S CORP DIVIDENDS RECLASSIFIED AS WAGES - COST TAXPAYER OVER $20,000

The government keeps chipping away the tax savings strategy of S corporations. As you know wages are subject to payroll taxes whereas distributions from S corporations are not. Here is a new case which the IRS prevailed in court.

The court determined that the IRS may recharacterize dividend payments to S shareholder-employee as wages. The district court has concluded that an S corporation shareholder-employee's $24,000 salary in 2002 and 2003 was unreasonably low, and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. The corporation will also owe employment taxes on the reclassified dividend payments. Watson, P.C. v. U.S.

I estimate that the this cost the taxpayer and the corporation a total of $21,000 to $30,000 in additional tax for the two years.

SORRY YOU CAN'T DEDUCT THIS

A magazine editor recently asked me for a list of items that taxpayers think are deductible but are not. I thought my might be interested in my response.

• Reimbursed Job Expenses. It's true that you can deduct unreimbursed business expenses as an itemized deduction. The issue is that if the expenses are reimbursed, to the extent that your employer pays you back for any of those costs, those portions of the expenses are not deductible.
• Diets and Health Club Dues. Most diets and health club dues aren't deductible even if your doctor has recommended that you lose some weight in order to improve your health. Unfortunately you cannot deduct the cost of expenses that are merely beneficial to your health. To be deductible, the diet or exercise plan must be specifically prescribed by a doctor for a diagnosed medical condition, not as preventative care. Some limited exceptions apply.
• Primary Telephone Landlines. The IRS considers a primary telephone line routinely personal and thus, not deductible. You may not pro rate the cost of the phone even if you can prove non-personal use. You can, however, deduct long distance and other related charges if you can prove business use.
• Home Improvements. Home improvements are considered personal expenses and therefore not deductible. But wait... under current law, you can get a tax credit for the purchase and installation of certain energy-efficient improvements.
• Campaign Expenses. Thinking of running for office? Expenses incurred as part of your election campaign aren't deductible on your federal income tax return. In addition contributions made to a candidate are not deductible.
• Commuting Costs. While it's true that you can deduct certain travel expenses related to your job (such as traveling from one workplace to another in the course of your job or business; visiting clients, vendors or customers; and going to a business meeting away from your workplace), you can't deduct the costs of commuting to and from work.
• Charitable Services. You may deduct the cost of goods and cash that you donate to qualified organizations but you cannot deduct the value of your time.
• Pet Care. You may not deduct the cost of taking care of your pet even if your pet incurs significant medical expenses. An exception applies with respect to guide dogs and service animals -- you can include the costs of buying, training and maintaining those animals as part of your deductible medical expenses.
• Attorney's Fees. Attorney's fees may be deductible for businesses, but as a general rule, individual taxpayers cannot deduct most legal fees. This includes attorney's fees related to divorces, disputes over property boundaries and personal injury cases. Those legal disputes are considered personal in nature, which means the IRS won't allow you to take a deduction for them. related to producing or collecting taxable income.

IRS ANNOUNCES SMART PHONE APP

WASHINGTON — The Internal Revenue Service today unveiled IRS2Go, its first smartphone application that lets taxpayers check on their status of their tax refund and obtain helpful tax information.

"This new smart phone app reflects our commitment to modernizing the agency and engaging taxpayers where they want when they want it," said IRS Commissioner Doug Shulman. "As technology evolves and younger taxpayers get their information in new ways, we will keep innovating to make it easy for all taxpayers to access helpful information."

The IRS2Go phone app gives people a convenient way of checking on their federal refund. It also gives people a quick way of obtaining easy-to-understand tax tips.
Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.

"This phone app is a first step for us," Shulman said. "We will look for additional ways to expand and refine our use of smartphones and other new technologies to help meet the needs of taxpayers."
The mobile app, among a handful in the federal government, offers a number of safe and secure ways to help taxpayers. Features of the first release of the IRS2Go app include:

Get Your Refund Status Taxpayers can check the status of their federal refund through the new phone app with a few basic pieces of information. First, taxpayers enter a Social Security number, which is masked and encrypted for security purposes. Next, taxpayers pick the filing status they used on their tax return. Finally, taxpayers enter the amount of the refund they expect from their 2010 tax return.

For people who e-file, the refund function of the phone app will work within about 72 hours after taxpayers receive an e-mail acknowledgement saying the IRS received their tax return. For people filing paper tax returns, longer processing times mean they will need to wait three to four weeks before they can check their refund status.

TAX CREDITS TO HELP PAY FOR HIGHER EDUCATION

I receive a lot of question on tax breaks for higher education. There are several tax breaks. Here is a summary of two of the credits that most people qualify for.

Larry Kopsa CPA


There are two federal tax credits available to help you offset the costs of higher education for yourself or your dependents. These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay post secondary tuition and fees for yourself, your spouse or your dependent.

• The credit may be claimed by the parent or the student, but not by both.
• If the student was claimed as a dependent, the student cannot file for the credit.
• For each student, you can choose to claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter's tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.
• If you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Here are some key facts about these valuable education credits:

The American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.
  

Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of post secondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

MILEAGE RATES

Q. Is there a new mileage rate for 2011?

A. I published this earlier but just in case you missed it, the standard mileage rates went up. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 51¢ per each business mile traveled after 2010. That's 1¢ more than the 50¢ allowance for business mileage during 2010. Further, the 2011 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 19¢ per mile, 2.5¢ more per mile than the 16.5¢ for 2010.

Projection -- with gas rates going up so quickly I would not be surprised to see the IRS issue higer rates mid year. I will keep you posted.

IF YOU ARE INVOLVED WITH SMALL NON PROFITS I THOUGHT YOU MIGHT WANT TO KNOW THIS

On January 18, 2011 the IRS has announced a change in the reporting requirements for small tax-exemption organizations. Beginning in 2007 (for tax year 2006), organizations with gross receipts of less than $25,000 were required to file a form 990-N (sometimes called an “e-Postcard”) with the IRS each year. Beginning in 2011 (meaning the 2010 tax year), the threshold for use of the e-Postcard has changed to gross receipts of $50,000 or less.

Some exceptions apply to the threshold. For example, supporting organizations must continue to file the form 990 (or 900-EZ). Additionally, a private foundation must still continue to file a form 990-PF. Failure to comply with reporting requirements could result in a loss of tax-exempt status.

WHERE CAN I GET SOME GOOD BOOTH RENTAL INFORMATION

Q. I have started a booth rental salon and I was wondering if you have any good information that I could use in managing my operation?

A. Good luck on your new venture. You do need to be careful and make sure that you are operating your booth rental salon as a true rental. Ken Cassidy has some very good information at his web site. You can reach Ken at 562-434-3431 or pygmalionsalon@earthlink.net or you can visit his web site at http://www.kassidys.com/index.html.

Best of luck.

Larry Kopsa, CPA
Member

NEW YEARS RESOLUTION- GET OUT OF DEBT

One of the top New Year's resolutions is getting out of debt. The following article is a good reminder on how to do this. Enjoy and good luck!!

http://www.littlethingsmatter.com/blog/2011/01/18/10-tips-to-getting-out-of-debt

DOES THE 2% PAYROLL TAX HOLIDAY AFFECT THE SELF EMPLOYEED?

Q. I am self employeed. I understand that employees do not have to pay the full Social Security tax of 6.2% they only have to pay 4.2% for 2011. Does that apply to me as a self employed person?

A. I have received a number of questions about the Payroll Tax Holiday and how it applies to those who are self-employed. The short answer to this is "yes" it does apply to people that have self employement income. Instead of paying the full 15.3% Social Security and Medicare tax you will only have to pay 13.3%.

I recommend that you consider how this will impact your estimated tax payments for 2011.

CHECK US OUT

We are excited to say that we have been in the NEWS lately..

Nails Magazine: Year-end Tax Planning
http://www.nailsmag.com/article/82043/year-end-tax-planning-when-to-spend


Salon Today’s Coaches and Consultants Guide:
http://modernsalon.com/Kopsa-Otte-CPAs-and-Advisors/2010-11-19/SalonToday-SalonManagementArticle.aspx?oid=1284634&fid=ST-Articles


Skin Magazine: Understanding your financial statement
http://www.skininc.com/spabusiness/management/finance/112934544.html

MOVING EXPENSES

QUESTION: I got a new job and am moving about 150 miles from my current job. Can I deduct my moving expenses even if I don't itemize?

Jerrold


ANSWER: Congratulations on the new job. You can take a deduction even if you do not itemize.

You can deduct the expenses for one trip (for you and your family) to the new home and for moving your furniture and household goods (see below). There are two tests that you must meet which it appears you should qualify.

Distance test: The distance from your old residence to your new job location must be at least 50 miles more than the distance from your old residence to your old job location. (But, the distance from your new residence to the new job can't be greater than the distance from your old residence to the new job, unless you are either required to live in the new location or your time or cost of commuting are being reduced.)

Period-of-employment test: To qualify for the moving expense deduction, you must either:
(1) work full-time as an employee for 39 weeks during the 12-month period after arriving at the new location, or
(2) work full-time as an employee or perform services full-time as a self-employed individual for 78 weeks during the 24-month period after arrival, of which not less than 39 weeks are during the first 12-month period.
Either you or your spouse can satisfy one of the above period-of-employment tests, but weeks worked by one can't be added to weeks worked by the other.

Deductible moving expenses. If you meet the above tests, you can deduct the following expenses of moving yourself and the members of your household (but not tenants or employees) to the new location:

• The cost of moving household goods and personal effects. This includes the cost of packing, crating, transporting, storing, and insuring (for any consecutive 30-day period after the move), connecting and disconnecting utilities and shipping the car and household pets. Expenses of moving household goods or personal effects from a place other than the old residence are deductible only to the extent of what it would cost you to move them from the old residence. The cost of moving items bought en route isn't deductible.
• Expenses of travel (including lodging but not meals) from the old residence to the new. The cost of a single trip for you and for members of your household is allowed, but you needn't travel together at the same time. If you use your car for travel, you can deduct either the cost of gas and oil (accurate records must be kept) or a standard mileage plus parking fees and tolls. General maintenance, repairs, insurance or depreciation aren't deductible.
• Lodging expenses for the day you arrive in the new area, and the cost of lodging in the old area within one day after you could no longer live in the old home because your furniture had been moved. Note that pre-move and temporary living house-hunting expenses aren't deductible.

There's no dollar limit on the amount of the expenses, but you can only deduct reasonable costs. That means the expenses can't be lavish or extravagant.

The expenses will be deducted in the year(s) in which you pay them. You may deduct the expenses even if you haven't satisfied the minimum employment period by return time. If you later can't satisfy the requirement, you must either include in income the amount you deducted, or file an amended return for the year of the deduction with the deduction eliminated. You also can wait and claim the deduction on an amended return or refund claim when you have satisfied the minimum employment period.

If you are reimbursed by your employer for your expenses or if your employer pays them directly, you won't have to include the reimbursements or payments in income if you properly account to your employer and you could have deducted the expenses had you paid them yourself. (Of course, you get no deduction for any amounts you don't have to include in income.) Excludable expenses aren't included in “wages” or any other taxable amounts on your Form W-2, but excludable expense reimbursements your employer pays directly to you will appear for information purposes only in Box 12 of the W-2 as Code P.

It's important that you keep records of distances from old and new residence to old and new job, dates of travel and arrival to the new area, employment periods, and records and receipts for your moving expenses, to support your deduction.

It is a pleasure serving you.

QUESTION- BOOTHRENTER AND MANAGER TROUBLES

I have a Salon and have spoken with you before. I have a boothrenter that just moved in (massage therapist) in October. We signed a contract where I have all the front desk services itemized, phone, and receptionist service, are extra cost. We did not determine that instantly because I wanted to use that income to give my wonderful salon manager a raise. She said she could only pay me $100. more per month so I figured out a .50 raise is the most I could do. I pay my salon manager now $14.00 per hr. My boothrenter did not pay that added fee on my invoice for November or December. When I inquired why, she told me she was paying my manager $25 per week on the side and said she told me which would not be agreeable to me. When I asked my manager about it, she got very upset and said she deserved both money's from the boothrenter and me. I would agree she is worth more but I am not being compensated anything for phone and time I take when my manager is not there. Or even when I have another person answering the phone for me. These are both key people to me. I am so sad and hate to lose either. What would you do? I have done all the talking and explaining. My Manager's husband is out of work and I understand she needs the $. My boothrenter does not think she has done anything wrong. She says that is the way she's always done things. Isn't that wrong? Does anyone hold them accountable or am I being too strict. Should I just let it go and be thankful I have them?
I appreciate your response. Thank you so much.
Natalie

What a mess. The booth renter has probably committed a contract violation by not paying the agreed upon rent. The receptionist has not been honest with you by not telling you that she was being paid by the renter. The renter should be treating the receptionist as an employee and withholding and giving the receptionist a W-2 or at least treat her as an independent contractor and give her a 1099. Unfortunately there is nothing you can do about that. There arrangement is between them.

I guess as you make the decision on what to do, you have to ask yourself what the cost is. I always advise client to “quantify” the cost so that they know the financial impact of a business decision. In your case, if you gave the receptionist a 50 cent raise and she works full time the cost to you is $1,040 in addition pay (full time 2080 hours times $.50) plus payroll tax burden of around $100 for a total of $1,140. The question that you have to ask yourself is it worth $1,140 to stick to your guns and risk the possibility of losing one of these people?

Good luck!

REPEAL OF THE NEW 1099 LAWS NOT IN THE NEW TAX ACT

We were all hoping that the Congress would see fit to repeal the new onerous 1099 rules that were part of the Health Care Bill. But no luck.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 did not include a provision to repeal the 1099 rules that were adopted earlier in the year by Congress. For unspecified reasons, the repeal of the 1099 provisions were not included in the legislation and no amendments to the original legislation were adopted. As a result, it will likely be the earlier part of the next session of Congress before this issue will again be addressed.

Our concern is that (1) keeping records to track expenses by provider, (2) obtaining tax identification numbers and other information from providers of property and services, and (3) providing Forms 1099-MISC during January, a month when taxpayers would not normally be focused on tax issues, would be extremely burdensome.

As I am sure that you know, the provision in the Patient Protection Act that expands information reporting requirements to business payments for property from corporations and the provisions in the Small Business Jobs Act of 2010 that expands the information reporting requirements to payments for rental property expenses, both add to these critical administrative burdens. The new requirements applicable to rental property expense payments will take effect in 2011. Note, this would be the first time that individual taxpayers owning rental property who are not "engaged in a trade or business," would be required to provide Forms 1099-MISC. For example, many individuals, who own a vacation property that is rented part of the year to help defray their costs, may be subject to the reporting provisions.

I thought that this might be a good place to show you what the legislation looked like in the Health Care Bill. See if you can read it.

INFORMATION RETURNS. The Patient Protection
and Affordable Care Act, Pub. L. No. 111-148, extended
information reporting beginning in 2012. Section 9006 of Public
Law 111-148 entitled, “Expansion of Information Reporting
Requirements” amends I.R.C. § 6041(a) and adds I.R.C. §§
6041(h) and 6041(i), all effective for payments made after
December 31, 2011. Section 2101 of the Small Business Jobs
Act of 2010, Pub. L. No. 111-240, added I.R.C. § 6041(h) to
provide:
“Solely for purposes of subsection (a) and except as
provided in paragraph (2), a person receiving rental income
from real estate shall be considered to be engaged in a trade
or business of renting property.”
Effective for taxable years beginning after December 31, 2010.
Pub. L. No. 111-240. Exceptions are provided for members of
the military and for hardship and minimal amounts as set by
regulations.

WILL THIS BE IN THE FUTURE FOR THE UNITED STATES?

While U.S. Grows Government, European Governments Spending Less

(Budget & Tax News ) -- Heartland.org reports, "Americans are seeing a massive expansion of the scale and scope of their government’s spending, while Europeans are coming to terms with austerity, conservative fiscal policy, and a reexamination of the state’s role in society." The story notes that in the UK, every government entity — except the National Health Service and Foreign Aid Department — plan to make 25- 40% cuts to their budgets. In France, the government is increasing retirement age. And in Germany, Chancellor Angela Merkel’s government has instituted an aggressive deficit-reduction program.

http://www.heartland.org/budgetandtax-news.org/article/28988/While_Europes_Governments_Spend_Less_US_Spends_More.html

QUESTION- SCALP DISORDERS

Larry
I read some time ago in your blog about a book that you recommended for scalp disorders. Can you tell me what the name of it was again please?

Thank You
Sam


Sam-

Please check out the book Common Disorders of the Skin, Scalp & Hair
http://www.centerforbeautyandhealthexcellence.com/Resource_Tools.html


All the best,
Larry Kopsa CPA

A NATION IN DEBT

(U.S. Chamber Magazine) -- USChamberMagazine.com reports that "federal spending has accelerated sharply, having increased $5,000 per household since 2008 and $10,000 per household in the past decade." The story notes that "federal debt is expected to equal 62% of GDP in 2010, up from 40% in 2008, according to the CBO." And if "you count the government’s obligations (Social Security, Medicare, and Medicaid), debt is currently approaching 100% of the size of the economy."

At recent forum held by the U.S. Chamber’s Campaign for Free Enterprise (CFE) and the National Chamber Foundation (NCF), former Comptroller General of the United States David Walker said, "The biggest deficit in this country is a leadership deficit."

http://www.nebraskaagconnection.com/story-national.php?Id=2541&yr=2010

QUESTION ON NOT BEING ABLE TO FILE RETURN UNTIL FEBRUARY

QUESTION: I heard that we could not file our tax return until the end of February. I was expecting a refund. Is this true?
Casey

Sorry Casey, you are going to have to wait to get your refund. It is not the IRS's fault. Congress had all year to make the changes but they waited until December 16th to pass the legislation. Last week’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

The Internal Revenue Service announced on December 23rd that the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

Taxpayers will need to wait to file if they are within any of the following three categories:

• Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.

• Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.

• Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.