Tax software is incredibly powerful and functional. But the clean and official-looking printouts can give you a
false sense of security. Even though your system is accurately performing millions of calculations, it is your
responsibility to input the data correctly and understand how these calculations are made to ensure
accurate input and compliance. If you have a business, you should strongly consider professional help.
Form 1099-MISC Required for Noncorporate Service Providers
Employers must provide a Form 1099-MISC, Miscellaneous Income, by Jan. 31, to any noncorporate service provider who was paid at least $600 for services during the calendar year. The Form 1099-MISC does not have to be provided to a corporate service provider. Employers should look at the completed Form W-9, Request for Taxpayer Identification Number and Certification, that they received from the service provider to determine whether the service provider is “noncorporate” or “corporate.” Employers must provide Form 1099-MISC to sole proprietorships, partnerships, attorneys, and medical service providers who do business as corporations.
There is no requirement to send a Form 1099-MISC to any contractor that was paid electronically, such as by credit card, debit card, PayPal, or gift card. The bank or credit card company that made the actual payment to the contractor will send the contractor Form 1099-K, Merchant Card and Third Party Network Payments. ACH payments still need a 1099-MISC.
Employers can't go wrong by sending more 1099s than are required, but could be subject to penalties if they do not send all qualified service providers their Form 1099-MISC.
Paper copies of Forms 1099-MISC must be mailed to the IRS no later than Feb. 28 to avoid penalties. No extension for leap years.
1099 and W-2 Penalties Increase January 1, 2011
The penalties for failure to file correct 1099 information returns and failure to furnish correct payee W-2 statements have increased. These penalties will be adjusted for inflation every 5 years after 2012.
• $30 per form if you correctly file within 30 days; maximum $250,000 per year ($75,000 for small businesses)
• $60 per form if you correctly file more than 30 days after the due date but by August 1; maximum penalty $500,000 ($200,000 for small businesses)
• $100 per form if you file after August 1st or you do not file required information returns; maximum penalty $1.5 million per year ($500,000 for small businesses)
If any failure to file a correct form is due to intentional disregard of the filing or requirements, the penalty is at least $250 per form with no maximum.
Simplified Employment Tax Filing Requirements for Small Employers
Form 944 reduces the burden on eligible small employers who file quarterly returns with little or no
employment tax due. Employers who file Form 944 will be able to make a single payment with their annual
return.
Eligible employers are those with estimated annual employment tax liability of $1,000 or less.
Employers who believe they are eligible to file Form 944
can call the IRS at 1-800-829-0115.
New employers who expect to owe $1,000 or less in total annual employment tax (approximately $4,000 or less in
annual wages) also are eligible to file Form 944. These employers can indicate their estimated tax amount when
applying for their EIN (Employer’s Identification Number) on Form SS-4. The IRS will notify the employer to file
either Form 944 or Form 941 in the same notice indicating the taxpayer’s new EIN.
SSA Provides Online SSN Verification
The Social Security Number Verification Service (SSNVS) allows employers to match their record
of employee names and SSNs before preparing and submitting Forms W-2. A correct name-SSN match
is important because unmatched records can result in additional processing costs for your business
clients and uncredited earnings for individual employees. Employers are able to enter up to 10 employees
at a time and find out immediately if those numbers agree with SSA’s records. For more information
on SSNVS see http://www.socialsecurity.gov/bso/bsowelcome.htm or call the Employer Reporting Service
Center at 800-772-6270.
Bigger Depreciation Deductions
The Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business.
Two of the most significant changes allow for faster cost recovery of business property.
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the
cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in
the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small
Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment
and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced
(but not below zero) by the amount by which the cost of qualifying property placed in service in tax years
beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010
and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
The new law also makes certain real property eligible for expensing. For property placed in service in any
tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to
$250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property,
and qualified retail improvement property).
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures
over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more
rapidly deduct capital expenditures of most new tangible personal property, and certain other new property,
placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the
cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010
(2011 for certain property).
The 2010 Tax Relief Act includes an expansion and extension of additional first-year depreciation. Businesses are
allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous
legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible
personal property, and certain other new property, placed in service in 2008, 2009, or 2010 (2011 for certain property),
by permitting the first-year write-off of 50% of the cost. The new law extends and temporarily increases this
additional first-year depreciation provision for investment in new business equipment. For investments placed in
service after September 8, 2010 and through December 31, 2011 (through December 31, 2012 for certain longer-lived
and transportation property), the new law provides for 100% additional first-year depreciation. In other words,
the entire cost of qualifying property placed in service during that time frame can be written off, without limit.
Note that even though the legislation did not take shape in Congress until mid-December of 2010, the effective date
of this provision was made retroactive, to include qualifying property placed in service after September 8, 2010.
Fifty percent additional first-year depreciation will apply again in 2012.
Off-the-shelf computer software as qualifying property is extended through 2012.
The new laws also extends, through 2012, the provision permitting a taxpayer to amend or irrevocably revoke
a Code Sec. 179 expense election for a tax year without IRS's consent.
Hiring New Employees
Tax breaks for hiring new employees. Employers are exempted from paying the employer 6.2% share
of Social Security employment taxes on wages paid in 2010 to newly hired qualified individuals.
These are workers who: (1) begin employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011, (2)
certify by signed affidavit, under penalties of perjury, that they haven't been employed for more than 40 hours
during the 60-day period ending on the date the individual begins employment with the qualified employer; (3) do not
replace other employees of the employer (unless those employees left voluntarily or for cause), and (4) aren't related
to the employer under special definitions. The payroll tax relief applies only for wages paid from Mar. 19, 2010
through Dec. 31, 2010.
Employers also may qualify for an up-to-$1,000 tax credit for retaining qualified individuals. The workers must be
employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment
during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.
The IRS had issued guidance on these tax breaks in the form of frequently asked questions (FAQs). Updated
FAQs explain: when an employee is considered to begin work; how the exemption can be claimed for a new hire who
replaces a prior employee; that the exemption can be taken for someone who was self-employed for the entire 60-day
lookback period; that minors may sign the HIRE Act employee affidavit (Form W-11); and what counts as wages for the
retention credit.
Start-up Expenses
A taxpayer can elect a current deduction for up to $5,000 of start-up expenditures in the tax year in which the
active trade or business begins. However, this $5,000 amount is reduced (but not below zero) by the amount by
which the cumulative cost of start-up expenditures exceeds $50,000 (the deduction phaseout threshold).
The remainder of the start-up expenditures can be claimed as a deduction ratably over 180 months starting with
the month the active trade or business began.
For tax years beginning in 2010, the 2010 Small Business Act increased the amount of start-up expenses a
taxpayer can elect to deduct from $5,000 to $10,000. The deduction phaseout threshold also increased - the
$10,000 is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds
$60,000. In 2011, the amount goes back to $5,000 deduction with $50,000 phaseout threshold.
Cell Phones
The 2010 Small Business Act removes cell phones and other similar telecommunications equipment from the categories
of “listed property”. Thus,the heightened substantiation requirements and special depreciation rules that apply
to listed property don't apply to cell phones.
This means employers may deduct the cost of providing cell phones to their employees for employment-related business
use, without having to satisfy the strict substantiation requirements for listed property. To support a deduction for
the cell phones, the employer need only substantiate their cost, in much the same way as the employer supports the
deduction for other types of business equipment.
The Act also makes it easier for employees to claim deductions for their own cell phones if used for
employment-related purposes. The elimination of “listed property” treatment means that the employee's use of his
own cell phone won't have to be “for the convenience of the employer” and “as a condition of employment”
(required for listed property) for the deductions (e.g., depreciation, expensing, lease payments) to be available.
But the employee's use of his cell phone still must be in connection with the performance of services as an employee;
i.e., the deductions are available only to the extent the cell phone is used for employment-related purposes.
The costs associated with the employee's personal use of his own cell phone continue to be personal expenses and
not deductible.
Over-the-Counter Drugs
Over-the-counter drug costs will no longer be reimbursable. Effective Jan. 1, 2011, unless prescribed or insulin,
the cost of over-the-counter medicines cannot be reimbursed from flexible spending arrangements (FSA), health
reimbursement arrangements (HRA), Health Savings Accounts (HSA) and Archer Medical Savings Accounts (Archer MSA).
The IRS has issued guidance explaining that an individual may be reimbursed for over-the counter medicines or drugs,
so long as the individual obtains a prescription for the medicines or drugs. It also makes clear that expenses
incurred for over-the-counter medicines or drugs purchased without a prescription before Jan. 1, 2011 may be
reimbursed tax-free at any time by an employer-provided plan, including an FSA or HRA, under the terms of the
employer's plan.
Simplified Per Diem Rates
Simplified per diem rates lowered effective Oct. 1, 2010. Reimbursements of an employee's business travel costs
(lodging, meal and incidental expenses (M&IE)) at a per diem rate are payroll-and income-tax free if simplified
substantiation is provided and the daily rate doesn't exceed the federal per diem rate (the maximum amount that
the federal government reimburses its employees) for the locality of travel for that day. While the per diem rates
vary by travel destination, employers can make reimbursements at the simplified “high-low” per diem rates, which
assign one per diem rate to high-cost areas within the continental U.S., and another to non-high-cost areas. The
IRS has issued the “high-low” simplified per diem rates for post-Sept. 30, 2010, travel. An employer may reimburse
up to $233 for high-cost localities ($168 for lodging and $65 for M&IE) and $160 for other localities ($108 for
lodging and $52 for M&IE). The list of high-cost areas is also updated.
Medical Coverage Deduction with Employee-Spouse,
Sole Proprietors can deduct as a business expense the full amount of medical insurance premiums and medical reimbursement costs incurred under an accident and health plan that covers all employees. The plan can be set up to excluded employees not with company for set number of years, seasonal workers, level of part time workers, etc. If the sole proprietor's spouse is also an employee, the sole proprietor can be covered under the medical plan as part of the employee's family. Amounts paid to the employee-spouse under the plan are excludable from the employee-spouse's gross income [IRC sections 105(b) and 106] and deductible by the employer [IRC Section 162]. There are more details on ensuring the employee-spouse is a bona fide employee and the wages vs benefits. This can be a real tax savings if you qualify.
Partial List of Deductible Medical Expenses
* Health Insurance Premiums
* Dental Care including premiums
* Eyeglasses and Vision Care
* Prescription Drugs
* Physician Care
* Chiropractic Care
* Deductibles
* Long Term Care Insurance
* Co-pays
* Orthodontic Expenses
* Mileage to doctor offices, pick up prescriptions
* And Much More
Meals and Entertainment Expenses
A business meal must take place in surroundings conducive to business. The IRS does not consider dinner at a nightclub with a continuous floorshow or a large cocktail party as a business setting.
The theater also is not conducive to conduct business. However, if business is discussed at dinner, the theater tickets are deductible under the "associated" entertainment rule. The entertainment must proceed or follow the dinner and discussions. Keep a record of what was discussed.
Other "associated" entertainment that can be linked to business meals with discussions the same day include nightclubs, golf courses, sports events, hunting trips and ski trips.
Entertainment is 50 percent deductible, but business promotion is 100 percent deductible. A golf club sales person who plays golf to demonstrate golf equipment can deduct 100 percent of the green fees, golf balls, caddie, etc.
Season tickets and box seats to theaters and sport events can be deducted by each individual event.
For business gifts the maximum deduction to any one person is $25 during a tax year. Husband and wife are treated as one taxpayer for purposes of the $25 limit. The $25 limit does not apply when gifts are made to businesses where no one single person is designated or benefits from the gift.
There is an alternate rule for theater tickets. You can treat theater tickets as a gift or entertainment. The $25 limit does not apply on the entertainment gift. You also do not need to go along. Gifts for entertainment meals are not allowed. You must be present to get the tax deduction.
The "closely connected" rule allows you to deduct the cost of entertaining your spouse as well as the spouse of your business guest as long as you and your business guest discuss business, and you meet the business discussion and documentation requirements.
The IRS at its discretion may invoke the "Sutter Rule" which disallows portions of your business meals if such meals absorb a substantial portion of your living expense.
You can entertain at home as it is a setting conducive to a business discussion. There also is no time limit on how long you must spend discussing business or entertaining.
You can give small parties at home. Keep your guest list small - less than 12 couples. You need not discuss business with spouses or significant friends that accompany your business client. However you must have talked business with each of your guests.
To invite more than 12 couples to your home, you will have to establish commercial motivation. Also do not mix a personal celebration (such as an individual's birthday party) with business entertainment.
If you entertain your guests for the purpose of showing a display of your products or services, commercial motivation can be established. Also if you can prove you have no personal or social relations with your guests, your chances for deductions are improved.
The reasonable cost of a year-end party or summer outing for employees and their families is 100 percent deductible. The 50 percent rule does not apply.
Dues paid to your Chamber of Commerce, professional societies and trade associations, are deductible if the purpose of the organization is to promote the business interests of its members.
Food and refreshments served at home during a sales seminars and presentations at home is 100 percent deductible.
Business travel expenses under $75 do not require a receipt (except lodging). You must document the expenses. You must have a good diary or tax organizer to keep track of these expenses. (You cannot guess later) If you do not have the required documentation you must have the receipt. You must always have the receipt for lodging.
Entertainment expenses again the $75 rule applies and so does the documentation. The 5 required questions you need to be sure you have on your receipt or in your planner:
Who was entertained (business relationship)?
Where did the entertainment take place? (usually on receipt)
When did the entertainment take place? (usually on receipt)
Why did the entertainment take place (business purpose)?
How much did the entertainment cost? (usually on receipt)
Remember if the expense is over $75 you will need a receipt and be sure to address all 5 questions then too. Also keep in mind that you are only allowed to deduct 50% of any entertainment cost.
Auto expenses you must keep a log of your business and personal mileage. You can choose the method that is best for you.
Do the “perfect one-day log”. List all you appointments, both business and personal, in tax diary or tax organizer. This would be done everyday not at the end of the month or end of the year.
Do a 90-day log if your mileage is representative for the entire year. You would do the same as above, but only for 90 days. Remember all your driving should be about the same all year to use this method.
Keep a log for the first week of each month. This assumes that the other weeks in the month are going to be about the same.
Keep track of only your personal and commuting mileage for 90 days. Document your beginning and ending 90-day odometer reading and the odometer readings on January 1 and December 31.
For all methods you must keep a list of all appointments in your appointment book, tax organizer, or diary to substantiate the business mileage. If your business or personal mileage changes from month to month you will need to do the one-day log.
Is documentation worth the time and effort it takes? Will you remember after even one year the expense, what it was for, who you were with, what you discussed? Will you remember all the business appointments you had? The times you drove your auto to take care of business for your company (going to the bank, purchasing supplies, etc.)? In the event of an audit, would you rather go in with every deduction backed up or trying to remember who, what, when, & where to come up with the amount that is on the tax return. Don’t underestimate your expenses or get stuck in an audit with a lot of expenses you cannot prove. Take the time to DOCUMENT every expense.
Credit Card Charges as Expenses
If you use a bank credit card to charge charitable contributions, medical expenses, subscriptions, business expenses, etc., you claim the deduction in the year the item was charged. This is true even though the bill is paid next year.
If you use a store charge, the rule is the opposite of bank cards. The deduction is taken in the year that the bill is paid.
The information you obtain at this site is not, nor is it intended to be, tax advice. You should consult a licensed tax professional for individual advice regarding your own situation.
