Tax software is incredibly powerful and functional. But the clean and official-looking printouts can give you a
false sense of security. Even though your system is accurately performing millions of calculations, it is your
responsibility to input the data correctly and understand how these calculations are made to ensure
accurate input and compliance. If you have a business, you should strongly consider professional help.
Simplified Employment Tax Filing Requirements for Small Employers
The Internal Revenue Service issued temporary and proposed regulations that will significantly reduce tax
filing burden for nearly 950,000 small business owners. Beginning January 1, 2006, certain employment tax filers
will be able to file the new Form 944 (Employer’s Annual Federal Tax Return) once a year rather than filing
Form 941 (Employer’s Quarterly Federal Tax Return) four times a year.
The new Form 944 will reduce burden on eligible small employers who file quarterly returns with little or no
employment tax due. Most employers who file Form 944 will be able to make a single payment with their annual
return.
Eligible employers are those with estimated annual employment tax liability of $1,000 or less. The IRS will
begin mailing notification letters between February 1 and February 15, 2006 to eligible small employers for
calendar year 2006. Employers who do not receive a letter and believe they are eligible to file the new Form 944
can call the IRS at 1-800-829-0115 to find out if they qualify. Taxpayers should contact the IRS by April 1, 2006.
New employers who expect to owe $1,000 or less in total annual employment tax (approximately $4,000 or less in
annual wages) also are eligible to file Form 944. These employers can indicate their estimated tax amount when
applying for their EIN (Employer’s Identification Number) on Form SS-4. The IRS will notify the employer to file
either Form 944 or Form 941 in the same notice indicating the taxpayer’s new EIN.
The new Form 944 and instructions will be available on the IRS Web site at IRS.gov by January 31, 2006.
SSA Provides Online SSN Verification
The Social Security Number Verification Service (SSNVS) allows employers to match their record
of employee names and SSNs before preparing and submitting Forms W-2. A correct name-SSN match
is important because unmatched records can result in additional processing costs for your business
clients and uncredited earnings for individual employees. Employers are able to enter up to 10 employees
at a time and find out immediately if those numbers agree with SSA’s records. For more information
on SSNVS see http://www.socialsecurity.gov/bso/bsowelcome.htm or call the Employer Reporting Service
Center at 800-772-6270.
Bigger Depreciation Deductions
“Bonus depreciation” can be claimed for either 30 or 50% of the cost of qualified new property (computers, machinery, computer software, autos, trucks and other equipment) purchased during 2003 and 2004. This is in addition to the regular depreciation and the Section 179 deductions. For purchases made before May 5, 2003 only the 30% “bonus depreciation” can be used. For purchases made after May 5, 2003, you may choose between the 30% or 50%. In either case, you may choose to take no “bonus depreciation” but you must make this election. It is important to note that the “bonus depreciation” does reduce the basis in the property just as the section 179 deductions. The “bonus depreciation” is taken after the Section 179 election (if any) is made.
At the same time the deduction dollar limit and threshold for figuring any reduction in dollar limit have been raised for the Section 179 deduction. The new deduction dollar limit is $100,000 in 2003 and $102,000 in 2004 (up from $24,000). The reduction in dollar limit is $400,000 in 2003 and $410,000 in 2004 (up from $200,000).
For example, consider a business that acquired $1 million in qualified property before May 5, 2003. The business would be allowed an additional first-year depreciation of $300,000. If the qualified property was bought after May 5, 2003, the business would be allowed an additional first year depreciation of $500,000. In this case no Section 179 would be allowed because the purchases were over $400,000.
If the business acquired $400,000 in qualified property before May 5, 2003, the business could take a Section 179 deduction of $100,000 in 2003 and then the bonus depreciation of $90,000. If the qualified property was acquired after May 5, 2003, the business could take a Section 179 deduction of $100,000 and then bonus depreciation of $150,000.
In all cases, the remaining basis of the assets would be recovered in 2003 and/or 2004 and subsequent years under the usual depreciation rules.
SEP Plans
The new law corrects a technical mistake in the 2001 tax act to reflect Congress' intent to increase the annual contribution limit to Simplified Employee Pension (SEP) plans. As a result, the SEP contribution limit for 2002 jumps from 15% to 25% of compensation, up to a maximum deposit of $40,000.
Medical Coverage Deduction with Employee-Spouse,
Sole Proprietors can deduct as a business expense the full amount of medical insurance premiums and medical reimbursement costs incurred under an accident and health plan that covers all employees. The plan can be set up to excluded employees not with company for set number of years, seasonal workers, level of part time workers, etc. If the sole proprietor's spouse is also an employee, the sole proprietor can be covered under the medical plan as part of the employee's family. Amounts paid to the employee-spouse under the plan are excludable from the employee-spouse's gross income [IRC sections 105(b) and 106] and deductible by the employer [IRC Section 162]. There are more details on ensuring the employee-spouse is a bona fide employee and the wages vs benefits. This can be a real tax savings if you qualify.
Partial List of Deductible Medical Expenses
* Health Insurance Premiums
* Dental Care including premiums
* Eyeglasses and Vision Care
* Prescription Drugs
* Physician Care
* Chiropractic Care
* Deductibles
* Long Term Care Insurance
* Co-pays
* Orthodontic Expenses
* Mileage to doctor offices, pick up prescriptions
* And Much More
Meals and Entertainment Expenses
A business meal must take place in surroundings conducive to business. The IRS does not consider dinner at a nightclub with a continuous floorshow or a large cocktail party as a business setting.
The theater also is not conducive to conduct business. However, if business is discussed at dinner, the theater tickets are deductible under the "associated" entertainment rule. The entertainment must proceed or follow the dinner and discussions. Keep a record of what was discussed.
Other "associated" entertainment that can be linked to business meals with discussions the same day include nightclubs, golf courses, sports events, hunting trips and ski trips.
Entertainment is 50 percent deductible, but business promotion is 100 percent deductible. A golf club sales person who plays golf to demonstrate golf equipment can deduct 100 percent of the green fees, golf balls, caddie, etc.
Season tickets and box seats to theaters and sport events can be deducted by each individual event.
For business gifts the maximum deduction to any one person is $25 during a tax year. Husband and wife are treated as one taxpayer for purposes of the $25 limit. The $25 limit does not apply when gifts are made to businesses where no one single person is designated or benefits from the gift.
There is an alternate rule for theater tickets. You can treat theater tickets as a gift or entertainment. The $25 limit does not apply on the entertainment gift. You also do not need to go along. Gifts for entertainment meals are not allowed. You must be present to get the tax deduction.
The "closely connected" rule allows you to deduct the cost of entertaining your spouse as well as the spouse of your business guest as long as you and your business guest discuss business, and you meet the business discussion and documentation requirements.
The IRS at its discretion may invoke the "Sutter Rule" which disallows portions of your business meals if such meals absorb a substantial portion of your living expense.
You can entertain at home as it is a setting conducive to a business discussion. There also is no time limit on how long you must spend discussing business or entertaining.
You can give small parties at home. Keep your guest list small - less than 12 couples. You need not discuss business with spouses or significant friends that accompany your business client. However you must have talked business with each of your guests.
To invite more than 12 couples to your home, you will have to establish commercial motivation. Also do not mix a personal celebration (such as an individual's birthday party) with business entertainment.
If you entertain your guests for the purpose of showing a display of your products or services, commercial motivation can be established. Also if you can prove you have no personal or social relations with your guests, your chances for deductions are improved.
The reasonable cost of a year-end party or summer outing for employees and their families is 100 percent deductible. The 50 percent rule does not apply.
Dues paid to your Chamber of Commerce, professional societies and trade associations, are deductible if the purpose of the organization is to promote the business interests of its members.
Food and refreshments served at home during a sales seminars and presentations at home is 100 percent deductible.
Business travel expenses under $75 do not require a receipt (except lodging). You must document the expenses. You must have a good diary or tax organizer to keep track of these expenses. (You cannot guess later) If you do not have the required documentation you must have the receipt. You must always have the receipt for lodging.
Entertainment expenses again the $75 rule applies and so does the documentation. The 5 required questions you need to be sure you have on your receipt or in your planner:
Who was entertained (business relationship)?
Where did the entertainment take place? (usually on receipt)
When did the entertainment take place? (usually on receipt)
Why did the entertainment take place (business purpose)?
How much did the entertainment cost? (usually on receipt)
Remember if the expense is over $75 you will need a receipt and be sure to address all 5 questions then too. Also keep in mind that you are only allowed to deduct 50% of any entertainment cost.
Auto expenses you must keep a log of your business and personal mileage. You can choose the method that is best for you.
Do the “perfect one-day log”. List all you appointments, both business and personal, in tax diary or tax organizer. This would be done everyday not at the end of the month or end of the year.
Do a 90-day log if your mileage is representative for the entire year. You would do the same as above, but only for 90 days. Remember all your driving should be about the same all year to use this method.
Keep a log for the first week of each month. This assumes that the other weeks in the month are going to be about the same.
Keep track of only your personal and commuting mileage for 90 days. Document your beginning and ending 90-day odometer reading and the odometer readings on January 1 and December 31.
For all methods you must keep a list of all appointments in your appointment book, tax organizer, or diary to substantiate the business mileage. If your business or personal mileage changes from month to month you will need to do the one-day log.
Is documentation worth the time and effort it takes? Will you remember after even one year the expense, what it was for, who you were with, what you discussed? Will you remember all the business appointments you had? The times you drove your auto to take care of business for your company (going to the bank, purchasing supplies, etc.)? In the event of an audit, would you rather go in with every deduction backed up or trying to remember who, what, when, & where to come up with the amount that is on the tax return. Don’t underestimate your expenses or get stuck in an audit with a lot of expenses you cannot prove. Take the time to DOCUMENT every expense.
Credit Card Charges as Expenses
If you use a bank credit card to charge charitable contributions, medical expenses, subscriptions, business expenses, etc., you claim the deduction in the year the item was charged. This is true even though the bill is paid next year.
If you use a store charge, the rule is the opposite of bank cards. The deduction is taken in the year that the bill is paid.
The information you obtain at this site is not, nor is it intended to be, tax advice. You should consult a licensed tax professional for individual advice regarding your own situation.
