San Diego Enterprise Zone Expansion

As of September 4, 2012 the San Diego Enterprise Zone has been expanded to cover parts of the following communities: Rancho Bernardo, Mira Mesa, Kearny Mesa, Mission Gorge, Linda Vista, Bay Park, North Bay and Chula Vista.  See our previous post on the details of the credit.

According to the Mayor’s office, approximately 920 local companies have used the program to hire over 31,600 local workers. They also state that four large companies moved to San Diego because of the city’s commitment to seek this expansion of the Enterprise Zone.  ATK, Kyocera, Soitec and Shire indicated the promise of the Enterprise Zone was an important factor in their decision to expand to San Diego creating 866 jobs.

If you think you are in the “zone”, contact your tax preparer to see how you can take advantage of these credits.

Supreme Court Decision on Health Care Act

The Supreme Court upheld the individual mandate of the Affordable Health Care Act by a 5-4 vote.  (Read the decision here).  What is interesting is their conclusion and basis for such a vote.  Most of the arguments made were centered on the Commerce Clause yet the Supreme Court voted against the argument saying Congress has no authority over individuals who choose not to engage in commerce.  Commerce requires the activity of trade.  If you aren’t buying anything (in this case health insurance), then you are not engaging in commerce and therefore Congress has no power.  The ruling was based on Congress’ power to tax.  Now the Obama administration went through great efforts to stress the “fact” that the penalty for not buying insurance was NOT a tax, it was a penalty.  This is obviously for political reasons and the Court says you have to call it what it actually is, and that’s a tax.  What concerns me is what else can Congress tax me for not doing or buying?

At the end of the day, the Court probably wanted to stay out of the political game, as they are supposed to stay out of it.  Whether you are for the Act or against it, the Court is making a silent statement.  If you want to change the law, do it at the polls.  VOTE.

Failure to File and/or Pay Taxes

Most people know April 15th (April 17th in 2012) is the due date of your individual income tax return.  You may request a six month extension allowing you to file your return by October 15th without penalties.  However, if you fail to request the extension timely or if you don’t file your return by the extension date, you may be subject to late filing penalties.  The penalty is 5% (on the net amount of tax due) for each month not filed up to 25%.  If the return is more than 60 days late, the minimum penalty is the lesser of $135 or tax due.  Interestingly enough, there is no penalty if the return shows a refund.  I suppose this is because the IRS would be happy to keep your money, and the only way you can get it, is to file your return.

We remind our clients that even though the IRS will grant you an extension to file your return, the extension does not allow you more time to pay taxes.  You must pay your taxes on time.  Don’t ignore it because it will only get ugly!  You can set up an installment agreement with the IRS to pay your tax over time.  While it won’t eliminate the fee, they may reduce the rate by 50%. 

The failure to file timely penalty is 5% per month to a maximum of 25%.  The penalty for failure to pay timely is also 5% per month.  However, both penalties do not apply on the same liability.  If you are subject to both penalties in the same month, the failure to file penalty will be reduced by the failure to pay penalty.  (Aren’t they so kind?)  However, the entire time these penalties are running, additional interest is accruing on all tax and penalties owing.

My advice; file your return on time, even if you don’t have the money to pay the tax.  Contact the IRS to set up the installment agreement.  Don’t run from it.  It won’t help the situation.

As always, consult with your tax advisor!

It’s Your Money Not Theirs

Clients, Friends and Fans,
Sunday night Don and Paul were guests on the radio show “It’s your money not theirs” hosted by our good friend and former partner, Richard Muscio.  The show airs every Sunday at 7 p.m. on 760 KFMB.

We talked about entity selection and borrowing from traditional lenders like banks.

We have added some of the material to our website under articles of interest you can download the pdf here “Choice of Entity

Enjoy!

Listen to

 

B is for Bad Debt (Personal)

We often think of bad debt in the business sense.  However, from time to time we run into a non business or personal bad debt.  Believe it or not, the IRS allows you to deduct this loss… but there’s a catch.  It is treated as a short term capital loss and therefore is subject to the capital loss limitations (you cannot deduct more than $3,000 of net capital losses from income per year).

In order to deduct the loss, you must prove the debt had value at the beginning of the year and no value at the end of the year.  You must make a reasonable attempt to collect the debt and make a demand for repayment in writing.  If the debtor is unable to pay, request a written statement from him stating that he will not be able to meet his obligation and the reason why.

 A statement outlining the following must be attached to the tax return in order to take the personal bad debt.

  1. Description of the debt, amount and date due
  2. Debtor’s name and taxpayer’s relationship to debtor (cannot be a child or similarly related party)
  3. Description of efforts made to collect the debt and,
  4. Explanation of why the debt is now worthless (such as bankruptcy)

As always, seek advice from your tax preparer when writing of a non business bad debt.  If prepared improperly, the IRS likely will not allow the deduction.

B is for Bad Debt (Business)

In some instances bad debts may be written off.  Here we’ll look at what factors must be present in order to take a deduction.

For Accrual Method Taxpayers:

When using the accrual accounting method, management estimates an allowance for bad debts based on several factors such as prior experience, industry comparisons, the debtor’s ability to pay and/or appraisals of current economic conditions.  This is known as the allowance method.  Keep in mind; this is an estimate of an event that has not yet occurred.  When it comes to tax, the IRS does not allow you to make this estimate.  As you can imagine, it would be abused as a “tax planning” strategy.  Therefore, for tax purposes, we can only deduct actual bad debts.  The following factors must exist in order to deduct a bad debt:

  1. It must be a creditor-debtor relationship
  2. There must be a legal obligation to pay a fixed sum of money
  3. There must be an actual loss of money (loss of time spent rendering services is not a loss of money unless the uncollected fee has already been included in taxable revenues on the accrual method)
  4. Proof that the debt is and will remain uncollectible
  5. A business purpose for the debt

When using the specific charge-off method to deduct bad debt (unlike the allowance method previously discussed), management has to prove that the debt is uncollectible to expense it.

Recovery of previously written off bad debts in subsequent years is recognized as other income in the year received.  As always, see your tax preparer when determining what your business can deduct for bad debt expense.

For Cash Method Taxpayers:

Cash basis businesses cannot deduct bad debt since the related revenue was never recognized.  There would only be bad debt for actual cash lost, i.e. because it was paid in cash to a vendor, etc.

A is for AUTO EXPENSES

Business auto expenses… it’s an area of the tax law that can be confusing and lead to abuse.  Businesses have two methods available for determining the most beneficial expense.  The following will explain each approach.

For a business, a vehicle can be deducted in two ways; actual expense and mileage.  When using actual expense, the vehicle can be depreciated and maintenance, insurance, gas and other expenses can be deducted. When using the standard mileage rate to calculate the deduction, depreciation expense is  included, therefore separate depreciate expense would not be taken.  When you purchase a new vehicle we will calculate the deduction using both methods (assuming all information is provided) and the method that gives the higher deduction will be used.  You should keep a log for each company owned vehicle recording the mileage and expenses for each.  This can become tedious but it will be one of the first items requested by an IRS auditor

If your employees are allowed to use company owned vehicles on personal time, it is considered a taxable fringe benefit.  We collect certain data and use an IRS table to determine the taxable amount.  This allows the business to deduct one hundred percent of the auto expense.  The employee pays tax on the personal use of the vehicle.  The IRS table for this taxable fringe is so beneficial that this is often the best method for both employer and employee.  The most important pieces of information needed are the annual business and personal miles on the vehicle.

As always, see your tax preparer in considering your tax situation.

This is Your Blog Too!!

I can’t believe this blog will celebrate its two year anniversary in April.  I think we should have a party!  Oh wait, we already do… it’s our “end of tax season” party.  We’ve had our ups and downs but I’m proud of us for sticking with it.  Our staff stays very busy and sometimes posting a blog is challenging.  Things got pretty quiet during my four months of maternity leave last year, but I’m back!  I know you are excited! 

We created this blog to help you; our readers, our clients, our friends.  We know you are bombarded with information.  Tax and accounting can sometimes be intimidating topics.  Our goal is to keep you informed so you can be better business owners, employees and asset managers.  You can help us by giving us your feedback and requests.  If you have a question related to a particular blog already posted, leave a comment.  You can always email us questions on requested topics.  There are no dumb questions.  I’d bet money that if you have a question, many others have the same one.

One of my personal goals this year is to ramp up the blog again.  I want it to be resource for our readers. 

So bring on the questions!

A-Z Series – A is for Adoption Expense

We are starting two A to Z series (one for individual taxes and one for entity taxes) which will run through tax season.  We hope to bring you some useful information about the tax world.  As always, if there is a topic you’d like us to write on, please e-mail us your requests!  We love input!

Our first one is A for Adoption Expense.  Adopting a child is a noble act and unfortunately a costly one.  However, you may be eligible for a tax credit if you meet certain criteria.

  1. The child must be under the age 18 or
  2. Physically or mentally incapable of caring for himself/herself
  3. The credit is phased out for taxpayers with a modified Adjusted Gross Income  between $185,210 and $225,210 (tax year 2011) 

 Qualifying expenses include: 

–          Adoption fees

–          Attorney’s fees

–          Court costs

–          Travel expenses

The tax credit is limited to $13,360 (tax year 2011) per child.  You cannot take the credit until the year in which the adoption is final.  You will be required to attach a copy of the adoption order or decree to your tax return.  After the adoption is final, you can take the credit in the year in which you pay the expenses.  Keep in mind, the limitation amount is cumulative for each child.  It is not an annual amount.

Some employers offer adoption assistance programs to their employees (what an incredible benefit if you have this!).   If you receive assistance payments from your employer, the IRS will allow you to exclude up to $13,360 per child from income.  Both the credit and exclusion can be claimed for the same adoption; however, both cannot be claimed for the same expense.  Thus, for example if you spent $30,000, you could exclude $13,360 and take a credit of up to $13, 360.  The limit applies separately to the credit and exclusion if both are taken (meaning you can utilize both the $13,360 credit and the $13,360 exclusion from income.

If an adoption is unsuccessful, the expenses are combined with expenses of a later successful adoption for dollar limits.

If you adopt a special needs child, you are able to claim the full credit of $13,360 even if you don’t have $13,360 in qualified adoption expenses.

NOTE:  Adopting your spouse’s child or costs related to a surrogate parenting arrangement does not qualify for the credit or exclusion.

As always, see a tax professional when dealing with unique situations such as this.  There are additional facts to consider in each case which cannot be covered in one blog.

IRS Announces Cost of Living Adjustments

The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other tax benefits for Tax Year 2012.  The highlights include: 

  • 401(k), 403(b) and most 457 plans elective deferral increased from $16,500 to $17,000 (Catch-up contribution limit for those aged 50 and over remains unchanged at $5,500) 
  • Defined benefit plan limitation increased from $195,000 to $200,000 
  • Limitation for defined contribution plans increased from $49,000 to $50,000 
  • The definition of a highly compensated employee is increased from $110,000 to $115,000 
  • The definition of a key employee in a top-heavy employee benefit plan is increased from $160,000 to $165,000 in compensation
  • Personal and dependent exemption increased from $3,700 to $3,800 
  • Standard deduction for married filing a joint return increased from $11,600 to $11,900 
  • Standard deduction for singles and married filing separately increased from $5,800 to $5,950 
  • Standard deduction for heads of household increased from $8,500 to $8,700 
  • The foreign earned income deduction increased from $92,900 to $95,100 
  • Exclusion from estate tax amount increased from $5,000,000 to $5,120,000 (The annual exclusion for gifts remains unchanged at $13,000) 
  • Standard Continental United States  per diem rate increased to $123 ($77 lodging, $46 meals and incidental expenses) 

New business, medical and charity mileage rates have not been released as of this writing.

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It's Your Money, Not Theirs

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August 19th, 2012–Richard and Joe discuss tax policy and accounting services with Paul Polito, CPA and Don Eppich, CPA.

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