by Derek G. Rowley © 2009, All Rights Reserved

If the IRS tags your business for an audit, it is important to remember that IRS auditors are trained to identify the “economic reality” of the business. This means that they will look not only at your tax return, but at you and your economic circumstances. As a result, there are a number of issues are likely to get their attention:

• Does your business handle a lot of cash? If so, auditors will be looking closely to see if cash has been diverted to personal use without declaring it as income.
• Do you write off auto expenses for your only car? Auditors will expect to see some business deductions for auto use. Don’t expect them to believe that your only vehicle is being used 100% of the time for business. They want to see complete records.
• Are vacation costs and personal entertainment being deducted as business expenses? The IRS knows that there can be a lot of questionable deductions stored in the travel and entertainment expense category. Document all your travel and entertainment deductions.
• Are your payroll tax payments being made timely? If not, it can be a red flag that many other tax inconsistencies may also exist. Also, the IRS routinely audits businesses that hire independent contractors to make sure they are not really employees.

Tags: irs, audit

by Derek G. Rowley © 2009 All Rights Reserved

As we close in on the end of 2009, the thoughts of most entrepreneurs turn to the holidays, family traditions, wonderful meals - and tax planning. In addition to all of the year-end planning issues that require your attention, it is also time to start looking at the coming year. There are several changes in the tax law that can open up opportunities to save money. Here is a quick overview of what to expect:

• Equipment Write-Offs. Originally, the amount of Section 179 deductions that could be taken was scheduled to drop from $250,000 to $133,000. But, the higher cap has been extended in 2009, so the maximum amount that can be written off under Section 179 of the tax code is still $250,000.
• Bonus Depreciation. Property that is placed in service before January 1, 2010 has been given a 50% bonus depreciation deduction. This deduction is available for new property that has a MACRS recover period of 20 years or less. Luxury car depreciation has been increased by $8,000, up to a new cap of $10,960. Trucks and vans are limited to $11,060.
• Payroll Tax Changes. The wage limit on Social Security tax withholding has been increased from $102,000 to 106,800. The tax rate remains at 7.65%.
• Estimated Tax Relief. A small business owner with fewer than 500 employees, whose Adjusted Gross Income was less than $500,000, is able to base estimated tax payments on the lesser of 90% of the tax liability for either 2008 or 2009. This is an improvement over the previous 100% or 110% estimated tax requirements.
• Withholding Changes. Because of the Making Work Pay provision of the American Recovery and Reinvestment Act, there is now a refundable tax credit of up to $400 for working individuals ($800 for married taxpayers filing jointly). As a result, there are new withholding tables that impact individuals with Adjusted Gross Income less than $75,000.
• Retirement Plan Contributions. 401(k) contribution limits have been raised from $15,500 to $16,000 - plus another $5,500 for those age 50 or older. Simplified Employee Pension and Profit Sharing plan limits go up from $46,000 to $49,000. If you have a defined benefit pension plan, the limit increases from $185,000 to $195,000.
• Health Savings Account Deductions. The deduction limit has been increased to $5,950 for a family, and $3,000 for an individual.
• Mileage Rates. The IRS lowered the standard mileage rate for business use of vehicles to $.55 per mile for business miles; $.24 per mile for medical reasons or moving; $.14 for charitable purposes.
• Commuting & Parking. Business can pay $230 per month in tax-free parking or transit passes for employees. Also, businesses can offer employees a tax-free benefit of $20 per month to cover the cost of purchasing, maintaining and storing a bicycle for commuting.

by Derek Rowley © 2009 All Rights Reserved

Now that we have entered the fourth quarter of 2009, it is time to start looking at tax planning issues while there is still time to make adjustments and decisions that can favorably impact your taxes this year. Taking action early enough can mean tax savings for the year and for years to come.

• Review the form of business organization. It is always a good idea to periodically review the form of business that you are currently using. Depending upon your strategic needs, there can be advantages to using different entities for different tax outcomes. If you are using a “C” corporation, you should consider whether you should be preparing to file “S” corporation status for the coming year - or not.

• Plan equipment purchases. Take advantage of the increased dollar limit for first-year expensing ($250,000 in 2009).
• Review inventory. Consider writing down obsolete or damaged goods to their probably selling price. Generally, taxpayers must offer the goods for sale at a reduced price in order to take a loss on the decline in the value of the inventory.
• Manage expenses. Review your supplies and reorder now to increase deductions for the current year. Also, you can schedule company meetings this year that are slated for next year in order to increase deductions.
• Review estimated taxes to avoid penalties. Generally, for a corporation to avoid paying penalties for underpayment of taxes, it’s estimated tax payments must be at least the lesser of the following:

• 100% of the tax shown on the current return, or
• 100% of the tax shown on the prior year’s return.

by Derek G. Rowley

A discussion group at the TaxProf Blog has identified their annual Top Ten Tax Stories of 2008, covering a range of tax-related issues. You can read the whole story at their site, but for our purposes we will count them down, Letterman-style:
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