5 Overlooked Tax Deductions for small business owners

As a CPA, I consider that this is a critical time of year for all small business owners to try and dig up all the expenses we can from last year in order to drive down our tax bill as low as possible.

As you are sitting around your kitchen table organizing receipts and combing over bank and credit card statements, don’t be timid or shy when considering your expenses. I truly believe that far too many business owners, CPAs and Tax Preparers are overly conservative and miss out on important expenses that we are entitled to.

Here are 5 tax deductions that should be maximized to the greatest extent possible and will have a major impact on your tax return:

1. Travel related expenses. In my opinion, this is one of the most underutilized tax deductions by small business owners today. Unlike meals and entertainment that are limited by 50%, travel expenses are 100% deductible. These include airfare, hotel, rental cars, valet, taxi, trains, tolls, etc… You would be shocked to know how many tax returns come across my desk every year of new clients with literally zero travel deductions. Consider all of your travels last year that may have involved a meeting with a client, a vendor, or a training meeting, a tour of a competitor’s facility or store, your annual board of directors, shareholder, manager or member meeting, a conference with retreat with a partner, the list goes on and on. It just doesn’t make sense for any business owner to not have some travel expenses.

2. Auto Deductions. Remember this isn’t travel, but expenses for your car or truck used in your business. There are two main options: mileage or actual expenses, and statistics show that 90% of small business owners actually utilize the mileage method. For 2012 this was 55.5cents per mile. Surprisingly, again I see many taxpayers shy away from claiming their true mileage because they are afraid of an audit. True, you should do your best to keep a written record, but if you haven’t been extremely detailed, still utilize an estimate and take the deduction. I would rather see my client defend the deduction than not take it at all. As for ‘actual’ expenses, this is for those typically with large trucks or SUVs. Again, do your best to track down your fuel, repairs and maintenance for last year if you used the ‘actual’ method.

3. Dining and Entertainment. Again, a highly underutilized expense by small business owners and should be a healthy line item on your tax return. Please make sure you consider all of your meals last year where you discussed business with a partner, or a potential client, vendor or strategic alliance. If you didn’t keep a receipt, still take the expense. Technically, you don’t need a receipt if it was less than $75, but you still should be able to substantiate it if necessary with a credit card or bank statement and the purpose of the meeting. Another overlooked fact is that you can write-off dining by yourself when you are traveling. This has been defined as outside of a normal commute of your home office or place of business and business owners should be diligent in tracking these expenses. However remember, although you are traveling, all dining and entertainment is still limited to 50% of the full amount.

4. Office Supplies and Technology. Every small business owner is regularly buying supplies and upgrading their phone, computers and digital reading devices. Don’t forget that when you have a small business, the majority of these items can be fully expensed. Make sure you track them and discuss with your tax advisor which expenses for items should be reduced by some percentage for personal use if necessary.

5. Technology and Telephone. This is obviously an ever increasing expense as small business owners utilize technology to do business nationwide, if not worldwide. Many also don’t know that recent case law and IRS rulings allow business owners to write-off 100% of their cell phone expenses, so long as they have at least one dedicated home phone line. Moreover, make sure to include the cell phones of your family members that work in the business alongside you and need a cell phone for their legitimate roll in the business.

Now with all of these expenses, you need to take into account your overall income, profit and the size of your operations. Your deductions need to look realistic and common for the type of business you have. However, if they’re legitimate and you have support, don’t be afraid to take them. Go for it and just have your records as back up if you need them in the future to justify your expenses.

If you have any questions please do not hesitate to contact, Chicago Accountants at 773-728-1500!!

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‘C’ Corporations

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

If you are a C corporation, use the information in the chart below to help you determine some of the forms you may be required to file.

For more e-file information, see References/Related Topics listed below.

If you are a C corporation or an S corporation then you may be liable for…

Use Form…

Separate Instructions…

Income Tax

1120, U.S. Corporation Income Tax Return (PDF)

Instructions for Form 1120 U.S. Corporation Income Tax Return(PDF)

Estimated tax

1120-W, Estimated Tax for Corporations (PDF)

Instructions for Form 1120-W(PDF)

Employment taxes:

  • Social security and Medicare taxes and income tax withholding
  • Federal unemployment (FUTA) tax

941, Employer’s Quarterly Federal Tax Return (PDF) or943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF) (for farm employees)

940, Employer’s Annual Federal Unemployment (FUTA) Tax return (PDF)

Instructions for Form 941 (PDF)

Instructions for Form 943 (PDF)

Instructions for Form 940 (PDF)

Excise Taxes

Refer to the Excise Tax Web page

Please call Chicago Tax Accountants us at 773-728-1500 if you have questions regarding your ‘C’ Corporations.

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Find out if you qualify for Earned Income Tax Credit EITC / EIC

EITC, the Earned Income Tax Credit, sometimes called EIC is a tax credit to help you keep more of what you earned. It is a refundable federal income tax credit for low to moderate income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file.

Do You Qualify for EITC?

To qualify for EITC you must have earned income from employment, self-employment or another source and meet certain rules. Also, you must either meet the additional rules for workers without a qualifying child or have a child that meets all the qualifying child rules for you.

Earned Income Tax Credit Rules for Everyone

To qualify for Earned Income Tax Credit or EITC, you and your spouse if married and filing a joint return, must meet all of the following rules:

  1. Have a Social Security Number that is valid for employment
  2. Have earned income from employment, self-employment or another source
  3. Cannot use the married, filing separate filing status
  4. Must be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien
  5. Cannot be the qualifying child of another person*
  6. Cannot file Form 2555 or 2555-EZ (related to foreign earned income)
  7. Your Adjusted Gross Income and earned income must meet the limits shown on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page
  8. Your investment income must meet or be less than the amount listed on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page

After you meet the EITC rules for everyone, you must also meet the rules for either workers without a qualifying child or have a child that meets the *qualifying child rules.

Find out if you are eligible for the EITC by answering a few questions and providing basic income information, using the IRS’s online EITC Assistant web tool. The assistant also helps determine if your child meets the rules for a qualifying child and estimates the amount of your credit.  Find the English EITC Assistant here or o haga click aquí para seleccionar la Versión en Español del Asistente.

Special EITC Rules

There are special EITC rules for members of the military, ministers, members of the clergy and those receiving disability benefits. Find out more about the special EITC rules.

Rules for those Without a Qualifying Child

If you and your spouse, if filing a joint return, meet the EITC Rules for Everyone and you do not have a qualifying child, you may be eligible for EITC. Find the rules for those without a qualifying child here.

EITC Income Limits, Maximum Credit Amounts and Tax Law Updates

See the EITC Income Limits, Maximum Credit Amounts and Tax Law Updates for the current year, previous years and the upcoming year.

Special EITC Rules

Special EITC rules for members of the military, ministers, members of the clergy, those receiving disability benefits and those impacted by disasters. Read more about the special rules.

Disability and EITC

Many persons with disabilities or persons having children with disabilities qualify for the Earned Income Tax Credit or EITC. Find out more about Disability and EITC.

Please contact Chicago CPAs at 773-728-1500

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Filing and Paying Your Business Taxes

Business Taxes

The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general types of business taxes.

Income Tax

All businesses except partnerships must file an annual income tax return.  Partnerships file an information return.  The form you use depends on how your business is organized. Refer toBusiness Structures to find out which returns you must file based on the business entity established.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year.  An employee usually has income tax withheld from his or her pay.  If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.  If you are not required to make estimated tax payments, you may pay any tax due when you file your return.  For additional information refer to Publication 583.

Estimated tax

Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. For additional information, refer toEstimated Taxes.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves.  Your payments of SE tax contribute to your coverage under the social security system.  Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

  • If your net earnings from self-employment were $400 or more.
  • If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

Note: There are Special Rules and Exceptions for aliens, fishing crew members, notary public, State or local government employees, foreign government or international organization employees, etc.

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file.  Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

For additional information, refer to Employment Taxes for Small Businesses.

Excise Tax

This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following.

  • Manufacture or sell certain products.
  • Operate certain kinds of businesses.
  • Use various kinds of equipment, facilities, or products.
  • Receive payment for certain services.

Form 720 – The federal excise taxes reported on Form 720 (PDF), consist of several broad categories of taxes, including the following.

  • Environmental taxes.
  • Communications and air transportation taxes.
  • Fuel taxes.
  • Tax on the first retail sale of heavy trucks, trailers, and tractors.
  • Manufacturers taxes on the sale or use of a variety of different articles

Form 2290 – There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290 (PDF). For additional information, see the instructions for Form 2290 .

Form 730 – If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Use Form 730 (PDF), to figure the tax on the wagers you receive.

If you have questions regarding above, please contact Chicago Accountants at 773-728-1500!!

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IDENTITY THEFT ISSUES

The IRS, in conjunction with the Justice Department and other Federal, state, and local agencies, has intensified their efforts at preventing, detecting, and resolving identity theft and refund fraud.

The identity theft and refund fraud effort has involved 734 enforcement actions involving 389 individuals. The effort included 109 arrests, 189 indictments and complaints, and 47 search warrants.

In addition, the IRS began a special compliance effort that began on
January 28, 2013. IRS auditors and criminal investigators will visit 197 money service businesses to help make sure that these businesses are not assisting identity thieves or refund fraud when cashing checks.  These compliance visits took place in 17 high-risk areas identified by the IRS which included: New York, Philadelphia, Atlanta, Tampa, Miami, Chicago, Houston, Phoenix, Los Angeles, San Diego, El Paso, Tucson, Birmingham, Detroit, San Francisco, Oakland, and San Jose.

As part of this effort, the IRS has made a significant increase in the number and quality of identity theft filters in their processing system for the 2013 Filing Season. These filters are designed to spot fraudulent tax returns before the refund is issued.

Also, by late 2012, the IRS has more than doubled the number of IRS employees that are devoted to identity theft related issues.  They have also trained 35,000 employees that work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.

If you have been a victim of identity theft and have not contacted the IRS about this, you should  contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. Once you contact them, the IRS will ask you to complete Form 14039 (IRS Identity Theft Affidavit).

If you receive a notice from the IRS indicating that you might have been the victim of identity theft, you should follow the instructions on that notice.

For more information on what the IRS is doing to help prevent and combat identity theft and what a taxpayer should do if they might have been a victim, see the following:

If you have any questions we, Chicago Accountants are here to help you 773-728-1500!!

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What to Expect for Federal Refunds for the 2013 Filing Season

It is important to set your  expectations for when the IRS will be sending refunds during the upcoming 2013 Filing Season and beyond.

Due to the increase in fraud and identity theft, the IRS is increasing their fraud filters during the processing of all individual returns. This means that a larger number of returns will be reviewed therefore, processing will take longer and the refund will be sent out later for these returns.

The IRS messaging for refunds for the upcoming filing season will be that refunds will be sent to the taxpayer within 21 days from the time the return has been accepted. This message will be the same on the IRS website, “Where’s My Refund?” page, and when a taxpayer calls the IRS help desk.

The refund cycle chart has been eliminated.

You will also notice the following changes to the “Where’s My Refund?” tool for the upcoming filing season:

  • The expected date of when the refund will be sent will no longer be given when the return begins to be processed.
  • The refund status will be presented by way of a status bar as follows:
    • Return Received – From the time the return is received until the refund has been approved the message will be that the return is being processed and that the refund will be sent in less than 21 days.
    • Refund Approved – A date the refund is scheduled to be sent to the bank will be given.
    • Refund Sent – The date the refund was sent.
  • The taxpayer will be able to see the status of their return within 24 hours after their return has been accepted.

The IRS has also begun sending out an additional message to taxpayers that they should not be making major purchases during the holiday season solely on the expectation of when they will receive their refund before the bills arrive.

To learn more see the following:

Please call us, the CPAs in Chicago, at 773-728-1500 if you need help with your individual or corporate tax return.

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Direct Deposit Puts Your Money in Your Pocket…Faster

One of the most frequent questions that I am getting as a CPA during the tax season is: “How long will it take to get my refund? Will it be faster if I choose direct deposit?”

I always suggest getting direct deposit as it’s faster and safer, but some clients just want to see a check written with a big amount on their name.

However, I would say don’t wait around for a paper check. Have your federal tax and state (if applicable) refund deposited directly into your bank account. Choosing direct deposit is a secure and convenient way to get your money in your pocket faster.

  • Secure – there is no chance for a check to get lost in the mail. Thousands of checks are returned to the IRS by the U.S. post office every year as undeliverable mail.  Direct deposit eliminates the possibility of not receiving your check and prevents your refund from being stolen.
  •  Convenient – the money goes directly into your bank account.  You won’t have to make a special trip to the bank to deposit the money yourself.
  •  Easy – simply provide this office with your bank routing number and account number when your return is prepared, and you will receive your refund far quicker than by check.

Please call Accountants in Chicago at TaxCutters 773-728-1500 and we will answer your questions!!

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Don’t Forget Those Nominee 1099s

At the beginning of a new year clients reach out for my CPA advice and I am always being questioned about 1099 forms and who should issue such forms and what the deadline is.

For tax purposes, if you receive income in your name that actually belongs to someone else, you are also a nominee. Being a nominee means that you must file a 1099 form with the IRS appropriate to the type of income you received and give a copy of the 1099 to the actual owner of the income. However, if the other person is your spouse, no 1099 filing is required.

One of the most commonly encountered nominee situations is having a joint bank account or brokerage account with someone other than your spouse and all of the income from those accounts being reported under your SS number. You will need to provide the IRS and your joint account owner with a 1099 reporting the co-owner’s share of the income under his or her SS number. Then, when you file your return, you need to show all of the income but back out the co-owner’s share as “nominee amount.”

The type of 1099 to file depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends, and 1099-B for the proceeds from selling stocks and bonds.

Forms 1099-INT and 1099-DIV issued by you as a nominee are supposed to be provided to the recipients by January 31, while the deadline for providing forms 1099-B to the other owner(s) is February 15. In order to avoid penalties, copies of the 1099s need to be sent to the IRS by February 28.

If you have questions about filing 1099s as a nominee, please call us 773-728-1500.

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Chicago Businesses – Watch out for scams

Many of us are looking for cash. We’re all looking for ways to create wealth and save taxes. But when a prospective tax scheme or business strategy sounds too good to be true, it usually is.

Many times I have seen how a client became caught up in an elaborate business ruse, and as aCPA in Chicago area, who have helped countless businesses in filing their corporation tax returns, I have to sort through the resulting disaster for them. They never had to needlessly lose money in this way.

Considering these days economic times, when the wolves come out in sheep’s clothing, there are more crooks out there, and they’re looking for an edge. It’s a recipe for disaster.

Some of the most common scams you should watch out for:

The non licensed business coach, or tax adviser

“Coach” is a title someone often uses when they weren’t smart enough to finish school and get a graduate degree. Now there are great reasons for “coaching” in certain areas of business, but when they start giving tax and legal advice, watch out.

There are a plethora of call center operations that rope would-be entrepreneurs into paying money to talk to someone wearing sandals and a headset who has no business offering tax and legal advice, or doesn’t know anything about running a business.

The “I have a deal for you guys.”

It’s called “affinity fraud.” A friend or relative tells you that someone in their neighborhood or church has found a “great new business” to invest in, and you should chip in big money, too.

On its own, investing in a start-up can be a great idea if you can stomach the risk, but watch out if someone says you don’t need a lawyer or makes big promises. Be realistic, and make sure you use a lawyer to properly document the investment. Suing to recoup losses can often prove too costly to make a lawsuit worth it.

The corporate credit “shelf corporation.”

I have had numerous clients come through my office wondering what they might do with a “shelf corporation” they paid $5,000 to $15,000 for.

Many of  were sold on flashy terms like Dunn and Bradstreet numbers, Paydex scores and unsecured credit, and how they would somehow win larger loans by using the shelf corporation name. The truth is there is no short-cut process. Building corporate credit takes time.

The bogus state filing fee bill.

You register a corporation or LLC in your state, or make the other required filings. Then, all of a sudden you get a piece of mail with a state insignia on the envelope, telling you that you owe another fee.

Plain and simple, these can often be a scam. There are so many times I’ve had clients call me and say, “We got this piece of mail about a state fee. What’s this all about?” And I say, “It’s a scam. Don’t pay it.” And they say, “Really?” Don’t ignore any notice you receive that looks official, but make sure you get a second opinion.

Conclusion

Unfortunately the list could go on and on. So what’s the best way to avoid a scam?

Ask for credentials, make sure you understand who is actually going to be doing the work for you or giving advice, perform due, and get a second opinion from a trusted licensed adviser when tax and legal matters are at stake.

Finally, don’t forget, if it’s too good to be true, it probably is.

Don’t forget to call us at 773-728-1500 if you have any questions related to tax planning issues.  We also provide bookkeeping services for businesses in the Chicagoland area.

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MARRIED COUPLES VS. SAME SEX COUPLES? WHO PAYS MORE: BY CHICAGO CPA

The federal 1996 Defense of Marriage Act doesn’t offer tax breaks for gay spouses even more because the federal government doesn’t recognize gay marriage it results in paying as much as $6,000 extra a year for the same sex couples.

While filing jointly, as a married couple provides tax benefits, the same sex couples can not enjoy the same perks because they are not allowed to file their federal returns jointly.

However, there are some states (more than 12 now) that grant full or partial marriage rights to same sex couples, but the federal government is governed by the 1996 Defense of Marriage Act, which has the support of conservatives who consider that repealing the act would erode religious liberty for people who believe in the traditional definition of marriage.

We, the Chicago CPA have done the following analysis to compare who would pay more in individual income tax – A Married couple or a same sex couple??

Just to make it clearer we will give you an example of the act’s tax implications for a family with one spouse earning $100,000 and the other spouse staying home with the family’s two kids.

Case I: same sex couple

The working spouse files as head of a household and the spouse that stays home with the kids is considered to be a qualifying relative. As a result the federal tax owed by the household’s is $13,199.

Case II: married couple

The tax liability that the married couple who files a jointly tax return would be $8,656.

The result is a $4543 higher payment for the same sex couple. WHY? Because when you file as head of a household such a designation comes with disadvantages. When you file as head of a household instead of married filing jointly exposes more income to a higher bracket, plus the standard deductions are lower for a head of household than they are for married couples filing jointly.

To find out which status is right for you, please call us at 773-728-1500.

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