Due Date For Form 990-N Coming Soon
Small tax-exempt entities that are at risk of losing their exempt status for not filing annual returns were given until October 15, 2010, to file the e-Postcard. The IRS has noted that there has been a strong response to the relief with about 60,000 organizations submitting the electronic
Form 990-N.
President Signs Small Business Bill
On September 27, President Obama signed into law H.R. 5297, the Small Business Lending Funding Act. The tax title of this bill, the Small Business Jobs Act of 2010 (the Act), includes a number of important tax provisions for businesses large and small, and changes for individuals as well. The following are some of the more notable provisions:
Doubles the §179 expensing limit to $500,000, phasing out at $2 million for tax years beginning in 2010 and 2011, and allows the expensing of up to $250,000 of leasehold, retail, and restaurant improvements.
Reinstates 50% bonus depreciation for qualifying property acquired and placed in service in 2010, and authorizes an increased first-year depreciation limit by $8,000 for passenger autos that are "qualified property."
Doubles the allowable tax deduction for start-up expenditures to $10,000.
Removes cell phones from the definition of listed property.
Allows self-employed individuals to deduct health insurance costs in paying their 2010 self-employment tax.
Allows small businesses to carry back general business tax credits to offset their taxes from the previous five years, and count those credits against their Alternative Minimum Tax (AMT) liability.
Requires information reporting for rental property expense payments
Recent Legislation Offers Special Tax Incentives for Small Businesses to Provide Health Care, Hire New Workers
Videos
HIRE Act: English
Small Business Health Care Tax Credit: English
WASHINGTON — In recognition of National Small Business Week, the Internal Revenue Service encourages small businesses to take advantage of tax-saving opportunities included in recently enacted federal legislation.
A variety of business tax deductions and credits were created, extended and expanded by the American Recovery and Reinvestment Act of 2009 (ARRA), this year’s Hiring Incentives to Restore Employment (HIRE) Act and the Affordable Care Act. Because some of these changes are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a rundown of some of the key provisions.
New Health Care Tax Credit Helps Small Employers
The small business health care tax credit, created under the Affordable Care Act, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
The credit takes effect this year and is generally available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small employers that primarily employ low- and moderate-income workers.
For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers. The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers with more than 25 FTEs or with average wages of more than $50,000.
Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals. More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the IRS website.
Two New Benefits for Employers that Hire and Retain Recently Unemployed
Employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer’s share of Social Security tax on wages paid to these workers after March 18. In addition, for each qualified employee retained for at least a year whose wages did not significantly decrease in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their income tax return.
These tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives generally do not qualify.
Employers must get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. IRS Form W-11 can be used to meet this requirement. Further details, including answers to frequently asked questions, are posted on IRS.gov.
Work Opportunity Tax Credit Aids Employers That Hire Certain Workers
The work opportunity tax credit (WOTC) offers tax savings to businesses that hire employees belonging to various targeted groups. These groups include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, recipients of various types of public assistance, certain veterans, ex-felons and certain youth workers. The instructions for Form 8850 detail the requirements for each of these groups.
Certification by the state workforce agency is generally required. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.
An eligible employer can claim both the WOTC and the new hire retention credit for the same employee. However, an employer may not claim both the payroll tax exemption and the WOTC for the same employee. Therefore, any employer that chooses to apply the exemption to wages paid to a qualified employee may not receive the WOTC on any wages paid to that employee during the one-year period beginning on the employee’s hiring date.
Exclusion of Gain on the Sale of Certain Small Business Stock
An extra incentive is now available to individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009, and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.
COBRA Credit
Employers that provide the 65 percent COBRA premium subsidy to eligible former employees can claim credit for this subsidy on their quarterly or annual payroll tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their payroll tax deposits by the amount of the credit. For details, see the instructions for Form 941.
Small business owners can find a variety of helpful on-line resources in the Small Business and Self-Employed Tax Center on IRS.gov.
Running a Family Business Within the Law
Are you starting or currently operating a family business? Whether you are working with your spouse, your child, or with the whole family, you should be aware of several regulations that make your business different. Although family-run businesses must comply with all general legal steps in starting and managing operations, being in business with family can have additional implications. Here are the guidelines for running a family-owned business within the law. Read more...
How to Find and Attract Investors
Finding the right investor to finance your business plan can be a daunting task. Then, once you locate potential investors, convincing them to invest in your business is a whole new challenge. For small business owners who are looking for investors, read on to learn about places to find investors and tips to presenting a winning business case. Read more...
Education is Key for Women Business Owners Access to Capital
One of the challenges to growing a successful, sustainable business is the ability to obtain growth capital. However, according to research conducted by the Center for Women's Business Research, women historically have not had equal access to financial markets. A key explanation for this lack of parity stems from a proven systemic bias against women business owners, but that in and of itself does not entirely explain the situation. Read more...
LLCs Explained - A 101 for Small Business Owners
An LLC can provide your business with legal protection and operational ease, but depending on your circumstances, it can also present disadvantages. Here are some FAQs to help you ascertain whether becoming an LLC is right for you, and pointers on managing your business and legal obligations once you are established as an LLC entity. Read more...
Two New Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers
IR-2010-33, March 18, 2010
WASHINGTON — Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law today. Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages. In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns. “These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead,” said IRS Commissioner Doug Shulman. The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify. In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement. Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit. Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010. Revised forms and further details on these two new tax provisions will be posted on IRS.gov during the next few weeks. |
IRS Issues Winter 2010 Statistics Of Income Bulletin
WASHINGTON — The Internal Revenue Service today announced the release of the winter 2010 issue of the Statistics of Income Bulletin, featuring data on: preliminary 2008 individual income taxes, 2007 marginal income tax rates and 2007 sales of capital assets.
Taxpayers filed 142.4 million individual income tax returns for 2008, which was 0.5 percent fewer than the 143.0 million returns filed for 2007. Adjusted gross income (AGI) also declined between 2007 and 2008, falling by 3.7 percent to $8.2 trillion. This was the first time since 2002 that AGI decreased from the previous year. Also between 2007 and 2008, taxable income decreased 5.1 percent to $5.6 trillion, total income tax decreased by 6.2 percent to $1.0 trillion, and total tax liability fell by 6.0 percent to just under $1.1 trillion.
Individual income tax returns reporting a tax liability in 2007 faced an average tax rate of 13.8 percent, the same as in 2006. Taxpayers with AGI of at least $410,096, the top 1 percent of taxpayers, accounted for 22.8 percent of AGI in 2007, an increase of 0.8 percentage points. These taxpayers accounted for 40.4 percent of total income tax reported in 2007, an increase from 39.9 percent in the previous year.
For 2007, taxpayers realized $914.0 billion in net capital gains less losses, reported on 283.1 million asset transactions with overall sales of $5.3 trillion. Passthrough income represented the largest share of net gains less losses, followed by corporate stock.
This issue of the SOI Bulletin also contains articles on the following subjects:
Projections: A grand total of 238 million tax returns are expected during calendar year 2010.This is 1 percent fewer than estimated 2009 filings of 240.4 million returns.The primary cause is the residual effect of the Economic Stimulus Act of 2008, which in 2009 produced an estimated 14.4 million returns above baseline projections.Grand total return filings are projected to reach 253.6 million by 2016.
Foreign recipients of U.S. income: U.S.-source income payments to foreign persons rose to $646.5 billion in 2007.Foreign corporations received $472.0 billion (73.0 percent) of the total, while foreign governments and international organizations collected the next largest share, $41.9 billion (6.5 percent).Foreign partnerships and foreign trusts (3.0 percent) and foreign individuals (2.7 percent) received a combined $37.0 billion in gross income.
Split-Interest trusts: The Pension Protection Act of 2006 brought major revisions to the Split-Interest Trust Information Return for 2007.All split-interest trusts must now disclose the names of charities that receive distributions and the amount and type of distribution.Income from charitable lead trusts and pooled income funds is reported on this return, rather than on Form 1041.Information not pertaining to individuals is now open to the public.In 2008, 123,498 returns were filed; 94 percent were filed for charitable remainder trusts.
Unrelated business income tax: Charitable and other tax-exempt-organizations reported $11.3 billion in gross unrelated business income for 2006, offset by $10.0 billion in deductions.The resulting net unrelated business taxable income totaled $1.3 billion, which is 6 percent higher than for 2005.These organizations reported unrelated business income tax for 2006 of $556.2 million.
Interest-Charge Domestic International Sales Corporations: IC-DISC export gross receipts increased by 266 percent from 2004 ($5.3 billion) to 2006 ($19.3 billion). Net income (less deficit) rose from $448 million to $1.7 billion, and actual distributions to shareholders increased 317 percent, from $433 million to $1.8 billion.
Printed copies of the Statistics of Income Bulletin are available from the Superintendent of Documents, U.S. Government Printing Office, P.O. Box 37954, Pittsburgh PA 15250-7954. The annual subscription rate is $53 ($74.20 foreign), single issues cost $39 ($48.75 foreign).
For more information about these data, write to the Director, Statistics of Income (SOI) Division, RAS:S, Internal Revenue Service, P.O. Box 2608, Washington, DC 20013-2608.
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Issue Number: 2010-2
Inside This Issue
Tax calendar
1. Tax calendar
The online Publication 15, (Circular E), Employer's Tax Guide offers a tax calendar with useful reminders of what forms employers must file by Jan. 31 and in the coming months.
2. Filing forms W-2
Form W-2 – Where, When, and How to File offers detailed instructions for preparing and filing the forms timely and correctly.
Employers filing 250 or more Forms W-2 must file electronically unless granted a waiver. However, all employers are encouraged to file Forms W-2 electronically.
Related link:
3. Earned Income Tax Credit
Self-employed individuals and employees earning $48,821 or less could qualify for an Earned Income Tax Credit worth up to $5,657.
Related link:
4. Purchasing real property from a foreign person
There may be tax obligations for both the buyer and the seller when a foreign person sells real property in the United States.
5. Foreign corporations
Certain U.S. citizens and residents who are officers, directors or shareholders in a foreign corporation may be required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
Related link:
6. Recent IRS announcements
IR-2010-9, COBRA Subsidy Eligibility Period Extended Through February; 15-Months Subsidy Now Available to Those Who Qualify
IR-2010-6, New Homebuyer Credit Form Released; Taxpayers Reminded to Attach Settlement Statement and Other Key Documents
Tax Tips for Small Business; Winter 2009/2010
Employee or Independent Contractor?
Determining the proper worker status
When you hire someone to work in your business, that individual will either be an employee or independent contractor for tax purposes. Failure to properly classify the worker can subject you to an IRS audit and possibly interest and penalties for failing to withhold and deposit payroll taxes. Under common-law rules, if you have control over what work is being done and how it will be done, you are generally regarded as an employer and the worker is considered your employee.
The IRS uses three factors to determine the proper worker classification. Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. Behavioral control looks at the type of instruction given, the degree of instruction, an evaluation system, and training.
The second factor is financial control. Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job. Financial control factors consist of significant investment, unreimbursed expenses, opportunity for profit or loss, services available to the market, and method of payment. If you provide the tools and supplies to do the job, set the work hours, provide the location where the work is performed, and can hire or fire the worker, chances are this worker is classified as an employee. However, if the worker provides his own tools and supplies, performs services for an agreed price, performs these same services to others, and maintains control over how the work is completed, the worker is more likely an independent contractor.
The third factor is the type of relationship between you and the worker. Under type of relationship, take into consideration any written contracts, employee benefits, permanency of the relationship, and services provided as the key activity of the business. An employee will be hired for a long-term relationship and employee benefits will generally be provided.
You must weigh all of these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate an independent contractor. The key is to look at the entire relationship you have with the worker, consider the degree or extent of the right to direct or control, and finally document each of the factors used in arriving at a determination.
If you are unsure whether your newly hired worker is an employee or independent contractor, you may file Form SS-8 with the IRS. They will assist you in making a proper determination, thus avoiding mistakes, audits, and additional taxes and penalties.
New Forms to Correct Employment Returns
Do you need to make an adjustment?
The IRS has released the following new forms:
- Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, used to correct errors on Forms 941 and 941-SS. Form 941c can no longer be used.
- Form 943-X, Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim for Refund, used to correct errors on Form 943.
- Form 944-X, Adjusted Employer’s Annual Federal Tax Return or Claim for Refund, used to correct errors on Forms 944 and 944-SS.
- Form 945-X, Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund, used for adjusting prior filed employment forms and to fix errors on Form 945.
Qualified Transportation Fringe Benefits
New bicycle commuting reimbursement for 2009
The value of qualified transportation fringe benefits you pay to your employee is generally excluded from the employee’s wages for 2009 up to certain limits. For commuter highway vehicle transportation and transit passes paid during January and February 2009, the limit is $120 per month. The amount increased to $230 a month on March 1, 2009. Qualified parking is $230 per month. For each calendar year, $20 multiplied by the number of qualified bicycle commuting months during the year is the qualified bicycling commuting reimbursement.
A qualified bicycle commuting month is defined as any month the employee regularly uses a bicycle for a substantial portion of the travel between the employee’s residence and their work place. The employee cannot receive any other transportation fringe benefits during these months.
The employee can be reimbursed for the purchase of the bicycle and bicycle improvements, repairs, and storage. These expenses are considered reasonable as long as the bicycle is regularly used as transportation between the employee’s residence and work place.
Employer-Provided Educational Assistance
Giving back to your employees
You can provide your employees with tax-free education assistance by offering an educational assistance program. This allows you to provide up to $5,250 for tuition, fees, books, and supplies for classes without having to include the amount in an employee’s wages. Both undergraduate and graduate level courses qualify for the assistance. The classes need not be job-related to qualify.
Choosing the §179 Expense Deduction
Take advantage of year-end equipment purchases
Each year, the IRS allows a business to write off the cost of purchased equipment. For 2009, the maximum amount allowed is $250,000. The equipment can be purchased and placed in service at any time during the tax year. Even if you wait until the last day of the year to purchase and place in service a piece of equipment, you are allowed the full $250,000 deduction.
The $250,000 maximum is reduced dollar-for-dollar if your asset purchases exceed $800,000. This means that if you purchase $1,050,000 of eligible §179 properties during 2009, no deduction is allowed. Another limitation is that the §179 deduction cannot exceed your taxable business income. Business income includes the income from your trade or business plus wages received by you or your spouse, if married filing jointly.
Going Out of Business?
Know the tax consequences before closing your doors
You can close your business by selling all of the assets or converting the assets to personal use. The tax consequences of selling your business depend on whether you are operating a sole proprietorship or corporation. As a sole proprietor, if you sell all the assets of your business, you report the sale of each asset separately to determine the gain or loss. If you close your sole proprietorship business and keep all the assets to use personally, there may be some tax on recapture of depreciation.
When you want to end your corporate business, you can either sell the stock or the assets. If the assets are sold, the corporation pays the tax on any gain. As the shareholder, you don’t have any tax consequences unless the corporation liquidates and distributes the proceeds to you in exchange for your stock. If the stock is sold, you report the sale of your corporate stock on your personal tax return.
If you take the assets out of the corporation, gain or loss is recognized on the liquidating distribution of assets as if the corporation sold the assets to you at fair market value. You, as the shareholder, do not have any tax consequences unless the fair market value of the assets distributed exceeds your stock basis.
As with any sales contract, it’s important to determine the tax consequences before signing on the dotted line.
Health Savings Accounts (HSAs)
What are the employer contribution limits for 2009?
An HSA is a tax-exempt custodial account set up to pay or reimburse your medical expenses incurred during the year. The HSA is set up with a qualified HSA trustee. Eligible individuals must: (1) be covered under a high deductible health plan (HDHP) on the first day of the month, (2) have no other health coverage, (3) not be enrolled in Medicare, and (4) not be claimed as a dependent on someone else’s tax return.
The amount that you can contribute to an HSA depends on your type of HDHP, age, and date of eligibility. The date you are no longer eligible must also be considered if applicable. Employers can contribute up to a specified dollar limit, which is exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2009, the employer can contribute up to $3,000 ($4,000 if age 55 or older) if you have self-only coverage under a HDHP or up to $5,905 ($6,950 if age 55 or older) if you have family coverage under an HDHP.
Business Credits
You could be eligible
Business owners are eligible for a variety of tax credits. Here are a few credits you may qualify for:
• Alcohol Cellulosic Biofuel Fuels Credit. This credit varies depending on the alcohol proof percentage and the type of alcohol.
• Alternative Motor Vehicle Credit. This credit is available for certain new vehicles purchased and placed in service for business use during the tax year. There are five components to this credit.
(1) Qualified fuel cell motor vehicle credit;
(2) Advanced lean burn technology motor vehicle credit;
(3) Qualified hybrid motor vehicle credit;
(4) Qualified alternative fuel motor vehicle credit; and
(5) Plug-in conversion credit.
• Alternative Fuel Vehicle Refueling Property Credit. This credit has been increased to 50 percent of the cost of qualifying property up to $50,000 per location ($200,000 for hydrogen).
• Disabled Access Credit. This credit amount equals 50 percent of the eligible access expenditures for the tax year between $250 and $10,250, with a maximum credit of $5,000.
• Employer Provided Child Care Credit. Employers who provide in-house child care for their employees’ children qualify for this credit. The credit cannot exceed $150,000 for the year.
• Small Employer Pension Plan Start-Up Cost Credit. This 50-percent credit applies to the first $1,000 in administrative expenses over the first three years to set up an employer pension plan and is limited to $500 per year.
• Tip Credit. This credit is determined based on the federal minimum wage per hour rate. It is equal to 7.65 percent of the tips in excess of the amount needed to make up the minimum wage rate level. If the tip credit is claimed, the related social security taxes cannot be deducted.
Compensating an S Corporation Shareholder
What is considered reasonable?
If you are a corporate officer of an S corporation performing services for the corporation, you must pay yourself a reasonable salary. The IRS has not defined reasonable compensation in the code or regulations. However various courts have ruled on this issue based on the facts and circumstances of each case. Some of the factors the courts look at to determine reasonable compensation include training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, payments to non-shareholder employees, timing and manner of paying bonuses to key people, what comparable businesses pay for similar services, compensation agreements, and the use of a formula to determine reasonable compensation. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. The IRS could reclassify these amounts as compensation to the shareholder/employee resulting in additional taxes and penalties for the S corporation.
Keeping Good Records
Why it’s important for your business
A business owner who keeps good records is able to easily monitor the progress of his or her business. Records can show whether the business is improving, what items are selling, or what changes may be necessary to make it more profitable. Keeping good records can increase any business owner’s chances of success.
Records are needed to prepare your financial statements. Income statements and balance sheets are used to prepare your income tax returns. Saving your receipts makes it easy to keep track of which expenses are business-related and which ones are not. Keeping good records also helps you to distinguish between taxable and nontaxable income.
Keeping track of expenses lessens the chance that you’ll forget which expenses need to be deducted when it comes time to prepare your tax return. Any record that supports the information reported on your tax return is a record worth saving. If the IRS audits your tax return, having a complete set of records for the year in question will speed up the examination process.
Quik Tips
1. The maximum depreciation deduction you can take for a truck or van used in business and first placed in service in 2009 is $3,060 ($11,060 for trucks and vans for which the special depreciation allowance applies).
2. Your employer contributions to a profit-sharing, SEP, or a SIMPLE plan are due by the time you file your tax return unless you have a valid extension. If your tax return is on extension, you have until the extended due date to make the contribution.
3. The maximum employee elective deferral amount for a §401(k) or §403(b) plan is $16,500 for 2009.
4. Employers are required to issue W-2s to employees by January 31 of each year.
5. The standard mileage rate for business travel in 2009 is 55 cents per mile.
6. Are you giving gifts to your clients this holiday season? You are allowed a deduction for up to $25 for each business-related gift.
7. The maximum amount of wages subject to social security for 2009 is $106,800. There is no limit on the amount of wages subject to Medicare tax.
8. The 10-year rule for built-in gains tax on S corporations has been reduced to 7 years for tax years beginning in 2009 or 2010. This tax only applies to S corporations that used to be prior C corporations.
9. The exclusion for gain on the sale of qualified small business stock has increased to 75 percent for stock acquired after February 17, 2009, and before 2011.
The information contained in this newsletter is not intended to provide specific tax advice or to take the place of either the written law or regulations.