 

Safe Harbor Payments – Federal law and most states have safe harbor rules. There are two Federal safe harbor amounts that apply when the payments are made evenly throughout the year:

1. The first safe harbor is based on the tax owed in the current year.  If your payments equal or exceed 90% of your current year’s tax liability, you can escape a penalty.
   
   
2. The second safe harbor – and the one taxpayers rely on most often – is based on your tax in the immediately preceding tax year.  If your current year’s payments equal or exceed 100% of the amount of your prior year’s tax, you can escape a penalty.  If your prior year’s adjusted gross income was more than $150,000 ($75,000 if you file married separate status), then your payments for the current year must be 110% of the prior year’s tax to meet the safe harbor amount.

Where taxpayers get into trouble is when their income goes up or their withholding goes down for the current year versus the prior year.  Examples are having a substantial increase in income, such as when investments are cashed in, thereby increasing income but without any corresponding withholding or estimated payments.  Another frequently encountered situation is when a taxpayer retires and his payroll income is replaced with pension and Social Security income without adequate withholding.  Taxpayers who don’t recognize these types of situations often find themselves substantially underpaid and subject to the underpayment penalty when tax time comes around.  

Bottom line, 100% (or 110% for upper-income taxpayers) of your prior year’s total tax is the only true safe harbor because it is based on the prior year’s tax (a known amount), whereas the 90% of the current year’s tax amount is a variable based on the income for the current year, and often that amount isn’t determined until it is too late to adjust the prepayment amounts.   

Therefore, it is very important that you let this office know of any potential tax events so that adjustments to your withholding can be suggested or estimated payment vouchers can be provided. Please call this office for assistance.

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Are You Missing Out on Your 2007 Tax Refund?

If you, a member of your family or a friend has a refund coming from a 2007 return that has yet to be filed, you only have until Monday (April 18) to claim your refund.   The IRS reports that it has refunds totaling approximately $1.1 billion for the nearly 1.1 million people who did not file a federal income tax return for 2007.  

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund.  If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury. 

By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2007.  In addition, many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2007 were $39,783 for those with two or more children, $35,241 for people with one child, and $14,590 for those with no children. 

For 2007 returns, the window closes on April 18, 2011. The law requires that the return be properly addressed, mailed and postmarked by that date.  There is no penalty for filing a late return qualifying for a refund. 

The IRS reminds taxpayers seeking a 2007 refund that their checks will be held if they have not filed tax returns for 2008 and 2009. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past due federal debts such as student loans. 

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Is a Home Office Right for You?

In the current economic environment, many smaller firms are looking for ways to cut costs.  One such possible move would be to relocate from a rented office space to a home office.  With today’s modern means of communications and virtual marketplace, this may be a good option for your business.

The advantages include the ability for you to deduct from your business income some home expenses, such as utilities and certain maintenance costs that are not otherwise deductible.  Those expenses will include a depreciation allowance for the part of your home that is the office.  A portion of your mortgage interest and real property taxes will be deducted on your business schedule rather than as itemized deductions.  You will be eliminating the costs of your nondeductible commuting travel, while business travel will now generally be measured from your front door. 

There are two significant downsides to a home office.  First, to the extent of the depreciation taken on the home, gain when you sell it cannot be excluded under the home sale rules.  Secondly, if the home office is in a separate structure, then the separate business portion does not qualify for the home gain exclusion.  You should also note that the home office deduction is limited in any year that your business operates at a loss.

Generally, a self-employed individual will qualify for a home office deduction if the office is a place where the taxpayer meets with customers, patients or clients, or is used on an exclusive and regular basis for administrative or management activities of his or her trade or business, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business.  Even if a taxpayer conducts administrative activities at a fixed location outside the home, he or she is still eligible to claim a deduction as long as the administrative activities conducted at the outside location aren’t substantial.  Space in the home used to store inventory for a wholesale or retail business also qualifies as business use of the home.

If you would like to learn more about how the business use of your home might affect your taxes, please give this office a call.

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Sales Orders in QuickBooks: Why? When? How?

There aren’t that many different types of forms to keep straight in QuickBooks, but you likely don’t use all of them. You probably use invoices and purchase orders frequently, and may fill out the occasional sales receipt or credit memo or estimate.

But what about sales orders? You may find that they could make your bookkeeping more accurate and easier. There are only a few situations where they’re needed, but they’re the appropriate form to use at those times.

A happy problem

If you’re lucky (or a good businessperson), you have customers who place orders frequently. It’s not practical to invoice them every time they order, but you want to make sure everything is recorded. A sales order (which you’ll eventually turn into an invoice) is the correct choice for these customers.

Warning: You must use a sales order from the beginning of the selling process; you can’t switch gears part-way through.

To get started, click Customers | Create Sales Orders. A blank form like this one will open.
 


Figure 1: To create a sales order, you simply fill in the blanks and select from drop-down lists, just as you would with an invoice.

Would you send a sales order out to a customer in a multi-order situation, or wait until you have enough sales to dispatch an invoice? That’s up to you. It’s a good idea if you want them to be aware of the costs that are piling up.

Looking good

Before you begin entering data on the sales order form, check the fields to make sure they’re all needed, or if you’re missing any. The Template field in the upper right corner should display Custom Sales Order; change it if not. Should you want to add or delete fields, click the arrow next to Customize, then Customize Design and Layout.

If you’ve just been sending out the default forms that QuickBooks offers, you should consider adding some personalization. Click Create new design if you want to upload a logo and select fonts, colors, etc. Once you’ve decided on a theme, QuickBooks can apply it to all of your forms.

To add or delete fields, click Customize data layout. By checking and unchecking boxes, you can alter the content of your sales orders.
 


Figure 2: It’s easy. Just check or uncheck boxes to have field labels appear (or not) onscreen and in print. You can also change the label text, reorder columns, and designate text for a footer.

Halfway there

Another situation where you might want to send a sales order is when you’re doing partial invoicing; that is, when you don’t have enough items to fulfill the order as it came in.

In a case like this, go ahead and complete a sales order as if you had everything in stock. When you’re done, save the sales order, then find it and open it again. Click the arrow next to Create Invoice, then click Invoice. You’ll see this dialog box.
 


Figure 3: This dialog box lets you create an invoice for all items on a sales order or just a subset.

Click Create invoice for selected items, then OK. The Specify Invoice Quantities for Items on Sales Order(s) window opens. Items on the sales order you created are listed here, with additional columns for number available and number you ordered, number previously invoiced, and the unit of measured used (if applicable).  

There’s a check box next to Show quantity available instead of quantity on hand. Here, you can opt to display the number of each item that’s truly available; that is, the number actually in inventory minus those reserved, either on other sales orders or for building inventory assembly items. Or you can request the number that’s physically in inventory.

Using this information about availability, you’ll enter the number of items you want to invoice from this sales order in the To Invoice column.  It would look something like this:
 


Figure 4: When you convert a sales order into an invoice, you can select which items should be included.

Click OK, and your invoice appears. Do any editing necessary, and dispatch the invoice.

Tip: You can choose whether to have the items with a quantity of zero display on your invoice by going to Edit | Preferences and clicking on the Sales & Customers tab.  

Tracking it all

There are several places in QuickBooks where you can view your sales orders. The best way to keep track of those partially filled is through two reports, Open Sales Orders by Customer and Open Sales Orders by Item. You can also see them, of course, in the Customer Center, and in the balance and transaction history found next to transaction forms.

Sales orders can help you better track sales, speed up receivables with partial invoices, and maintain communications with frequent buyers. But partial invoices require extra attention to inventory. Before working with them, it’d be best to schedule a session with us; we can help you keep things straight.

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