The Tax Club Report

The Tax Club Investigates: Effective Business Planning

March 11th, 2010

Every small business owner has dreams of making their company a huge success. Unfortunately, creating a successful business cannot be accomplished overnight or with little effort. The preparation that goes into a business before it actually gets started can make a difference. Before a business owner can sell products and services, they must define their goals. The goals of the business must then be assigned a realistic timeline which will allow the business to prosper and succeed at a steady rate. These can be outlined in a well drawn business plan. A concrete business plan provides the foundation for an efficient and organized company. It will house the company’s executive summary, marketing strategy, and operational and financial plan.

The executive summary is the perfect start to a business plan. The summary allows the business owner to develop a general company description and initial snap shot of the business. Even though the executive summary is created in the initial stages of the business, it needs to be powerful. The ingredients should capture the attention of lenders and business partners and give business owners more confidence in what their business offers. Products and services need to be described in detail and appear unique compared to other businesses. The ready to market product or service will eventually gain attention from consumers, partners, and professional organizations.

Once the executive summary is created, a proper marketing strategy needs to be developed. If a marketing strategy is not thought out or organized, a business can fail in a short period of time. The marketing strategy needs to define the competition and identify the areas of the market that the business will be embracing. Outlining competitors and understanding market niches allows business owners to sustain themselves in the market and provide products and services that consumers can appreciate. Other areas of the marketing strategy will contain market research and support material. The information in this area will act as a library for ideas and fundamental reasoning for market engagement.

Enable to take full advantage of the market one must understand how their business operates. The operational plan will vary from business to business depending on the type of entity that is created and the types of products or services offered. Generally, the plan will identify product and service development and how it will be maintained and serviced over the initial years of the business. Eventually this plan will invite small business owners to spot glaring weaknesses and make changes when necessary. The operational plan will also outline how the business will function. Information on ownership, investors, and directors are usually kept in Minutes and By Laws or Operating Agreements. The plan goes beyond this information by displaying an organizational chart and providing information for founders, key advisors, and hired salaries.

The last key attribute of a well structured business plan is the financial analysis. Since the business has not officially started, business owners should make projections. Income and cash flow statements should be created on a quarterly or monthly basis for three to five years while balance sheets should be created on an annual basis for three to five years. These statements will allow a business owner to see if the business is exceeding or falling short of expectations over time. Information of this nature allows owners to make marquee decisions on the direction of their establishment. Showing assumptions, developing a break even analysis, and estimating financial ratios and statistics can become the bottom line in realizing how effective one needs their business to be over time.

The business plan outlines the structure of the company and the direction it will be heading. Even though a business plan is created during the initial stages of a business, it can be changed over time. Understanding the products and services, market, structure, and financial obligations of the business will make you a savvy business owner. Creating an efficient business plan will not always lead to success but it will reduce the chance of failure by optimizing ideas, measuring performance, and increasing profits.

If you would like a free consultation on how to implement any of The Tax Club’s blog’s strategies or advice, please give us a call at 866-840-1829 x5438

Tags: business plans, entrepreneur, Small Business
Posted in Uncategorized | 8 Comments »

The Housing Bubble and Ensuing Mortgage Crisis

March 1st, 2010

The mortgage crisis caused the country and partially the world to go into a recession. Why did it happen and how does it affect you and who do we blame? During the 90’s administration, banking laws were deregulated thus allowing banks to act as investment banks. Instead of banks just lending money and making interest, they could now invest in all sorts of different investment activities. The situation did not seem bad at the time but increasingly became a critical ingredient to a perfect storm for a financial meltdown.

Next the banks started to Securitize the loans. Securitizing a loan is when a bank provides mortgages to lots of people. The bank then groups the loans together, any amount, and sells them to investors in parts or shares. Now all the banks had to do was find a person who needed a mortgage to buy a house or wanted to refinance. They would issue them a mortgage and then be able to sell it. They also could hold it so it would look great on their financial statements. On their balance sheets, it would look like a strong asset and on the income statement the bank would show large amounts of mortgage interest income.

The bank structure and the securitizing of loans made it great to be a mortgage broker. A broker is an intermediary between the lender and the borrower and would try to find the borrower a loan and get a commission. While brokers searched for loans, the banks in competition with each other to originate loans increased causing banks to loosen their terms and conditions. First, putting down 15% instead of the normal 20% was okay. Next, 10% was plenty, and then a person could borrow 105% of what the property was worth. Even though you would pay a higher interest rate, 7-8% became cheap enough. People were able to take out lots of money from a refinance, or buy that Mansion they always wanted. Builders kept on building because people kept buying. Then, banks started lending with no income verification. If you had a decent credit score, you could get a loan. All a person had to do was sign a paper saying they were making whatever the bank wanted to hear.

Let’s assume I am buying a house for $500,000 and I cannot afford the $3,000 a month payment on the $500,000 house I just purchased (assuming a fixed rate of 6% over 30 years). No problem! The banks will only require me to make interest payments. As a bonus the bank will give a rate of about 2% for the first two or three years. Now I can pay $840 a month for the mortgage on the house. The house sounds great until two or three years later when principal needs to be paid and the interest rate jumps up 5 percent or more at one time.

Many Americans could not afford these large jumps and as a result people faced foreclosure. In a lot of cases the loans were not interest only. In some cases there were adjustable rate mortgages where the rate automatically jumped up after an introductory period of anywhere between two and seven years.

Somebody needs to take the blame. How could banks be so liberal with their loans? Easy! Bank executives were the ones cashing in on the bonuses because the incomes of the banks were so high. They were making a quick profit at the expense of building long term wealth. An employee with Washington Mutual bank had threatened to go to the Federal Government and Securities and Exchange Commission to expose the situation, but employees with this knowledge eventually decided against being a whistle blower because of fears of retribution or losing their jobs.

Now let us look at the mortgage brokers. The broker’s job is to sell the loan. That resulted in some brokers not telling people everything they should know about the loan. An example of this is when people would get an adjustable rate mortgage where it had a low promotional rate for the first 3 years but then automatically when up by 5% or more. The broker would say it became adjustable but would leave out the part about the jump. Unless the borrower read the fine print, they were in for a surprise. Brokers are paid by “points,” (a point is 1% of the loan value). They would then encourage people to borrow more than they could afford in order to raise their commissions. Another very illegal tactic that the brokers would do is falsifying documents. It was not uncommon for brokers to create pay-stubs or tax returns for clients to show more money than they actually made. Most lenders now require people to sign forms allowing them to verify the income with the IRS. If you found crooked enough brokers, there was no limit to the forgery and or fraud that existed.

Home owners can share in the blame as well. People wanted to borrow as much money as they could to get the best house possible figuring their income would only go up. Everybody wants to do the best for themselves and their family, but people were not realalistic. Soon principle and interest payments were due and the rates had adjusted to an amount that could not be controlled. The only area of concern was getting into the house as soon as possible.

When a loan goes into default and a house or other real estate property goes into foreclosure a bank has to send several legal notices to the home owners in an attempt to get the mortgage up to date. If payment is not made, the bank will become the owner of the house. In general, if the loan cannot be repaid, the borrower will eventually lose the house. In Long Island, New York a judge in foreclosure case actually ruled that a couple was no longer responsible for their mortgage of around $500,000. The reason he cited was the lenders complete disregard for the couple who took out the mortgage. While this will probably be overturned on appeal, this does send out a very harsh message to banks. In an appeal the court will only look at the application of law by the judge in the initial case and will not make rulings on the circumstances of the case. In this situation the bank will not help the couple who took out the mortgage. The likely result of will be banks becoming more flexible and compassionate toward lenders. The federal government has also been encouraging banks to refinance people’s loans in order to make it easier on people. Unfortunately only around 85,000 people have taken advantage of this out of the 50 million plus mortgages in this country. One of the reasons why so few people took advantage is because people who really struggled but paid their bills on time were either not eligible or not offered help.

In an effort to fix the mortgage mess Congress had to get involved. While they were not directly bailing out people in trouble I do believe it was necessary to bail out the banks. If one of the large banks failed it would have had catastrophic results. Many more people would have lost their jobs and all the investors in those institutions would have lost all of their investments. The situation would have had a ripple effect on the market that would have made the recession much more serious than it already was and is currently.

The problem has a solution as do most problems. On the loan side more needs to be required from potential borrowers. Interest only loans should be only issued in rare cases to people with outstanding track records. Those types of loans should also only be given to people with proven track records. The adjustable rate mortgages should not be given out to anybody including “subprime borrowers,” who are borrowers with credit scores below 620. This way there is no chance of the payment jumping up to the point where the loan is no longer affordable. Thirdly, people should be required to put down a substantial amount of money; at least 10% plus closing costs. The more money put down would give people more of a financial interest and the banks a little cushion in case the market does take a dip. If these procedures are done along with legitimate verification of loan documents, the system would be more efficient. The house prices also would not go up as high or as quick because less people would be able to bid as high as they were able to during the buying frenzy. Right now as the markets begin to recover housing prices are getting more stable. Even with all these procedures foreclosures are still inevitable but the percentage of loans in foreclosure will drop.

If you have been foreclosed upon, there are things you can do to fight back from a financial perspective. If you are in dire straits, start to prioritize. Cut expenses such as: cable, going out to eat, and entertainment. Do not spend any more money on paying off your credit cards since the debt is unsecured debt which means the credit card companies cannot take your house, car, boat or other possessions in order to satisfy the debt. Your credit score will suffer tremendously but when you are in this position your credit score matters less. Next, if income is very limited, stop making car payments. One can always find a cheap-older model car that will get you from point A to point B. All money should be going toward your house, food and medical expenses. You can even stop paying property taxes before you stop paying the mortgage. A city or state foreclosing for unpaid property taxes takes years and that can give you a reprieve if you are looking for new employment. Before you stop paying the taxes contact an attorney and understand the laws for your local jurisdiction. You will still be responsible for the taxes but if you can defer the payments it may be the way to go for now.

This country has had a tough time with the financial mess but it does present lots of opportunities for people. If you are looking to buy a house right now, you can get it for a lot less then what people were paying for it two years ago. Investors can also take advantage because there are a lot of houses on the market at reasonable prices and plenty of room to negotiate. Rents have also gone down so if you have had the unfortunate circumstance of being foreclosed upon, you may be able to live easier paying less in a rented space. Don’t forget the $8,000 first time home buyer credit the government is offering.

Tags: finance, loans, mortgages
Posted in Uncategorized | 5 Comments »

The Tax Club Investigates: What to Do When You Get an IRS Notice

February 23rd, 2010

The first thing most people do when they receive a notice from the IRS is freak out. A notice from the IRS does not necessarily mean that you or your tax preparer did anything wrong. The most important thing to remember is to not panic.

Make sure you read the notice carefully to determine the issue. If after reading the notice you are unsure what it says, then call the number in the upper right hand portion of the notice to speak to an IRS official who will be able to help you. Once you determine the issue, gather all relevant documents and tax returns and review the paperwork.

The worst course of action is to do nothing. Do not just ignore the notice—the IRS will not forget about the issue and your problems could increase.

After determining what the notice is about, then you will have to act accordingly. If the notice is proposing changes to your return and you agree with the changes, you do not need to respond to the IRS. If you disagree with the changes, you should respond to the IRS by the reply by date on the notice and explain what items you take issue with. The notice should have an address where to send your reply. Make sure that you save any copies of correspondence with the IRS for your files.

If you use a professional tax preparer, contact them immediately and give them a complete copy of the notice. Most likely, the professional will be able to research and resolve the issue fairly quickly. If you do not have a paid preparer, consider contacting one for help with dealing with any issues that you do not fully understand.

We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829 x5438

Tags: IRS Notices, tax returns, Taxes
Posted in Uncategorized | 13 Comments »

The Tax Club Investigates: Health Savings Accounts

February 17th, 2010

Health Savings Accounts are really a combination of a health insurance policy meeting minimum US Treasury policy design requirements called a High Deductible Health Plan (HDHP) and a separate custodial savings account for future medical expenses called a Health Savings Account (HSA). A health insurance company or an insurance plan usually provides the qualified health insurance policy. A licensed HSA administrator and financial services company, such as a bank, usually acts as the custodian and administers the savings account portion of the HSA.

The HSA is an account into which you can deposit pre-tax money to be used for future medical expenses. It’s like a savings account, but with an HSA the money can only be used to pay for medical expenses. The money in an HSA is owned and controlled by you, not your employer, health insurer or anyone else. If funds are only used for medical expenses, withdrawals are tax-free.

You can start a health savings account on your own through a bank or other financial institution, or your employer may offer a health savings account option.

To qualify for a health savings account, you must be under age 65 and purchase a HDHP which means that the insurance doesn’t pay for the first several thousand dollars of health care expenses. This unpaid portion of expenses is known as a deductible. Some high-deductible plans do cover preventive services, such as mammograms, before the deductible is met, so check your plan’s coverage details carefully.

This HDHP must be your only health insurance coverage, and you can’t be covered by other health insurance. However, you can have a policy covering a specific disease such as cancer, one providing a fixed payment for hospital coverage such as a daily benefit, or you can have one that provides supplemental accident, disability, dental, vision or long-term care benefits

You can use your HSA funds to pay deductible expenses, copays associated with the plan, and other noncovered health care expenses.

One thing to consider very carefully is what medical expenses are covered by your high-deductible plan. If you receive care for something that’s not covered by your high-deductible health insurance plan, the cost likely won’t count toward your deductible. .

The dollar amount of the deductible that qualifies as a HDHP changes each year, usually in step with inflation. In 2010, the minimum deductible for a single person is $1,150 and $2,300 for a family. Of course, you can select plans with a higher deductible, as a way to reduce insurance premiums.

On the other end, to qualify as a HDHP, the insurance must limit your out-of-pocket expenses to $5,800 for a single person and $11,600 for a family in 2010.

If your employer offers a high-deductible insurance plan, you may be able to deposit money into an HSA on a pretax basis. If you open an HSA on your own, you can deduct your contributions, up to a maximum of $3,000 for individuals and $5,900 for a family during 2010. There is a $1,000 “catch-up” provision if you are age 55 or older and the limits are indexed for inflation. Contributions are tax-deductible, like a Traditional IRA, for the individual even if the taxpayer does not itemize deductions on their tax return.

There are a couple of other factors to consider. For example, you are allowed a one-time rollover from a Health Reimbursement Arrangement (HRA) or a Flexible Spending Account (FSA) into your HSA, as well as a one-time rollover from an IRA into your HSA. In addition, amounts are no longer pro-rated by the month you start the plan. You can now make the full year’s contribution even if you start as late as December.

If your employer contributes for your plan, the total of your employer’s contribution plus your contribution still must be within contribution limits.

Summary for HDHP and HSA in 2010

	Single	Family
Minimum Deductible to be a HDHP	$1,200	$2,400
Maximum Out-of Pocket to be a HDHP	$5,950	$11,900
Maximum Contribution to HAS	$3,050 (1)	$6,150 (1)

(1) If age 55 or older, an additional $1,000 contribution is permitted.

Unspent money in your HSA can be rolled over each year. Money put into an HSA is yours and can be taken with you if you switch jobs or retire, unlike a Flexible Spending Account. Also, it’s important to know that in most cases you can’t have both an HSA and a Flexible Spending Account.

All withdrawals for medical expenses are tax free, regardless of your age. Funds can be used for any family member’s eligible medical expenses even though HSA accounts are individual accounts.

Withdrawals for nonmedical expenses prior to age 65 are subject to income tax and a 10% penalty. Withdrawals for nonmedical expenses at age 65 or older are subject to income tax, but avoid the 10% penalty.

What becomes clear, an HSA is not a “one size fits all” type of product. You will need to consider a wide range of factors, such as your family’s health, policy coverage and costs, and your tax situation to see if the HSA makes sense for you.

Tags: finance, health savings accounts, medical expenses
Posted in Uncategorized | 14 Comments »

Keeping It in the Family

February 11th, 2010

Unincorporated businesses like sole proprietorships, partnerships and LLCs could provide some valuable tax benefits when the business owner employs his own children under the age of 18. The wages are not subject to Social Security and Medicare withholding and if the child is under 21, the wages are also not subject to federal unemployment insurance. Thus, the wages that you pay to your children for services rendered are deductible by the business and payroll tax-free.

Self-employed taxpayers who employ their children can also avoid getting hit with the “Kiddie Tax”. When a child’s unearned income equals or exceeds the threshold of $1,900, the parent’s tax rate is used in calculating the income tax. This is called “kiddie tax” and it effectively curtails the ability of the parents to lower their family’s tax bill by transferring investment assets to their minor children who belong to a lower tax bracket. In contrast, earned income is not subject to this rule and when the taxpayer employs and pays his child, he is able to effectively shift his income to a lower tax bracket.

Hiring your spouse as an employee for the business can also create important tax deductions for self-employment tax purposes. The general rule is, self-employed taxpayers can deduct health insurance premiums for income tax purposes but not for self-employment tax purposes. The premiums are deducted as an adjustment to income on the first page of Form 1040 which reduces your total income. By hiring your spouse, a medical reimbursement plan can be established to be able to deduct 100% of one’s medical expenses. This plan will make health insurance premiums and other medical expense reimbursements a tax-free fringe benefit for the employee/spouse and 100% deductible for self employment tax purposes. Keep in mind that the employee/spouse should be paid to be covered under the medical reimbursement plan.

The requirements that the employee/spouse should meet to be eligible for the medical reimbursement plan are the following:

The employee/spouse must perform legitimate services for the business.
The medical reimbursement plan must be set up and the employee/spouse must conform to the plan rules.
The insurance coverage must be in the name of the employee/spouse.
The employee/spouse cannot be an owner of the business.

A health savings account can also be used in conjunction with a medical reimbursement plan to cover certain preventive care and specialty health out of pocket costs. We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829.

Tags: Employee Taxes, Income Taxes, Medical Reimbursement Plan
Posted in Uncategorized | 11 Comments »

Get Your Extra Credit For Higher Education

February 9th, 2010

A recent Census Bureau report (2007) showed the median annual income of a Bachelor’s degree holder as $46,805. What was the median annual income for a holder of just a high school diploma? $26,894.

We so often focus these days on the cost of getting a higher education. Clearly, as the statistics show, there is the cost of NOT getting a higher education. Nevertheless, the price these days of a college education is beyond an academic matter. For 2010, the average cost for a private four-year college is $26,273 per year. For the average public, a four-year college education would cost $7,020 (source: http://www.collegeboard.com/student/pay/add-it-up/4494.html). These prices are up 5.5% from last year, even during the worst recession since the 1930s.

Fortunately, there will be additional relief for many parents and students under the American Recovery and Reinvestment Act. Within this Act is the American Opportunity Tax Credit, which has renamed the existing Hope Credit. The good news is that unlike the Hope Credit, where the credit could only be claimed for two years of post-secondary education, the new credit covers the first four years. Another significant change for the credit is what constitutes “qualified tuition and qualified expenses.” Course materials are now covered, such as necessary books, supplies and equipment.

The calculation of the credit is rather simple: the credit is 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of qualified expenses. Thus the maximum credit per student is $2,500.

The eligible credit amount will reduce your tax liability, dollar for dollar. If your credit exceeds your total tax liability, 40% of it will be refunded to you.

To qualify for the maximum credit, your modified adjusted gross income cannot exceed $80,000 for single filers ($160,000 for joint filers). Between $80,000 and $90,000 for single filers, the allowable credit is gradually reduced ($160,000 to $180,000 for joint filers). The American Opportunity Tax Credit is available for tax years 2009 and 2010.

If you would like a free consultation with the experts that provide this information, please contact 866-840-1829 x5438

Tags: Education, tax credit, the tax club
Posted in Uncategorized | 13 Comments »

The State of the Union: Taxpayer Edition

February 4th, 2010

In January of 1790, President George Washington addressed Congress at the nation’s capital, which at the time was New York City. He decided that with America still in its infancy, the beginning of the year was an ideal time to discuss what Congress should do in the years ahead. He read from seven pages about political topics, such as immigration and the standard of currency. Though it was not called the “State of the Union Address” until 1934, President Washington had begun a tradition that presidents still honor today.

Since that time, the State of the Union speech has obviously become longer than seven handwritten pages, and so it can be difficult to understand what particular goals are being suggested. Last week, President Barack Obama gave the 220^th State of the Union address in Washington, DC, in which he mentioned taxes several times. But with other topics being covered, most people were discussing jobs and healthcare by the next day. So what new tax legislation did Obama suggest? And how does it affect our daily lives? Let’s break it down.

“If these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”
“A modest fee” refers to a tax. The President is recommending that we tax the largest firms to regain some of the taxpayer money that went into the bailouts. Admitting that the Troubled Asset Relief Program and other government assistance to financial institutions are as popular as a root canal, he said that these bailout programs were necessary to save the economy. Taxing those institutions that benefited from these bailouts would go a long way to recouping some of the taxpayer’s money used to rescue them in their time of need.
“Let’s also eliminate all capital gains taxes on small business investment, and provide a tax incentive for all large businesses and all small businesses to invest in new plants and equipment.”

It seems that President Obama is suggesting that the capital gains tax rate for small business investment should be “0”, no matter what the income is. The purpose of this proposal is to encourage people to invest their hard-earned money in small business stocks and spur a lackluster economy to life. A capital gain is the money a person makes when they purchase something at one price and then sell it for more money. Traditionally, people are taxed for that money. An example of this would be a person buying an object for $50, and then selling it for $150. If that capital gain is short term, i.e, sold and bought within that year, then that person can be taxed over 35% for the profit. Obviously, going to 0% would be a big difference.

The President’s statement on providing a tax incentive for businesses to invest in new plants and equipment refers to extending the liberal write-offs of capital equipment that expired at the end of last year. These provisions allowed a Section 179 deduction in the year of purchase and a special depreciation allowance of 50 percent in the year of acquisition for capital investments.

“And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America.”

When you hear somebody on Capitol Hill use the word “incentive”, then there is a good chance they are talking about taxes. It is very likely that President Obama is suggesting that either consumers of clean energy and/or those who manufacture clean energy products will have tax incentives such as credits.

“Let’s take that money and give families a $10,000 tax credit for four years of college and increase Pell Grants. And let’s tell another 1 million students that when they graduate, they will be required to pay only 10 percent of their income on student loans, and all of their debt will be forgiven after 20 years.”

This suggestion is pretty straightforward. If you or your dependent goes to college, you can get tax credits. Like the clean energy incentives mentioned above, the student tax credit would be another incentive for people to invest in their own education. Deductions and credits are the two most popular tax incentives. Unlike a deduction, which reduces your taxable income, a tax credit is a literal, dollar-for-dollar reduction on how much you owe in your taxes.

“We will not continue tax cuts for oil companies, for investment fund managers and for those making over $250,000 a year. We just can’t afford it.”

President Obama is supporting extending tax cuts to those with income under $250,000. On January 1, 2011, the tax cuts enacted under President Bush will expire, so it was expected that President Obama would mention his stance on their status during this speech. The current Administration favors the reinstatement of the pre-2001 36 percent and 39.6 percent tax brackets on income and the increase of the top tax rate on capital gains and dividends from 15 percent to 20 percent. This proposal is expected to increase income taxes for about 5 percent of all taxpayers with most of the increase geared towards those earning more than $250,000.

Of course, as enlightening as it is to see the direction that any branch of our government wants to head, the recommendations that a president makes in the State of the Union Address are just that – recommendations. We can’t be sure of which goals the rest of our government will support or implement. If you have any questions about taxes or require a free tax consultation, please contact us at (866) 840-1829.

Tags: politics, President Obama, Taxes
Posted in Uncategorized | 21 Comments »

STRICT ENFORCEMENT OF S CORPORATION TAX COMPLIANCE FORTHCOMING

February 1st, 2010

The Government Accountability Office recently released a report recommending Congress and the IRS to address long-standing problems with S corporation tax compliance.

S corporations have been around since the 1980s and are considered the most popular entity choice for closely-held businesses. It’s easy to understand why this entity has gained so much popularity since its conception. Aside from providing shareholders with the same liability protection afforded to the shareholders of C corporations, S corporations allow the income, deductions and tax credits to flow through to shareholders, regardless of whether distributions are made. Thus, income is taxed at the shareholder level and not at the corporate level. Also, income from the S corporation is not subject to employment taxes and certain corporate penalty taxes do not apply to this hybrid entity.

According to data provided by the IRS, about 68 percent of S corporation returns filed misreported at least one item. Deducting ineligible expenses was determined to be the most frequent error on the returns. There were also a lot of mistakes found in the calculation of the basis of shareholders when claiming losses that flowed through to their personal returns. The amount of losses that a shareholder can claim on his tax return is limited to his basis in the S corporation. Apparently, tracking basis remains to be one of the biggest challenges for shareholders.

In addition, it appears that a large number of S corporations failed to pay adequate wages to shareholders for the services that they render to the company. A reasonable compensation is required to be paid to shareholders who are deemed employees because of the work that they perform for the corporation. Not doing so would lead to the underpayment of employment taxes and the IRS will re-characterize the profits and levy interest and penalty for non-compliance. This is considered a serious issue by the GAO, who announced that the net shareholder compensation underreporting equaled roughly $23.6 billion!

The IRS has not released any clear guidance on what tantamount to reasonable compensation and this is seen to hinder compliance and enforcement. Studies show that the average S corporation allocates about 41.5% of the profit to shareholders in the form of salaries and the remaining 58.5% in the form of K-1 distributions. Among tax professionals, however, the following practices have been resorted to when determining how much is reasonable:

Using industry averages and surveys
Finding salary data online at various websites that offer salary calculators
Determining how much comparable employees are paid by comparable corporations

The IRS generally agreed with the Government Accountability Office’s recommendations and that indicates more audits will be performed on S corporations in the near future. Now that the IRS is beginning to take a harder look at S-corporations, both the shareholders and their tax professionals should carefully evaluate if the deductions taken on the tax return could withstand intense scrutiny, determine if the salary paid to the shareholder/employee is reasonable, re-calculate the basis of the shareholders and be vigilant in maintaining good business records.

Because the S corporation is such a popular strategy for our clients, we will be keeping a close eye on these issues. We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829.

Tags: Tax Compliance, tax returns, the tax club
Posted in Uncategorized | 9 Comments »

Is E-Filing The Fix For A Crazy Tax Season?

January 28th, 2010

In this age of abundant technology, corporations keep making our lives easier. We can electronically mail each other instantly; we can order and watch movies and television shows on our computers; we can even carry around our entire music collection in phones small enough to fit in a pocket. The question is, will e-filing be the next step on this ladder of progress? It seems likely.

The process is far from brand new; the IRS piloted the e-filing system 24 years ago, during the 1986 filing season. Back then, the types of returns were limited, and you could only e-file at three locations nationwide. Over 25,000 taxpayers took advantage of the system and those who used it found the system so useful that it was implemented by the next tax year. Since then, the IRS has worked on perfecting the security and the simplicity of e-filing to make sure any taxpayer can reap the benefits.

Their efforts were so successful that in 2008, 58% of all returns that the IRS received were e-filed, and 78% of tax preparers reported that they e-filed for themselves and for their clients. The consumer has spoken: electronically filing taxes online is the most straightforward way to file. The IRS quickly learned that easier for the taxpayer meant easier for them, and so they are still working hard to make e-filing even more efficient.

The software does not only help taxpayers fill out their usual information. It also helps them with navigating complex tax laws and discovering new deductions, as well as fixing errors and discrepancies.

Taxpayers who use the system agree that the three biggest difficulties with filing are basically eradicated with the e-filing system.

Choosing a form is automatic. Once you input your information, the e-filing software selects the form that best suits your needs. With the forms being chosen for you, you’re less likely to lose money on mistakes and delays.
Ensuring the delivery of your return is easy. The IRS acknowledges receipts of e-filed returns earlier than non-e-filed returns, since sending them is instantaneous. As mentioned earlier, last year the IRS was able to contact taxpayers within 48 hours to inform them of their return’s status. Mailed returns can take much longer, and papers can easily be lost. This speedy confirmation also means that receiving your refund no longer needs to take weeks and weeks. If you e-file and set up direct deposit with the IRS, you can get your refund in as quickly as 10 days.
Messy forms and mistakes are diminished by the simplicity of typing your information, and by the software’s ability to correct errors. This doesn’t only make you look more professional, it also saves you time and money, allowing you to be more productive during tax season.

So this tax season, join the growing number of taxpayers who electronically file. Be your most professional, productive self, and spend April 15^th organized with extra time and money.

If you require a free tax consultation, please feel free to call 866-840-1829 x5438

Tags: E-Filing, tax returns, Taxes
Posted in Uncategorized | 9 Comments »

Claiming Dependency Exemptions

January 25th, 2010

If I pay all of my grandson’s expenses, can I really save money by claiming him as a dependent? If I have three kids, how many exemptions can I claim? These are questions that every taxpayer should know the answers too. In order to fully take advantage of all tax loopholes available to you, we must first understand certain important items about this often overlooked credit.

Before we go into further details about who qualifies as a dependent, we will first visit the topic of exemptions and how one can save money on taxes from personal and dependency exemptions. The use of exemptions in the tax system is based in part on the idea that a taxpayer with a small amount of income should be exempt from income taxation. An exemption frees a specified amount of income from tax, decreasing your tax liability (the amount we must pay in tax). For tax years 2009 and 2010, you are allowed to take an exemption in the amount of $3,650 for you, the taxpayer, your spouse and or your dependents. These deductions are called dependency exemptions and you are allowed to deduct them for each person that you maintain and take care of, also known as your dependents.

So how do you know if your grandmother is your dependent? How do you know if your girlfriend is your dependent? How do you know if your child who is in college and making some money from his job at the mall is still your dependent? In order for you to classify a person as your dependent, there are certain requirements that should be met. There are two types of dependents, a “qualifying child,” which is exactly what it sounds like and a “qualifying relative,” which is a somewhat misleading name to describe this type of dependents as you will find out as you continue to read this article.

Qualifying Child

In order for your child to qualify as a dependent, we must first establish that this child should be under the age of 19 or under the age of 24, in the case of a student.
This child must be a son, daughter, adopted child, stepchild, eligible foster child, brother, sister, half brother, half sister, or a descendant.
The child must live with you for more than half of the year.
And this child must receive more than half of his support from you, the taxpayer. For students, the amount paid for school is considered support.

If these requirements are met, the child is considered your dependent and you can claim the dependency exemption on your tax return. Now what about those people who live with you but are not related to you at all? In the midst of this turmoil that our economy is in, can you claim your boyfriend as a dependent if he loses his job and is unemployed for the whole year? The answer is yes. Although he is not a relative, he can still be claimed as a dependent, which is why the “qualifying relative” is a misleading name to describe this type of dependency.

A “qualifying relative” is anyone who:

Is a relative – parents, grandparents, step-parents, uncles, aunts, in laws, or some one who is not related but lived with you the entire year.

They must not have a gross income of more than $3,650, or the exemption amount.
They must receive over one-half of their support from you. Support includes food, shelter, clothing, medicines and so on.

If they are members of your household, did not make more than $3,650 and you provided for their support, they could qualify as your dependent regardless of their relationship to you.

Of course, it goes without saying that in order for a person to qualify as a dependent, he or she must be a US citizen and have lived on US soil for at least part of the year.

Now it is important to note that these tax exemptions are not available to all tax payers. If you make too much money, your exemptions will decrease as you make more income. This means that if:

You are married and you make over $250,200, your exemptions will be reduced until you hit $372,700, which then completely erases the exemption.

If you are head of household, your phase out starts at $208,500 and is completely wiped out at $331,000.
If you are single, your phase out starts at $166,800 and ends at $289,300.
For married couples filing separate returns, phase out starts at $125,000 and ends at $186,350.

We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829.

Tags: Dependants, Tax Exemptions, Taxes
Posted in Uncategorized | 7 Comments »