YEAREND INVENTORY

Q: We are wondering if it makes sense to buy additional stock of product lines that we carry before a price increase takes effect given the fact that it will increase our inventory at the end of the year. Is there any way around this now that we are on an accrual basis?

A: Inventory at year end is a question that a lot of people have.  For some reason many people think that if their inventory is high they will have to pay more in tax.  That is just not true.  I think the reason that people have this misconception is that if you overstate you inventory then, working through the calculation of cost of sales, you will be understating your cost which brings your income up and therefore your taxes up.  The opposite is true if you understate your inventory. 

Here is an example:

A business has a beginning inventory of $90,000; sales of $500,000; purchases of $250,000 and ending inventory of $75,000 their calculation of gross profit would look like this:

 

 

 

 

 

 

 

 

 

Let’s change the facts a little.  Let’s assume that the owner finds a deal on inventory and purchases $30,000 on inventory before the end of the year.  This inventory has not been sold and is still on the shelf.  Whether the owner paid cash, credit card or still owes for the inventory what would happen is that purchase would go up and ending inventory goes up so therefore no change in the bottom line.  The statement would look like this:

 

 

 

 

I think here is where the confusion comes in.  What if, going back to our first example with the ending inventory at $75,000, what if the owner miscounts and says that the ending inventory is $85,000, $10,000 higher than actual?  That is where there is a problem.  In that case the cost of sales would be lower and therefore the income mistakenly higher.  For example:

 

 

 

 

Let’s keep going.  This is true for retail sales for both cash and accrual basis taxpayers.  If cash basis taxpayers purchase inventory and include the amount in ending inventory they should record the payable even though they are cash basis.  There is a difference in back bar supplies for cash basis taxpayers.  Cash basis taxpayers do not have to inventory back bar supplies.  They can write them off when they write the check or pay by credit card.

I hope that this is helpful.

REIMBURSE EMPLOYEE MILEAGE

Q:  Hi Larry, I have a question about how to reimburse an employee for mileage. I just read what the deduction is but I need to know what the rate is for a business to pay back an employee for auto expenses they incur running errands for the business. I am assuming it is an amount per mile and I have asked them to keep a log.

 

A: You are correct that they should turn in a log (diary) of their miles.  By your question I am assuming that these are routine trips around town such as to the bank etc.  If this is true instead of a daily log the employee can determine the routine miles for the trip and then if they can somehow document the number of trips you can just multiply to determine total business miles.  Having said that in my opinion the IRS likes a detailed log but the other method works.

The mileage rate is 55.5 cents for 2012 and 56.5 cents for 2013.  The amount given to the employee is not added to the W-2 and you do not have to give the employee a 1099.  It is deductible to you and not income to the employee.

QUICKBOOKS 2013 UPDATE

In response to customer feedback, QB’s has released an update for QB 2013 that will allow you to change the black ribbon at the top to a lighter color which is easier to read and looks similar to the older versions of QB’s.  This is under Edit; Preferences; Desktop View; My Preferences; Switch to colored icons/light background.  Always run updates because they may contain more options to switch the color scheme back to “normal”.

 

Default

 

 

 

 

 

 

 

 

 

 

 

Preference

 

SCIENCE GOES WILD #2

Last week I mentioned the Ig Nobels.

 Our second winner:

A British-American group won the physics prize for

“Figuring Out How a Ponytail Bounces.”

 

HERE COME THE 1099K NOTICES

WE HAVE OUR FIRST CLIENT TO RECEIVE A 1099K NOTICE

You may remember that as part of ObamaCare credit and debit card companies are required to send a 1099K to companies reporting the amount of credit and debit card sales. The IRS receives a copy of the form. At first we were supposed to reconcile the 1099K to the companies Gross Income. Common sense prevailed and the IRS decided that that because of sales tax; tips; gift certificate sales; different year ends; cash given back and numerous other reasons this would be impossible to monitor. Because of this the IRS ruled that you do not have to reconcile on the tax return. But that is not the end of it.

Since the IRS gets a copy of the 1099K it's computer compares the form to the tax return and if the amounts are not within some unknown percent the taxpayer gets a notice and has to reconcile. Of course the IRS developed a form to file out explaining the difference. This is a lot of work.

www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/New-Notices-Related-to-Form-1099-K.


Here is the notice that the IRS just released:

The IRS compared 1099-Ks filed by credit card companies and third-party networks such as PayPal with income shown on returns by taxpayers who received the forms. It is now mailing notices to firms it believes may have unreported gross receipts. But the 1099-K matching program is imprecise. The form reports receipts for a calendar year, which doesn't jive for firms with fiscal years. And businesses don't have to separately report amounts shown on 1099-Ks. So the form's usefulness as a tool to spot under reporting is lessened. Nevertheless, IRS still asks businesses to explain discrepancies and will follow up with firms that don't respond to the notices.

SELLING SOME LOSERS CAN TRIM YOUR TAX BILL

Capital losses offset your gains, plus up to $3,000 of other income. Any excess losses are carried over to next year.

Note the wash-sale rule: If you buy the identical securities within 30 days before or after the sale, the loss isn't deductible. Instead the disallowed loss is added to the basis of the new shares. The rule can bite you if your IRA quickly buys stock that you sold at a loss in a taxable account. You can innocently run afoul of this rule if you sell a mutual fund at a loss within 30 days of the date a dividend is reinvested.

DON'T FORGET ABOUT THE 0% RATE ON LONG-TERM CAPITAL GAINS AND DIVIDENDS

If your income other than gains and dividends is in the 10% or 15% bracket, profits on sales of assets owned for over a year and dividends are tax free until they push you into the 25% bracket. That bracket starts at $70,700 of taxable income for couples and $35,350 for singles. The balance of your long-term gains and dividends is taxed at 15%. But short-term capital gains are taxed as ordinary income ... up to a 35% rate.

MAIL CHECKS FOR DEDUCTIBLE ITEMS BEFORE YEAR-END TO ENSURE A 2012 WRITE-OFF

You are able to claim the deduction this year even if the checks do not clear until January. And make sure you know the tax rules if you are charging deductible items. For charges that you make with a retail store credit card, you are allowed to claim the deduction for the item only in the tax year in which you pay the bill. For transactions made with a bank credit card, you take the write-off in the tax year that you charged the goods, even if you pay the bill next year.

CHECK THE BALANCE IN YOUR FLEXIBLE SPENDING ACCOUNT

Just a reminder~

 If your employer still has not implemented the 2½-month grace period that IRS now permits you must clean it out by December 31. If you do not, any money remaining in your account is forfeited.

Remember that in the Patient Protection Act there is a $2,500 annual ceiling on health FSA that takes effect for 2013.

CHRISTMAS CARD FROM THE IRS

The IRS just issued a gift to taxpayers.  It is their Tax Tips for the "Season of Giving."  Note that they stayed "politically correct."

IRS Offers Tax Tips for “The Season of Giving"

December is traditionally a month for giving generously to charities, friends and family. But it’s also a time that can have a major impact on the tax return you’ll file in the New Year. Here are some “Season of Giving” tips from the IRS covering everything from charity donations to refund planning:

• Contribute to Qualified Charities. If you plan to take an itemized charitable deduction on your 2012 tax return, your donation must go to a qualified charity by Dec. 31. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Exempt Organizations Select Check tool to check if your favorite charity is a qualified charity. Donations charged to a credit card by Dec. 31 are deductible for 2012, even if you pay the bill in 2013. A gift by check also counts for 2012 as long as you mail it in December. Gifts given to individuals, whether to friends, family or strangers, are not deductible.
• What You Can Deduct. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified charity. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
• Keep Records of All Donations. You need to keep a record of any donations you deduct, regardless of the amount. You must have a written record of all cash contributions to claim a deduction. This may include a cancelled check, bank or credit card statement or payroll deduction record. You can also ask the charity for a written statement that shows the charity’s name, contribution date and amount.
• Gather Records in a Safe Place. As long as you’re gathering those records for your charitable contributions, it’s a good time to start rounding up documents you will need to file your tax return in 2013. This includes receipts, canceled checks and other documents that support income or deductions you will claim on your tax return. Be sure to store them in a safe place so you can easily access them later when you file your tax return.
• Plan Ahead for Major Purchases. If you are making major purchases during the holiday season, don’t base them solely on the expectation of receiving your tax refund before the bills arrive. Many factors can impact the timing of a tax refund. The IRS issues most refunds in less than 21 days after receiving a tax return. However, if your tax return requires additional review, it may take longer to receive your refund.

For more information about contributions, check out Publication 526, Charitable Contributions. The booklet is available on IRS.gov or order by mail at 800-TAX-FORM (800-829-3676).

2013 RAPIDLY APPROACHING WHILE MANY PAYROLL TAX ISSUES REMAIN UNRESOLVED

There is a great deal of concern in the tax community generally about unresolved tax issues, including the sunsetting tax provisions, extenders, and lack of an alternative minimum tax (AMT) patch. However, one group in particular—payroll professionals—has an especially pressing need for certain tax issues to be decided in order to compute 2013 withholding. This article details a number of these key issues.

Withholding tables. Income tax rates are scheduled to increase on Jan. 1, 2013, if Congress does not act before then to keep the rates at the current levels. It's unclear whether IRS will release the 2013 withholding tables without congressional action.

Backup withholding. The backup withholding rate will increase from 28% to 31% on Jan. 1, 2013, if Congress does not act to keep the income tax rates at current levels.

Payroll tax cut. The “payroll tax cut” has temporarily lowered the Social Security withholding tax rate on wages earned by employees in 2011 and 2012 from 6.2% to 4.2%. Currently, there is no legislation in Congress that would extend the payroll tax cut beyond Dec. 31, 2012, but there has been some recent talk in Washington about either extending the cut or providing some other payroll tax stimulus.

Commuting benefits. Without congressional action, the annual tax-free exclusion for the combined value of employer-provided transit passes and transportation in a commuter highway vehicle ($125 a month in 2012) will remain unconnected to the tax-free exclusion for qualified parking expenses ($240 a month in 2012).

Employer-provided educational assistance.Through Dec. 31, 2012, employers may provide up to $5,250 annually in educational assistance to an employee on a tax-free basis. This provision will expire on Jan. 1, 2013, without congressional action. If the provision does expire, education expenses will only be able to be excluded from an employee's income if the expenses qualify as a working condition fringe benefit.

Adoption assistance. In 2012, employees may exclude from gross income up to $12,650 paid or reimbursed by an employer for qualifying adoption expenses under an adoption assistance program. This fringe benefit will not be available in 2013 without congressional action.

koa observation: Until some of the issues above are resolved, it is unclear whether IRS will release the 2013 Circular E (IRS Publication 15), 2013 Form W-4, and 2013 Form 941.

ACTING IRS COMMISSIONER: CONGRESS' FAILURE TO ACT ON FISCAL CLIFF COULD DELAY FILING SEASON

Taxpayers may face a significantly delayed filing season and a much larger tax bill for 2012 if Congress fails to timely resolve fiscal cliff issues, Acting IRS Commissioner Steven T. Miller said on December 6.

Speaking at the 25th Annual Institute on Current Issues in International Tax sponsored by IRS and the George Washington University School of Law in Washington, Miller said that “I remain optimistic that the fiscal cliff will be resolved by the end of this calendar fiscal year [but] if that turns out not to be true, then what is clear is that many of us will see a delayed filing season.”

Miller said that the uncertainty as to what the tax law will be in 2012 creates a risk for the entire tax system, including a strain on IRS, tax practitioners, and ultimately, taxpayers.

“There is currently a real discussion about the tax rates for the next year and beyond as well as the national debt and that is an incredibly important discussion,” he said. “But taxpayers and the IRS need to know what the tax provisions are for 2012 so you know what you owe and so we know how to process the return beginning in January.”

He noted that the alternative minimum tax (AMT) and other extender provisions had expired at the end of 2011, but that these had been overshadowed by other higher profile fiscal cliff issues. Miller said that in programming its systems, IRS has assumed that Congress will patch the AMT as it has for so many years in the past. However, he warned that if Congress fails to resolve fiscal cliff issues prior to the end of the year and the IRS's assumptions are incorrect, the filing season will be delayed for many taxpayers.

SCIENCE GOES WILD

Apparently, researchers can be as goofy as anyone else. The Ig Nobel Prizes the American parody of the Nobel Prizes, gives out yearly prizes for the strangest, weirdest and most incomprehensible research pursued by actual scientists.

Perhaps the greatest question raised by the Ig Nobles is: How do these people get funding for this, um, research?

This year's crop of winners is as daft as ever. We will "reveal" them over several weeks.

Our first winner:

Three psychology researchers from the Netherlands won for their study

       "Leaning to the Left Makes the Eiffel Tower Seem Smaller."