Dear Clients and Contacts,

Summer is finally upon us. This edition of our newsletter covers some important tips and reminders. Keep in mind that you can make an appointment throughout the year for other services that you may need.

Your continued patronage and referrals are greatly appreciated.

Sincerely,

Tarlow & Co., C.P.A.'S

Parents Can Get Credit for Sending Kids to Day Camp

With summer just around the corner, there is a tax break that working parents should know about. Many working parents must arrange for care of their children under 13 years of age during the school vacation period. A popular solution — with a tax benefit — is a day camp program.

The cost of day camp can count as an expense towards the child and dependent care credit. But be careful, expenses for overnight camps do not qualify. If your childcare provider is a sitter at your home or a daycare facility outside the home, you will get some tax benefit if you qualify for the credit.

The credit is generally 20% to 35% of non-reimbursed expenses; up to $3000 in expenses for one child and up to $6000 for two or more children. The actual credit is also based on your income. The credit is 35% of the child care expense if your income is under $15,000. The credit percentage gradually decreases as the income gets higher, but remains at a fixed 20% rate once your income exceeds $43,000.

If you have questions regarding the available tax credits for child care and what the tax benefit would be if your child attended a summer day camp please give this office a call.

Tax Tips for Recently Married Taxpayers

If you, like many others during the summer months, have gotten married or plan to get married in the near future, here are some post-marriage tips to help you avoid stress at tax time.

Notify the Social Security Administration - Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site, by calling 800-772-1213, or at local offices.
Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822, Change of Address.
Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state correspondence can be forwarded.
Notify Your Employer - Report any name and address changes to your employer(s) to ensure receipt of a correct Form W-2, Wage and Tax Statement after the end of the year.
Check Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket and you may have an unpleasant surprise come tax season next year. On the other hand, if only one works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. Either way, it may be appropriate to estimate your income tax for 2011 and make any required adjustments as soon as possible.

If you need assistance projecting your joint 2011 taxes and adjusting your withholding or other prepayments, please give this office a call.

Tax Tips for Students with a Summer Job

Many students hold a summer job during their time off from school. Here are some tax issues that should be considered when working a summer job.

Completing Form W-4 When Starting a New Job – This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $5,800 (the standard deduction amount) without being liable for income tax. However, if the student has other investment income, the tax determination becomes more complicated. This is because he or she is a dependent of another and subject to special rules.

Tips – For example, if the student works as a waiter or a camp counselor, he or she may receive tips as part of his or her summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and health insurance) and income taxes on these reported tips and then includes the tips and wages on the employee’s W-2. The IRS provides Form 4070A for keeping track of tips.

Cash Jobs – Many students do odd jobs over the summer and are paid in cash. Just because it is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see below). These earnings include income from odd jobs like babysitting and lawn mowing.

Self-Employment Tax – When an individual works for an employer, the employer withholds FICA (Social Security taxes) and Medicare taxes from his or her pay, matches the amount dollar for dollar, and remits the combined amount to the government. When someone is self-employed, he or she is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings is $400 or more. This tax pays for his or her benefits under the Social Security system. Even if he or she is not liable for income tax, this 13.3% tax may apply.

Classification as an Independent Contractor – It does not happen frequently, but some employers will try to avoid paying certain payroll taxes by treating the student employee as an independent contractor. You can tell this is the case if the student receives his or her pay without any income tax or social security withholding, leaving the student holding the bag to pay the 13.3% self-employment tax and income tax liability when he or she file returns the next year after receiving a 1099-MISC instead of a W-2. If this is the case, be prepared and save some of the income to pay the taxes.

ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:

They are in the business of delivering newspapers;
All of their pay for these services directly relates to sales rather than to the number of hours worked; and
They perform the delivery services under a written contract which states that they will not be treated as an employee for federal tax purposes.

Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Please call this office if you are the student or parent and have additional questions.

Do You Have a Financial Interest or Signature with a Foreign Financial Account? Better Read This! June 30th is a Critical Date.

Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities, or other types of financial accounts in a foreign country), if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government each calendar year.

The government uses this reporting mechanism as a means to uncover hidden foreign accounts and ensure that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether they have a reporting requirement.

Reporting is accomplished by filing a “Report of Foreign Bank and Financial Accounts”—more commonly referred to as the “FBAR”—which is due on or before June 30 of the succeeding year. Thus the FBAR filing for the 2010 year is due on June 30, 2011. This report is filed separately from the taxpayer’s income tax return, and no extensions of time are available for filing this form. In addition, taxpayers generally are required to answer “yes” or “no” to questions related to foreign bank and financial accounts on their tax returns.

Penalties for failing to comply can be draconian. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations.

Overlooked Accounts – Many taxpayers overlook the fact that they have a reporting requirement in situations such as the following:

Family Accounts – Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in the foreign country. This is common practice for some ethnic groups. The taxpayer does not really consider the account his or hers, but it falls under the reporting requirement if he or she has signature or other authority over the account and the value exceeds $10,000.
Inherited Accounts – Accounts in a foreign country and inherited fall under the FBAR reporting requirement even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.
Business Accounts – An officer or board member may have signature authority over a business account held in a foreign country and overlook the need to meet the FBAR reporting requirements.

In addition to including any reportable foreign income on one’s tax return, a taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR is filed when required.

If you should have filed the FBAR form in prior years but failed to do so, the IRS has a voluntary disclosure initiative in effect through August 31 of this year. This initiative provides for reduced penalties for those who come forward and pay back taxes and penalties on unreported foreign income for prior years.

If you have questions regarding this reporting requirement, please contact this office.

Tax Perks For the Business Traveler

Food and lodging expenses may be deducted when you are away from home for business purposes. Like everything in the tax law, to be tax deductible there are certain rules to follow and the individuals that know the rules and keep good records get the most out of these deductions.

The IRS requires that lodging expenses (and other expenses of $75 or more) be substantiated by records or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of the expense. The following are some tips to help you stay on top of the required documentation:

Keep good records of travel expenses.
Maintain the records on a contemporaneous basis, i.e., make diary and log notations close to the time the expense is incurred.
Document the business purpose and the expected business benefit.
Retain your travel itinerary to document the business activity while away.

Travel expenses are deductible only if the individual is away from his or her "tax home"—usually considered to be one’s regular place of business—for more than one business day.

Meal expenses are deductible only if the trip is overnight or long enough that there is a need to stop for sleep or rest to properly perform one’s duties. The amount of the meal expenses must be substantiated, but instead of keeping records of the actual cost of meal expenses, a "standard meal allowance" ranging from $46 to $71 can generally be used, depending on where and when the individual travels. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

Lodging expenses must be substantiated with actual receipts and are 100% deductible. Meals included in lodging expenses, such as room service or dining costs charged to a hotel room, must be separately identified, since meals have the 50% limitation as noted above.

In addition to the travel, lodging and meal expenses discussed above, the incidental costs incurred on a deductible trip such as laundry, dry cleaning, phone calls, baggage handling, and so on are fully deductible.

Employees must deduct their unreimbursed travel expenses as a miscellaneous itemized deduction which is subject to a 2% of AGI floor. They are not deductible at all to the extent the employee’s income is subject to the alternative minimum tax (AMT). That is why it is to an employee’s advantage to utilize an employer’s “accountable” reimbursement plan (under which qualified reimbursements are not taxable and not reported in the employee’s W-2 wages) rather than deducting the expenses on their tax return. On the other hand, these expenses are fully deductible as a business expense for a self-employed individual.

Taking the Spouse Along? Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer who accompany the taxpayer on the business trip unless the:

(1) Spouse or dependent is an employee of the taxpayer, and
(2) Travel of the spouse, dependent or employee is for a bona fide business purpose, and
(3) Expenses would otherwise be deductible by the spouse, dependent or employee.

Strategy - The law allows a deduction for the single rate for lodging and frequently there is no rate difference between one or two occupants. Thus, the entire lodging expense for an accompanying spouse will virtually be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if you are traveling by vehicle, the entire cost of the transportation would be deductible. That would generally also apply to taxis at the destination. The only substantial cost that is not allowed is the cost of the spouse’s meals, which, even if they were deductible, would be reduced by the 50% rule. If traveling by air or rail, the cost of the spouse’s tickets also would not be deductible.

Please give this office a call if you have questions related to business travel expenses.

Are You Missing Out On the Research Credit?

The Internal Revenue Code (Sec 41) provides a tax credit of up to 20% of qualified expenditures for businesses that develop, design or improve products, processes, techniques, formulas or software and similar activities. The credit has been available off and on since 1981 and has never been made permanent by Congress. It has been extended several times and is currently scheduled to expire at the end of 2011.

The credit is calculated on the basis of increases in research activities and expenditures. Its purpose is to reward businesses that pursue innovation by continually increasing investment. Even so, an alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline when compared with prior years.

The two methods used to compute the credit are the regular method that provides for the 20% credit, or the simplified method which is easier to document but results in reduced credit amounts.

Regular Method - Under the regular research credit method, the credit equals 20% of qualified research expenditures for a tax year over a base amount established by the taxpayer in 1984–1988 or by another method for companies that started up subsequently. This method may be best for companies that can document a low base amount.
Simplified Method - The alternative simplified method credit equals 14% (12% for years prior to 2009) of qualified research expenses over 50% of the average annual qualified research expenses in the three immediately preceding tax years. If the taxpayer has no qualified research expenses in any of the three preceding tax years, the alternative simplified method credit may be 6% of the tax year’s qualified research expenses. This method may be the best choice for taxpayers with incomplete records from the mid-1980s, those complicated by mergers and acquisitions, or taxpayers with a high base amount from that period.

Qualified Research - The term “qualified research” means research which is undertaken for the purpose of discovering information which is technological in nature, and the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and relates to:

A new or improved function,
Performance, or
Reliability or quality.

Certain purposes that are not qualified include style, taste, cosmetic, or seasonal design factors. The definition is relatively broad and encompasses such activities as:

Developing new or improved products, processes or formulas;
Developing prototypes or models;
Developing or applying for patents;
Certification testing;
Developing new technology;
Environmental testing;
Developing or improving software technologies;
Building or improving manufacturing facilities; and
Streamlining internal processes.

Qualifying Research Expenditures – Generally, expenses that qualify for the credit include in-house wages and supplies attributable to the qualified research; computer time-sharing costs; 65% of contract research expenses (paid to outside contractors in the U.S. who are conducting qualified research on the taxpayer's behalf); and supplies directly used in the conduct of the qualified research.

Note: Alternately, research and experimental expenses may be deducted or capitalized under Sec 174 on the Internal Revenue Code. However, a taxpayer must elect either to deduct or amortize (not less than 60 months) such expenses OR claim the credit for them – he or she may not do both!

Limitations - The R&D credit is also subject to limitations of the general business credit. Its total and others included in the general business credit are limited to 25% of the taxpayer’s net tax liability over $25,000. To the extent that a research credit is not available for use in the current year or immediate prior year, unused credits have a 20-year carry forward.

If you have questions related to this credit or need assistance in developing the base amounts needed to compute this credit, please give this office a call.

Job-Tracking Adds Precision to Your QuickBooks Company

Does your business have clients whose work sometimes requires multiple steps drawn out over weeks or months, like remodeling projects or court cases? If so, and you're not using QuickBooks' Jobs features, you're missing out on the opportunity to track and evaluate the financial impact of these complex tasks.

You can, of course, just send an invoice out to these customers. But if you do, you're not taking advantage of what QuickBooks' job tools can do. If you create and track these projects faithfully, you'll have valuable insight that you wouldn't otherwise.

Simple definitions
Before you create jobs, you'll need to make sure that QuickBooks is set up properly. Click on Edit | Preferences and then on the Jobs & Estimates and Company Preferencestabs. You'll see this window:

Figure 1: It's important to set up Jobs options before you begin.

There are just a few preferences to set here, but you need to make any necessary changes before you launch into job creation. Also, if you track time, scroll down on the list on the left to Time & Expenses. Be sure time-tracking is turned on, as this will likely be an important element of your jobs.

Before you can attach jobs to customers, you'll have to define your Job Types. Go to Lists | Customer & Vendor Profile Lists | Job Type List. A small window opens with command bars at the bottom. Open the Job Type tab and click New. Let's say you're a building contractor. You might type Remodel in the Job Type Name box, then OK.

Repeat until you've entered all of your job types. If you want to build subtypes, click New again and enter the name of the subtype, like Kitchen. Click Subtype of and click the arrow to drop down the list. Select the parent type and click OK.

Figure 2: It's easy to build a list of your job types and subtypes.

Outlining your jobs
Of course, you'll be attaching jobs to customers, though each Customer:Job will exist as an individual entity. So start by opening the Customer Center. Right-click on a customer who needs a job tracked and select Add Job. The New Job window opens, which should already contain your customer's profile. Click on the Job Info tab. In the Job Name field, enter Main Home Kitchen Remodel, and skip over the Opening Balance field.

Click the arrow to open the Job Status list and select Awarded from the options offered (None, Pending, Awarded, In Progress, Closed, Not Awarded). Select the Start Date and Projected End Date. Type a brief description in the Description field and select the correct job type. Your window will look something like this:

Figure 3: You can lay out simple details about each job on this screen.

Click OK to save this job. It's now available for use in transactions and reports. When you're creating an invoice or estimate for a specific job, for example, or filtering a report, you'll need to make sure that you select the correct job, and not just the customer. Otherwise, your bookkeeping will not be accurate.

Estimates and progress invoicing
If you do many jobs that take weeks or months, you may find yourself in a bit of a cash flow crunch. Rather than billing for everything at the end, companies in this position often deal with that by creating estimates and dispatching progress invoices. You don't even have to send estimates to customers; they're helpful, though, for gauging your projected income and expenses.

To build a progress invoice partway through a job, create the estimate and click Create Invoice. This window will open, offering three billing options:

Figure 4: QuickBooks gives you three options when you're creating a progress invoice.

Select the one you want and click OK. Your invoice will appear, billed according to your instructions.

In-depth reports
Insightful, detailed reports are your reward for all of this meticulous bookkeeping. QuickBooks' job definitions may be fairly simple, but the reports they make possible give you tremendous insight into how cost-effective your projects are. You'll learn how each job is doing in terms of things like:

• Profitability
• The accuracy of your estimates
• Time and mileage
• Unbilled costs
• Job status

QuickBooks' job-tracking tools are not overly difficult to use, but you may want our help in getting your jobs set up and preparing progress invoices. Once you get more than a few jobs in the pipeline, you're going to want to be very confident in your ability to keep up with these procedures. But if you do, you'll have a deeper awareness of how all of your inventory and labor and other expenses are working together to complete projects profitably.