2014 is about to end and you might be thinking about how to lower your tax bill. Given the holiday season, you might also be thinking about how to do some good in the world. There’s still time to do both!
Charitable contributions can be an effective tool to lower your tax bill if you itemize your deductions. Here are some other things to consider:
- You have to donate to a qualified charity- not individuals, political organizations or candidates.
- Keep records! Any cash you donate must have a written record with the charity name, date, and amount. For donations over $250, the charity must give you a written letter.
- Donating clothing or other items? You need to file Form 8283 Noncash Charitable Contributions http://www.irs.gov/pub/irs-pdf/f8283.pdf if the gift is more than $500. Gifts over $5,000 need an appraisal.
- You can only deduct a contribution if the value of anything you receive is less than your contribution. For example, if you paid to go to a charity dinner, only a portion of that is deductible.
Being a South Jersey native and growing up in Atlantic City, the Miss America Pageant was always an exciting thing. I even got to be in the Miss America Parade in high school with the marching band. But it wasn’t until seeing this John Oliver piece that I really gave it much thought. Apparently the organization claims to provide scholarships of $4 million to women. John’s team dug up all of the organizations tax returns, which are required to be open to public inspection because it is a non profit organization, and discovered that the actual dollar figure of scholarships given out was more along the lines of $500,000. How can this difference be? It turns out that Miss America comes to the $4 million figure by adding up all possible scholarships that they give, as well as all other scholarships that other organizations will give to their participants. That is some creative accounting if I’ve ever seen any. Watch the video- skip ahead to minute 9 to see the discussion on the tax returns.
Many business owners might not be aware of this, but gifts that your business gives out to vendors, customers, or other business associates are only tax deductible up to $25 per year, per recipient. This means that if you were thinking of passing out expensive bottles of wine (or tequila if you were thinking of sending your favorite CPA a gift! ;-) from your business, you would only be able to deduct $25 for each bottle on your tax return.
There are some exceptions to this $25 rule that will allow you to deduct the cost of gifts fully:
- Any item that costs $4 or less and has the giver’s name imprinted on it – think pens, swag bags, etc.
- Signs and promotional materials for the recipient to use on their business premises.
Hopefully, you have been doing the responsible thing and putting away a nice little nest egg in retirement plans such as pensions, profit sharing plans and individual retirement accounts (IRAs). If you did, resist the urge to take money out of those accounts before your turn 59½. For starters, the money you withdraw will be taxable to you. Additionally, it is subject to a 10% early-withdrawal penalty. It’s an IRS “red flag” to forget to include that 10% penalty and increases your chance of an audit.
There are some exceptions to this early-withdrawal penalty. The penalty does not apply if you are disabled, distribution is due to the taxpayer’s death, or benefits are paid out as an annuity over the remaining life expectancy. It also does not apply to IRS withdrawals for educational expenses, certain home-buying expenses, and unreimbursed medical expenses in excess of 7.5% AGI.
Usually when you work with a payroll company, the last thing you expect is for them to not send your tax payments into the IRS. Unfortunately, in a recent court case, when a payroll company declared bankruptcy, that is exactly what happened.
In this particular case, when the payroll company went under it held client funds that were supposed to be paid to the IRS. Some clients received IRS notices that they still owed money while others never received those notices because they went straight to the payroll company. The bankrupt payroll company told some clients it was an IRS error. Regardless, the clients’ money was gone- and they still owed the taxes.
To reduce the risk of something like this happening to you, follow these steps:
- Hire reputable payroll companies. I work with http://www.zenpayroll.com.
- Don’t allow the payroll company to sign your tax returns. Confirm that the payroll company deposited your tax payments and filed your returns.
- Don’t let IRS correspondence be sent to the payroll company.
- Request tax account transcripts from the IRS on a regular basis.
Payroll taxes is one area the IRS is not sympathetic or forgiving about. Companies are always responsible for their taxes and the tax courts agree.
It’s back to school time! As everyone is busy getting ready to head to class, I want to remind the teachers out there that they have a special educator expense deduction.
Eligible educators can deduct up to $250 of any unreimbursed expenses paid for books, supplies, computer equipment, and materials used in the classroom on their personal tax return. To be eligible educators must be a kindergarten through twelfth-grade teacher, instructor, counselor, principal, or aid, and work at least 900 hours in the school year.
Currently, this deduction is only good for 2013. It expired last December and as of today, has not been renewed for 2014 or later. Hopefully, Congress will extend this.
Bitcoin is a new, virtual currency created in 2009. Transactions are made without banks, without fees, and without giving your real name. Exchange Bitcoins via mobile apps or computers, similar to sending cash digitally (like PayPal). Some big companies, such as Dell, Expedia, and Zynga even accept Bitcoin as payment.
Virtual currency sounds great except that as far as the IRS is concerned, Bitcoin is not considered cash. It is considered to be property. Similar to buying and selling stock, you need to record the cost you paid for the Bitcoin and the value when you sold it.
Here’s an example. You buy a Bitcoin for $2- this is your cost. Later you use that Bitcoin to pay for $10 worth of Candy Crush items from Zynga. The $10 would be your sales price. According to the IRS, you have a taxable gain of $8 ($10 sale less the $2 cost), which you need to report on your tax return! Pay $10 to Zynga in cash, and there would not be anything to report.
Tax issues surrounding Bitcoin and virtual currency are new and developing. If you work with Bitcoin and have tax questions, please contact me.
When companies are hiring there is often a question of whether they are bringing on contractors or employees. Sometimes it is easy to figure out, like when you use an outsourcing company or a subcontractor. Other times it can be more difficult to determine, such as hiring a remote employee or a sales representative.
The IRS asks some questions when determining if someone is a contractor or an employee:
- Does the company control what the worker does and how the worker does his job? For example, do you tell the worker he has to work from 9-5, or can he work whenever is convenient to him?
- Are the business aspects of the worker’s cob controlled by the company? This can include how you pay the worker, if you reimburse expenses, if you supply tools, etc.
- Are there written contracts or employee-type benefits? This can include pension plans, insurance, vacation pay, etc.
There are consequences for miscategorizing employees as contractors. If you are paying workers as contractors when they should be employees, you can be responsible for payroll taxes. Late fees and penalties for missed payroll taxes can be very steep, and the IRS takes this very seriously.
There is no set rule for answering the contractor vs. employee question. Consider the entire relationship, make sure you consider the degree of control involved (what will be done and how it will be done), and make sure you document the decision in case the IRS questions you.
If you have questions about contractors vs. employees or payroll issues, please contact me.
What’s the difference between a hobby and a business? According to the IRS, it is whether or not you are trying to make a profit. If you are not trying to make a profit and just want to write off the cost of your hobby, then you are subject to the “hobby loss rules.”
Business losses (when expenses are greater than income) can offset other income on your tax return. The general rule is that your business must make a profit in at least three out of the last five tax years. Otherwise, the IRS is allowed to re-characterize it as a hobby. The reason this is a problem is because losses from hobbies can only be deducted up to the amount of income and only as a miscellaneous itemized deduction on Schedule A. This difference in treatment can significantly affect the amount of tax you pay.
The IRS provides this list to help you determine if you are in business or just enjoying your hobby:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
If you are not sure if your business is just a hobby contact me for an evaluation.
I regularly get questions about whether or not to file 1099s. They are often surprised that more vendors and contractors need 1099s than they think. The list goes well beyond a freelancer you hire or a subcontractor you use.
In general, 1099s are required for payments over $600 made to individuals and partnerships – NOT corporations. The following is a list of common vendors you will need to issue 1099s for:
- Payments for services
- Payments for rent to landlords
- Payments for prizes and awards
- Payments to attorneys
The biggest exception to the general rules above is that a 1099 needs to be filed for attorneys and legal services even if they are a corporation.
Not sure if you should file a 1099? My theory is- if in doubt, file it. There is no problem if you file a 1099 you did not need to file. However, the IRS can hit you for up to $100 per 1099 you do not file if you needed to. Even worse, the IRS can disallow the corresponding deduction on your income tax return.