Tax Tips

Would you be ready if your business was one of the 6,000 companies expected to be randomly chosen for employment tax audits beginning this February?

As you wrap up 2009 payroll reporting, taking time to review your policies and procedures can save headaches down the road.

Here are tips.

• Reconcile quarterly and annual figures. Tie the wages you reported during the year on quarterly state and federal payroll tax returns to the total reported on "Form W-3, Transmittal of Wage and Tax Statements."
  In addition, whether you file electronically or on paper, the total of individual Forms W-2 must agree with Form W-3.
• File all necessary returns. Remember those returns that are due only once a year, such as Form 940, used to report federal unemployment tax, or Forms 1099, for independent contractors and other vendors.
  Do you file Form 944, the annual employment tax return? You're required to complete the form even if you paid no wages during the year.
• File on time. Forms W-2 are due to your employees by February 1, 2010, and to the Social Security administration by March 1 (March 31 if you file electronically). Quarterly and annual federal payroll returns are generally due by February 1.

For any filing assistance you need, please contact our office.

So what's new? If the question is about your 2009 federal income tax return, the IRS has been ready with the answer since June, when a draft copy of this year's Form 1040 was released.

Here are six items you can expect to see.

1. A reminder that the first $2,400 of unemployment benefits received in 2009 are tax-free.
2. An adjustment to income for the educator deduction. Up to $250 of qualified out-of-pocket costs for classroom supplies can be deducted, even when you don't itemize.
3. An increase of the $3,650 exemption for you and your dependents if you provided housing for victims of the 2008 Midwestern disasters. You can claim an additional $500 for each person you helped (up to a $2,000 maximum).
4. A new deduction for real estate taxes you paid in 2009. You can add up to $1,000 ($500 for singles) to the standard deduction of $11,400 for joint returns ($5,700 for singles).
5. You can also increase your standard deduction by adding state and local sales and excise taxes on new cars bought between February 17 and December 31, 2009. The deduction is limited to taxes paid on the first $49,500 of the purchase price. Income limits apply.
6. A potential refund of a portion of the American opportunity education credit. When the amount of your credit exceeds your 2009 tax, you can get a refund of up to $1,000 per eligible student.

Please call for details on these and other changes.

Did you contribute to the popularity of the "Cash for Clunkers" program or the recently announced profitability of a major car company? If so, keep the paperwork for your new vehicle handy. You might be eligible for deductions on your 2009 federal income tax return.

Here are some current year tax breaks.

• Sales tax deduction. New for 2009, this deduction is available on your personal income tax return whether you itemize or take the standard deduction.
  The deduction is for state and local sales and excise taxes paid on the first $49,500 of the purchase price. It applies to that new car, light truck, motorcycle, or motor home you bought between February 17 and December 31, 2009. Multiple vehicles can qualify.
  
  The deduction begins to phase out when your income reaches $250,000 on a joint return ($125,000 for singles).
  
  
• Increased depreciation deduction. Depending on the type of vehicle you purchase for your business, you could qualify for a Section 179 depreciation write-off of up to $250,000 for 2009. (SUVs are limited to $25,000.
  
  A special depreciation deduction is also available. This "bonus" depreciation increases the amount of first-year depreciation on new passenger autos used in your business to as much as $10,960 ($11,060 for vans and light trucks).
  
  
• Business mileage deduction. Do you use your new vehicle to run business errands, make sales calls, or conduct other business? Update your log book for 2009 to reflect where you went and what you did, and you can deduct 55¢ for each business mile you drove.

Please contact our office for advice on these and other vehicle tax incentives, such as credits for electric and energy efficient vehicles.

As you organize your payroll records for year-end processing, it's a good time to make sure you're complying with backup withholding rules. These rules come into play when you make payments such as rents, commissions, or fees to businesses or individuals who have not supplied you with a valid taxpayer identification number (TIN).

What's backup withholding? It's a 28% tax that you're required to withhold from payments your business makes to certain vendors. Backup withholding applies when a vendor fails to give you a TIN or when the IRS informs you a vendor's TIN is incorrect.

How does backup withholding work? Say you hire an independent contractor to design a website for your business. The contractor operates as a sole proprietor.

You know you have to file "Form 1099-MISC, Miscellaneous Income," when you pay more than $600 for certain services to a noncorporate payee (some corporate payees also) in the course of your business during the year. You ask for a TIN by sending the contractor a blank "Form W-9, Request for Taxpayer Identification Number and Certification."

The contractor ignores your request.

Under the backup withholding rules, you begin withholding 28% of the payments you make. You continue to withhold until the contractor supplies you with a valid TIN.

Until you receive the valid TIN, you remit the backup withholding to the IRS in the same way you make other payroll tax deposits.

In January, you file "Form 945, Annual Return of Withheld Federal Income Tax." You also report the backup withholding on the Form 1099 that you issue to the vendor.

Please call if you are missing TINs from vendors or others with whom you have a business relationship. We can guide you through the steps you'll need to take to avoid penalties.

Unless you're giving gift cards, you probably remove the price tags from presents you buy for others. But there's at least one situation when admitting how much you paid is not a social faux pas: when you give stock. In that case, telling the recipient what you paid for the investment, its current worth, and how much gift tax you paid on the transfer can save tax dollars down the road.

Here's why. The person to whom you give the stock generally receives your basis along with the shares. Your holding period carries over, too.

How it works. Say you bought a stock that's now worth more than you paid for it. You decide to gift it to your daughter. To calculate the gain when she sells the stock, your daughter will need to know your original purchase price plus adjustments such as commissions. She'll use the date you purchased the stock to determine whether the gain is short- or long-term.

The fair market value at the time of the gift comes into play when the stock is worth less than you paid for it. When this happens, the recipient receives what's called a dual basis. That means she'll use your carried-over adjusted basis if she sells the investment at a gain. If she sells at a loss, she'll use the lower of your basis or fair market value.

The fair market value also determines the amount of your gift — and any tax. When you give more than $13,000 ($26,000 if you and your spouse combine gifts) to any one person in 2009 or 2010, you may have to pay gift tax. A portion of that tax can increase the recipient's basis.

Please call if you're planning gifts of stocks or other investments this holiday season. We'll be happy to help you wrap up the tax numbers.

Whether you're considering putting money into your corporation this year or taking money out, your loans could have tax consequences.

Here are tips to keep in mind before you write those checks.

• Document your intent. Create a paper trail with an enforceable promissory note and a mention of the transaction in your corporate minutes. Can't be bothered with the paperwork? Think of this: Money you put into — and later take out of — your company that is not considered a "true loan" can be reclassified as wages or dividends, costing you tax dollars.

• Charge interest. Except for certain small loans that qualify for an exception, the payment of interest is an indication of a true debtor-creditor relationship between your company and you. To avoid the possibility of the IRS calculating the amount of interest you should have paid, you can use the "applicable federal rate," or AFR. The AFR is a minimum interest rate for federal tax purposes that's determined monthly by the Treasury.

• Make payments. Set up an amortization schedule reflecting the loan maturity, interest rate, and payment due dates shown in your promissory note. Write checks as required on the due dates. If you miss a payment, revise your promissory note. Why? Keeping transactions at arm's length can help prevent loans to and from your company from looking like a dividend distribution or a second class of stock.

While there are pitfalls to be aware of, properly structured shareholder loans can offer planning opportunities. Please call if you would like more information.

Thinking of bringing seasonal workers on staff to help out during your busy season?

Keep in mind that these temporary workers are typically subject to the same employment tax rules as your regular employees. You'll generally have to withhold social security and Medicare taxes, as well as federal income tax from their wages. You'll also have to follow payroll tax deposit rules and employment return filing requirements.

There are special filing rules if you only hire employees at a specific time of year, such as the holiday season. For each quarter that you pay wages, you can check the box for "seasonal employer" on Form 941, "Employer's Quarterly Federal Tax Return." By notifying the IRS of your seasonal status, you're not required to file returns for quarters when you have no wages or tax liability.

State rules regarding seasonal employees vary. In addition to reporting these employees as new hires and filing quarterly state payroll reports, you may have to request classification as a seasonal employer by completing a special form. In some states, you're required to reapply periodically. Qualifying as a seasonal employer can affect your staff's eligibility for unemployment benefits as well as your experience rating, which determines your tax rate.

When you hire seasonal farm or agricultural workers, additional rules may apply, even if you pay your help in cash.

Please call for more information about payroll tax rules, recordkeeping requirements, and documentation for seasonal employees. We're here to make sure your busy season goes smoothly.

Are you eyeing your portfolio with year-end investment loss harvesting in mind? Before you place those sell orders, take a moment for a brief arithmetic quiz.

• First question: When does 30 plus 30 equal 61?
  
  Answer: When you run afoul of the wash sale rules, a section of the Internal Revenue Code that prevents you from claiming a current loss on certain investments you sell, then reacquire within a short time period.

• Second question: Why the seemingly odd math?
  
  Answer: In addition to the thirty days before you sell the investment and the thirty days after, the wash sale rules include the day of the sale.

The rules apply to losses generated by transactions involving "substantially identical" stocks and securities, including mutual funds and stock or option grants you receive as part of your compensation. Whether one security is considered substantially identical to another depends on several factors. Generally stocks or bonds in different companies — even those in the same industry — are not substantially identical.

Wash sales can occur when you repurchase the security in your IRA, or when your spouse or a company you control does the buying.

While wash sale rules defer capital losses, in most cases you'll eventually get the benefit, since the disallowed loss is added to the basis of the reacquired securities. The holding period of the original security is also carried over, creating planning opportunities.

Please call for more answers and information about wash sales. We'll help make sure your investment decisions add up.