Saturday, February 28, 2015

How to lower your business tax bill this year (and every year)

Every penny you save in taxes is a penny you can reinvest in your business.

Although taxes may be the least favorite topic for business owners, it's one of the most important. Tax planning should be a part of almost every business decision.

Effective tax planning could help you to maximize your tax deductions and take advantage of tax credits to minimize your bill.

Tax credits and tax deductions

Tax credits and tax deductions both lower your tax bill, but they do so in very different ways. Tax credits are given to companies as incentives for certain activities. They're valuable for your business because they're a dollar-for-dollar reduction in the tax that you owe. A $2,000 tax credit can save you $2,000 in taxes.

A tax deduction lowers your taxable income and your savings are equal to a percentage of your marginal tax bracket. That means that a $2,000 tax deduction, at a 20 percent tax bracket, will save your company $400 in tax.

Common business tax credits

One of the most popular business tax credits is the Credit for Increasing Research Activities. Commonly known as the R&D tax credit or research tax credit, it can be claimed for increased expenditures in qualified research. If your company is developing a new or improved product, creating software, engaging in engineering, architecture, scientific or technical services or improving a manufacturing process, the R&D tax credit could potentially save you thousands of dollars.

Another popular tax credit, the Work Opportunity Tax Credit (WOTC) is available to employers that are hiring qualified individuals in groups that traditionally face employment barriers, like those in families receiving certain government benefits, veterans with service-related disabilities and those receiving supplemental income from Social Security. In general, the amount of the credit is 40 percent of the qualified worker's first year wages up to $6,000. For veterans, that amount increases to $12,000-$24,000.

For individuals who own restaurants, bars or other food and beverage establishments, there is a valuable credit worth pursuing, the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. This income tax credit applies toward employer-paid payroll taxes on employee tips.

There are a variety of credits designed to incentivize alternative and clean energy. For example, the Biodiesel and Renewable Diesel Fuels Credit is available to gas stations and other businesses that sell biodiesel fuel. Other energy-based credits for businesses include the Alternative Motor Vehicle Credit, the Alternative Fuel Vehicle Refueling Property Credit, the Energy-Efficient Home Credit, and the Energy-Efficient Appliance Credit, which is available for manufacturers of eligible appliances.

Don't qualify for any of these? Talk to your tax professional or visit to see other available tax credits for small businesses.

Available tax deductions

In general, most business expenses are deductible, including employee salaries, retirement plans, rent for a storefront, insurance costs and more. Your company has options about when and how to claim certain deductions or report income in order to change the taxes you owe.

For example, employers matching employee retirement contributions can delay depositing those contributions up until the due date for filing their federal income tax returns for the year. That includes employers who obtain an extension for filing a tax return. They have until the end of that extension period to deposit a contribution, in order for those contributions to be deducted on their previous-year tax return.

Additional deduction options for business owners include opportunities to claim accelerated depreciation on purchases made in 2014. Accelerated depreciation allows your company to deduct the cost of assets faster than they actually depreciate. The popular Section 179 deduction and bonus depreciation are examples of accelerated depreciation provisions.

Section 179 allows businesses to deduct qualifying equipment and property purchases by front loading them into a single tax year. Bonus depreciation allows business owners to take 50 percent bonus on their purchases of qualifying new tangible assets (such as furniture, cars or equipment) made in 2014, with no limit.

For more information about deducting business expenses, speak to your tax professional or visit

How else can I save on my tax bill this year?

Saving money on your tax bill can be as easy as changing the way you accommodate employees. Rather than provide your employees with a raise, compensating them with an increased contribution to their health insurance or retirement plan can reduce income and payroll tax for both you and your employees.

Another way to possibly lower your tax bill is to restructure your business. There are a number of different business structures (partnership, LLC, S-corporation and C-corporation); do you know how each one would affect your company's tax situation? If you are a C-corporation right now, you have 75 days from the beginning of each year to elect to convert your company into an S-corporation. Speak with a tax professional to determine which structure is the best fit for your business.

Finally, if you want to minimize your tax bill, stay current on law changes and find an experienced tax professional. The tax law is constantly evolving — major legislation, court cases and IRS rulings appear regularly. Many of these developments present positive tax opportunities for your company. If you know they exist, you can act more quickly and meet with your accountant to discuss any changes that might affect you or your business. Be proactive to claim applicable credits and deductions and keep your taxes as low as possible.

Tuesday, February 24, 2015

Here's How To Figure Out Whether You Should Do Your Own Taxes

Everyone has to pay taxes.
As to whether you should prepare your own or work with a tax preparer or accountant, however, there's no one-size-fits-all answer.
Since most people's financial situations change every year, it's a question worth asking annually. 
Americans have two basic options when it comes to filing their taxes:
1. Preparing yourself, with tax software or through the IRS website. Popular tax software includes programs like TurboTax (from $19.99), TaxACT (from $12.99), and H&R Block (from $19.95). All three programs provide free versions for people with simple tax needs.
The IRS does not charge to file taxes, and while you can print out and mail in your paperwork or request the paper forms in the mail, the IRS encourages online filing and directs taxpayers with incomes under $60,000 to available free filing software like that mentioned above. For people with incomes north of $60,000, the site provides free fillable forms.
2. Hiring a tax preparer to file for you. The only professionals qualified to help you are tax lawyers, CPAs, and enrolled IRS agents. You can search for appropriately credentialed preparers at
Preparers generally start at around $100 and vary depending on where you live and how complex your taxes are, and accountants might very well charge at least twice that, with similar variations in price according to location and complexity. According to a survey conducted by the National Society Of Accountants, federal and state tax preparation with itemized deductions costs an average of $261. Get Rich Slowly has a thorough breakdown of the costs of working with different tax preparation companies.
Note that if you itemize your deductions, you may be able to deduct the cost of your tax preparation from next year's taxes.
So, should you prepare taxes yourself or hire someone to help? For most people, it's not just about the price. Ultimately, it comes down to what you're most comfortable with, but these guidelines could help you decide.

Do your own taxes if:

You have a straightforward tax situation without dependents, investments, or significant assets or charitable contributions, and you don't own a business. Those basic, free versions of tax preparation software mentioned above were created for people like you, who have few deductions and factors to take into consideration.
You have the time and patience to deal with it. Taxes probably aren't the kind of thing you should do with Netflix on in the background. Expect to set aside some time to give it your undivided attention — in 2012, the IRS estimated you'd need 16 hours to do all of the preparation work for the basic form 1040. 
You feel comfortable hitting submit and want that control over your money. Taxes are a big deal. If you feel comfortable navigating the software, looking up questions on the (surprisingly accessible) IRS site, and the idea of having to fix any errors doesn't terrify you, then you'll probably feel more comfortable doing your own taxes.

Hire a professional if:

You earn over $200,000 a year. Kiplinger reports that IRS statistics show an increased likelihood of IRS audits once your household income passes $200,000, and even more so if you earn over $1 million annually. If the IRS is going to come knocking, you'll want to make sure everything is buttoned up as tightly as possible — and for most people, working with a professional is probably the best way to do this.
You've had a major life change in the last year. Did you get married? Buy a house? Have a baby? These all impact your tax filing, and, at least the first time you document them on your taxes, you might want someone to show you how best to do it.
You have a complicated tax situation with dependents, investments, or significant assets or charitable contributions, or you own a business. Nearly every financial transaction comes with some kind of tax consequence, and the more transactions you have, the more things you need to take into consideration. People who own businesses, freelance, or are self-employed in particular might want the help of a professional to iron out their atypical tax situations — deductions for home offices, business meals and travel, and vehicles are also audit red flags.
You're planning to itemize your deductions. This point goes hand in hand with having a complicated tax situation. If you have major medical costs, a mortgage, or make large charitable donations (among other factors) you might save more money itemizing your deductions than taking the standard deduction. Itemizing makes your taxes a little more complicated, which you might not want to take on.
You don't have the time and patience to deal with it. If you feel that the significant time you'd need to devote to doing your taxes would be better spent elsewhere, you might want to outsource. It's probably more prudent than rushing through your filing and making a mistake.
You don't trust yourself to cover all of your bases. If the idea of entering numbers and talking about dependents and deductions makes you break out in a cold sweat, you might want to leave the preparation to a professional.

Sunday, February 22, 2015

It's Complicated: Figuring out your tax bill for 2014 is more difficult than ever


Like millions of Americans, Karen and Bill Wiater annually pay a specialist to prepare their income tax forms.
“It’s too complicated,” said Bill Wiater, a senior citizen who lives in Crete. “I’ve had someone doing mine for years and years.”
Who can blame him?
The federal income tax code is more than 4 million words covering 9,000 plus pages. From 2001-2012 alone, there were 4,600 changes, more than one per day.
“Yes,” Bill Wiater said, “We’d probably do our own taxes if it was easier and simpler.”
Most Americans -- about 60 percent -- use some type of assistance when preparing their taxes, said Annelise Wiens, a spokeswoman for H & R Block, the nation’s largest tax preparation service.
In fact, the company’s tax preparers, each with an average of eight years in the industry, must take 15 hours of continuing education and 35 hours of tax education annually to keep up with changes and additions to the tax code.
A report by Bank of America/Merrill Lynch said that while the complexity of the tax code may continue to be discussed as a major failing, few people anymore expect taxpayers, or even most tax experts, to have a full grasp of the entire code.
“And as for simplifying the code Dave (Rep. Dave Camp, the chairman of the House committee on Ways and Means) Camp’s tax reform bill was 979 pages long,” the report said.
The last major revision of the Internal Revenue Code was in 1986.
However a report in Forbes magazine contends that the public seems unconcerned with the need to fix the tax code as a poll shows that tax reform did not make the list of the most important national problems.
David Bochnowski, chairman and CEO of Munster-based People’s Bankcorp Inc., said he would like to know “why tax forms are now so complex that you need a professional to do them.”
“Even Turbo Tax is a form of professional help,” Bochnowski said. “It’s very hard to understand and follow it’s complexities.”
Any reform of the tax code must have “fairness and simplicity,” he said.
“We don’t have either right now,” he said. “Everyone knows the issues but no one knows how to resolve them. The current tax code is for another time. We have to look at the alternatives. What are the give ups, but what are the returns.”
The tax code is supposed to and does influence behavior, he said. Therefore, jettisoning deductions can have unintended consequences. For example, eliminating the real estate tax deduction may make it less likely people would purchase homes, Bochnowski explained.
“Simplification is good,” said Jim Thomas, an accounting professor at Indiana University Northwest. “But that’s probably not going to happen.”
There are many, many ideas on how to make the tax code simpler, but no one agrees on how to do it, Thomas said.
“There are many problems with it and many general approaches, but they all have trade-offs,” Thomas said.
Some feel the government should lower taxes to stimulate the economy, while others feel the government should only use tax increases as a last resort when the economy is faltering, he said.
“Those two groups in Congress are typically at odds on how to do either,” Thomas said.
Middle-class Americans want to keep the deduction the tax code allows, such as the interest on home mortgages, real estate taxes, and charitable contributions and would fight any attempts to remove them or any elected officials who espoused those removals, Thomas said.
A “flat tax” where everyone pays relatively the same rate has been touted.
“It sounds great,” Thomas said. “Now rates vary from 0 to 39.6 percent, With a flat tax everyone would pay in the low 20 percent range.”
But again using a flat tax would remove the deductions prized by the average American. Plus, with a flat tax corporations wouldn’t be able to take deductions for the benefits they offer employees, such as health insurance, sick pay, vacations, making the flat tax more repugnant to the average taxpayer, according to Thomas.
There have been proposals to impose higher tax rates on the wealthy, “but people always say that takes away the money they would spend on new business investment. I think everyone agrees there’s a lot of simplification needed,” he said. “It will happen some way, but the country still has a great debt so it still has to charge taxes.”
Another approach is to limit individual and corporate deductions, he explained.
“But Congress put many deductions into the tax codes to help their contributors and neither group would want them removed."
“Many corporations have lawyers on staff who help write the tax code and have lobbyists to see that the proposals are put into place."
The 2014 Bank of American/Merrill Lynch report also said that one of the reasons the tax code hasn’t been simplified is that tax calculations have become automated.
“In some sense, tax reformers can be said to have been TurboTaxed,” the report says. “That is, the declining cost of computing software and hardware make it unnecessary to know most of what the tax code is doing… The lack of a hue and cry among taxpayers for tax reform may be partially the result of this automation of the code. One can get a copy of TurboTax online for $27.”
President Barack Obama has offered a detailed set of tax loophole closers and measures to broaden the tax base. Observers however, doubt his proposal can win the support of the U.S. House and Senate which Republicans holding the majority in Congress.
The President proposals include “cutting tax preferences for high-income households; eliminating special tax breaks for oil and gas companies; closing the carried interest loophole for investment fund managers; and eliminating benefits for those who buy corporate jets.”
A recent White House statement says tax reform should draw on those items, together with the elimination of additional inefficient tax breaks, to finance the reduction of marginal rates and meet the President’s other tax principles, including the Buffett Rule. The rule says, “No household making more than $1 million annually should pay a smaller share of their total income in taxes than middle-class families.”
“In the absence of fundamental tax reform, the President believes these measures should be enacted on a stand-alone basis, along with permanent extension of the middle class 2001 and 2003 tax cuts,” the White House report concludes.

Saturday, February 21, 2015

How to roll over your 401(k) to a traditional IRA

When you leave your job, your 401(k) balance can come with you. You may be tempted to keep some or all of the money instead of rolling it over, but that is rarely a good idea. If you cash out your 401(k) plan balance, you generally pay the income taxes due on the entire amount withdrawn, as well as a 10 percent penalty tax, unless you are at least 59½ or unless you are retiring from your employer at age 55 or older.

If, however, you want to keep the money in place for retirement, a good strategy to consider is rolling the funds over into an Individual Retirement Account, or IRA.

The process is simple:
• Find an IRA investment (such as an annuity, a bank CD, or a mutual fund) that’s appropriate for you. You will have to do some research or talk to a financial professional to find out which options are right for you.
• Contact the administrator of your former employer’s plan and arrange the direct rollover to the custodian of your new IRA. (The exact procedure may vary a little from company to company, but don’t worry – they’ve all dealt with this request before.)
• Sign documents to directly rollover the funds to your new account.
• The funds will arrive in your IRA for investment as you chose in step 1.

A word of caution: You can receive a distribution of your account balance from the plan instead of arranging for a direct rollover. This might not be the best idea. If you take a distribution, the plan administrator will have to withhold 20 percent of the distributable amount for federal income taxes.
That is a credit toward taxes that may be due when you do your income tax return. When you do this indirect rollover, you can increase the rollover amount, from your own funds, equal to the 20 percent withholding amount.

Doing a direct rollover, however, avoids this negative consequence. If you roll over the amount of the check you receive without adding that 20 percent back, then the amount withheld will be treated as a taxable distribution. You will generally have to pay income taxes on that amount as well as a 10 percent penalty tax if you are younger than 59½.

While some of the details can seem overwhelming, 401(k) rollovers are a relatively simple, common process that can be a valuable tool in planning for retirement.

Friday, February 20, 2015

3 Most Common Tax Return Errors for Self-Filers Can Delay Refunds and Trigger an Audit


  When Kayleigh Terranova self-filed her tax return last year, the 26-year-old Buffalo resident found the process confusing and time-consuming. 

“I would second guess myself and wonder if I had done everything correctly,” she told MainStreet. “I hated the stress of it all, but I also didn't want to have to pay money to get my tax return filed.” Though her then-fiancĂ© is a CPA, his new job during tax season and their wedding planning left him with scarce free time to help. 

Terranova is not alone in her misery: some 47 million of the 145 million annual tax returns filed to the IRS are self-prepared. But that self-reliance can spell trouble for tax-filers.

To prevent the costly consequences of mistakes wrought by independent and budget-minded filers, experts advise avoiding certain pitfalls, because one misstep could cost hundreds of dollars in potential return money or could lead to possible fines and jail time.

Too Virtuous? 
Presenting yourself as overly altruistic can tip the IRS off to possible tax fraud.

The national average for charitable contributions is about 3% of Annual Gross Income, according to the IRS, and tax payers who inflate theircharitable contributions beyond what could be expected in their income range could invite the scrutiny of an audit. 

“If you gave 1% of your AGI to charity last year and now you are reporting a 5%, it will create a red flag,” said John Gregory, tax practitioner and founder of “When giving money to a charitable organization, make sure you pay with a check and have a receipt from the organization showing your generous gift.” 

Enfant Terrible

Another wrench smooth tax filing plans? Dependents. A child can only be claimed one time, but if divorced spouses both claim the same child as a deduction, the mistake can cause delays.

“You may have a dishonest spouse that will claim the child when they should not,” Gregory said. “When that happens, the spouse who is rightfully entitled to receive those deductions will need to mail in their tax return with the divorce decree showing that they are entitled to that deduction. But it will take at least three months before the client receives the refund.” 

Sucking It In

Don't try to make your earnings skinnier than they are. The IRS will send a notice to consumers who under report their income, because they neglected to declare stock transactions with a small loss or gain. 

“The IRS will receive Form 1098 from the brokerage firm, which notes only the sale of stocks not the cost of equities,” said Gregory. “Only if your AGI does not change by more than $25.00 is it considered immaterial.” 

Thursday, February 19, 2015

Obamacare tax troubles popping up

Affordable Care Act tax issues
As the filing season kicked off in January, Treasury and Centers for Medicare & Medicaid Services officials warned that millions of filers could owe Affordable Care Act, or ACA, taxes.

Some filers will face penalties because they didn't get required insurance coverage. This is the individual shared responsibility tax.

Others will find they got too much government help to buy insurance and must pay it back. This is the premium tax credit, which millions used to help pay for the coverage they bought through a marketplace exchange.

While the IRS hasn't yet issued any data as to how many taxpayers are in such ACA payment predicaments, we are starting to get anecdotal reports.

Costly life changes
One California woman recently told CNN that she's using her savings to pay back the subsidy, officially known as the advance premium tax credit, that she received to buy her coverage through her state's exchange.

But, she admits, her surprise tax bill is her fault.

When she got a job after buying her policy thanks to the tax credit, she didn't let the exchange know of her income increase. Her situation is just one that was noted in Bankrate's story on the possible Obamacare tax costs that many might face.

No issues for early filers
Obviously, most of the folks filing early are not having Obamacare tax issues. The total number of refunds issued so far this year, as well as the average refund check amount, are larger than at the same time last year.

And most taxpayers won't have Obamacare tax troubles. They have health care coverage through their employers. All they have to do is check a box to that effect on their 1040 (or 1040A or 1040EZ).

But we'll keep an eye on the IRS filing season reports. The refund amounts will drop; they do so every year. Folks getting big refunds always file early, while the rest of us who get smaller refunds or owe tax are at the end of the annual filing parade.

If the refund amounts drop dramatically, it will be interesting to see if the IRS or Treasury will offer any reasons, Obamacare or otherwise, for the decreases.

Have you finished your 2014 tax return? Did you encounter any Affordable Care Act filing problems? Did your health care coverage affect your tax bill?

Wednesday, February 18, 2015

5 Tax Myths That Can Cost You

Tax myths are a lot like a bad date. They are annoying and seem to last forever. Yet people have beliefs about income taxes that have no basis in reality. Were it not for the potential financial costs, some of these might be amusing. But if you believe them and act upon them, they can cost you serious money.
Tax myths persist for several reasons, including:
  • The tax code is extremely complicated, and therefore misunderstood;
  • Revisions have changed the code, but old ideas live on long afterward; and
  • News media stories make the rounds, and endure even if they aren’t entirely accurate.
When it comes to preparing your income taxes, it’s important to research significant provisions required to file your return. If you’re unsure, you should seek professional help in the preparation of your returns.
Here are some of the more common tax myths that continue to circulate, despite information to the contrary.

1. The Home Office Deduction Is an Automatic Audit

This myth has been around for about a quarter-century and is accepted as gospel among those who are not intimately familiar with income tax preparation. In truth, as long as a home office deduction follows IRS rules, and is not excessive, this deduction is not an automatic red flag for audits.
The IRS has three basic rules when it comes to the home office deduction:
  • Regular and exclusive use – This means that the home office is regularly used for business, and has no other use. As long as you have a room in your home that you are using exclusively for business on a regular basis, you meet this requirement.
  • Principal place of business - The home office can’t simply be a space that you occasionally use to conduct business. It must be the primary office from which you run your business. This means that you can’t deduct expenses for a principal office outside of your home, in addition to your home office.
  • Additional tests for employee use – As an employee, you may be able to take a home office deduction if you a) meet the two tests above, b) your business use of your home is for the convenience of your employer, and c) your employer does not pay rent for the space.
The expenses that you are deducting for the business use of your home must also be reasonable. That means that your deductions should not exceed the amount of square footage of your home office, divided by the total square footage of your home. For example, if your home is 2,500 square feet, and your office is 200 square feet, then you will be able to deduct 8% of your home expenses (200 divided by 2,500) for income tax purposes.
If you deduct 40% or 50% of your total expenses as home office expenses, that could lead to trouble.
For more information on the home office deduction, see IRS Publication 587, Business Use of Your Home.

2. Students Don’t Have to File Income Tax Returns

There are those who believe that your status as a student exempts you from having to file income taxes. But there is no such status in the tax code. The determination for whether or not you need to file a return is determined by the amount of income that you earn for the year.
For 2014, you must file an income tax return if you earned at least $10,150, even if you were a full-time student for the entire year.
There are also situations where you will want to file a tax return even if you made less. One example is if you had tax withheld, and you have no tax liability. You’ll want to file in order to claim your refund.

3. You Must File Jointly If You’re Married

This myth probably exists because it seems to make so much sense. That thought may be reinforced by the fact that in the great majority of instances, the alternative results in higher tax bills. There is no requirement to file jointly, however, simply because you are married. And sometimes the alternative actually does work in your favor.
Even if you’re married, you still have the option to file separately. In about 90% of the cases, married filing joint will work better. But you could very well be in the 10% for whom filing separately is the better option.
Married filing separate can result in a lower tax liability in the event one spouse has significantly higher deductions than the other. When you file jointly, you may lose deductibility of certain items.
Medical expenses are an excellent example. Since they can only be deducted to the extent that they exceed 10% of your adjusted gross income (AGI), lowering the dollar amount of that percentage is one way to increase the deduction.
A couple earning $200,000 and having $20,000 in medical expenses will not be able to deduct any of it since it does not exceed 10% of their combined income. But if the spouse who incurred medical expenses made only $50,000, the 10% limit will be only $5,000.
By filing separately, the couple would be able to deduct the medical expenses, representing a substantial reduction in taxable income. Fortunately, there are computerized tax software packages that can do a joint versus separate filing comparison.

4. You Need a Bank Account to Get a Direct Deposit of Your Refund

This is one of the biggest tax-related myths. While it’s true that the vast majority of refunds do go to bank accounts, it’s not an absolute requirement. For example, you can have your refund sent to most prepaid debit cards, which is one of the refund options the IRS provides.
One of the potential downsides of using prepaid debit cards is cost. There are, however, some prepaid cards that have lower costs. Be sure to do your research before you sign up for one.

5. Getting a Large Tax Refund Is Good Tax Planning

There’s no question, getting a large tax refund feels good. But it doesn’t necessarily indicate good tax planning. For example, if your refund is $5,000, you have to consider that you will have given the government an interest-free loan for that amount during the course of the year. If there was something better that you could’ve done with the money (and there always is), your refund could end up having cost you money.
For example, let’s say that you had a credit card with a $5,000 balance, and an interest rate of 20%. Had you allocated the extra withholding to paying off the credit card, you would have saved yourself upwards of $1,000 in interest charges during the course of the year. It’s a bit more complicated than that, but the example still stands. Any time you’re giving the government use of your money, you are denying yourself the ability to use it for more productive purposes.
True good tax planning is when your refund comes in at a number very close to zero. To achieve that goal, the IRS offers a free withholdings calculator to help you determine how much your employer should withhold from your paychecks.