How the 2010 tax law affects your taxes

With all the uncertainty in Washington, you may have wondering and/or worrying what is going on with taxes in the next few years. Now that the 2010 tax relief act has been passed the picture is a bit clearer. Here are a few highlights of the extension:

1. The current income tax rates in which start at 10 percent and top out at 35 percent will be in place for two more years. The rates were previously schedule to rise in 2011.

2. The rate for which an employee pays into social security has been reduced from 6.2% to 4.2%. This basically means for ever $1,000 of earnings; an individual will take home an additional $20. This is only for 2011 and the employer still pays the full 6.2% employer portion.

3. Patches for Alternative Minimum Tax (“AMT”) were included for 2010 and 2011. In 2010 AMT exemptions will be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. In 2011, these amounts are set to be $48,450 and $74,450, respectively.

4. Extension of 100% bonus depreciation for business property acquired between September 8, 2010 and January 1, 2012, subject with certain limitations.

5. Important to the elderly, temporary reinstatement of the estate tax of 35% with $5 million exemption.

6. Certain credits and deduction extensions including but not limited to: increased standard deductions for those married and filing jointly, child tax credits, earned income credits, and child dependency credits.

Although there is approximately only one week until the end of the year, there is still plenty of time to make some tax saving moves prior to then. To determine how the new tax law affects your particular situation, contact dbbmckennon today.

Five Tips for Year-End Close

Many small businesses lack formal procedures to properly close their books. Here are five tips that can help streamline the process this year. 1. Make a list and check it twice – The most effective way to close a period correctly and accurately is to make sure everything is complete. Before the year-end, make a checklist of accounts to close, schedules to prepare, tasks to complete, and timeline for each. Keep track of what has been done, and what needs to be done. Identify who needs to prepare the work and who will review it. Then have each of those individuals sign-off on the checklist along the way. Preparing ahead of time and using a checklist will ensure completeness and timeliness.

2. Know your entries – Along with the checklist you make above, create a list of standard journal entries that are required to be made monthly, quarterly, and annually. Compare the list to your current close to make sure everything is properly booked.

3. Use Technology – Along with a listing of standard journal entries, try to use the power of your accounting system (i.e. QuickBooks, PeachTree, etc). Whatever entries can be automated should be set up to do so (i.e. monthly fixed asset depreciation, etc). Also try to use Excel to create dynamic workpapers that create journal entries for you each period to better automate the process. A little work ahead of time will save you time down the road.

4. Analyze variances – Compare each account in your current trial balance against the prior year(s). Set expectations of what you should see based on known activities, economic factors, and recent transactions. Look for accounts that vary outside of those expectations. This simple task will help you determine if something is misstated.

5. Have a tax plan – Develop a plan with your CPA regarding taxes and tax payments. Pro-active planning will help minimize tax burdens, increase cash management effectiveness, and ease your worries about the unknown.

Don’t hesitate to give dbbmckennon a call or email today, to ask us about how these tips can be integrated to your specific situation. We would be happy to help answer your questions or assist you in compliance in order to put your company on a path to success.

What to do if you receive a tax audit notice.

If you have received a letter from the Internal Revenue Service (“IRS”), Franchise Tax Board, or other tax agency, informing you that your tax return is subject to audit, don’t panic. Having a tax return audited does not always suggest that the taxpayer has made an error or has been dishonest. In fact, some audits result in a refund to the taxpayer or acceptance of the return without change. Even if you have made a mistake, the key is understanding how the IRS works and what you can expect from the audit process. The number one rule is not to ignore the IRS! The following are a few tips to guide you through the audit process.

• Hire professional help. Your best bet if you're audited is to retain the services of a qualified and experienced tax accountant who can argue your case without passion or prejudice. These professionals already know the most effective ways to help you quickly resolve a conflict with the taxing agency. In addition, the tax code has become so complicated that you're unlikely to know the law as it applies to your tax return and your rights as a taxpayer.

• Respond to the notice. You generally will have 10 days to respond to the initial notice requesting a meeting. You will normally have 30 days to obtain all the information requested by the agent. The audit notice will give you information as to what items are being examined. Knowing what's being scrutinized will help you determine what you need to bring to the audit, so you can substantiate the items in question. Be aware that the agent upon setting the initial meeting will send a more comprehensive list of items to be audited.

• Get your records organized and complete. Make the auditor's job easier by having organized and complete records. Organized records generally indicate to the auditor that that all of your items are documented and justified. Group each of the items in question, or attach an adding-machine tape that matches the tax return, and any other organization methods that will make it easily identifiable by the auditor for quick review of the important issues. You cannot simply throw your records in a bag, drop it on the auditor's desk, and think that they will figure it out. It is the tax payer’s legal obligation to be able to support all items on their tax return.

• Provide only records that are requested. Leave at home any additional records and items not requested in the original audit notice. Also do not bring original documents to the audit. If you do bring originals, have the agent copy immediately and return the original. There is a high probability that the documents could get lost. The taxing agency isn't responsible for documents lost in its possession.

In recent years, certain tax agencies have been increasing the amount of audits. If you get a notice from a tax agency notifying you that you have been selected for audit, your best bet is to seek out a qualified tax professional. Don’t hesitate to give dbbmckennon a call or email today. We have a significant amount of experience in handling IRS, Franchise Tax Board, State Board of Equalization (sales taxes), etc. We would be happy to help answer your questions or assist you with your needs.

What You Need to Know About IRS Communications

Over the last several months, our firm has been receiving a substantial number of calls from clients in a panic because they had received an email notification from the Internal Revenue Service “IRS” stating that their filed tax return will be subject to an audit. The words “IRS” and “audit” are enough to ruin anybody’s day. The IRS will never initiate taxpayer contact via an unsolicited e-mail. All initial contacts are made via US Mail. In addition, the IRS does not use e-mail to discuss cases or to solicit sensitive personal financial information from taxpayers. If this happens to you, the official IRS website (www.irs.gov) has specific instructions on reporting suspicious e-mails or other unsolicited contacts for personal information. The above applies to most government entities including but not limited to the California State Board of Equalization, California Franchise Tax Board, etc.

The IRS website also has some helpful hints on how to spot an e-mail scam. Many e-mail scams are fairly sophisticated and hard to detect. Here are signs from the IRS to watch for if you receive a suspicious e-mail: • Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother’s maiden name, either in the e-mail itself or on another site to which a link in the e-mail sends the recipient. • Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey. • Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient’s funds. • Gets the Internal Revenue Service or other federal agency names wrong. • Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers). • Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (http://www.irs.gov). The actual link’s address, or url, is revealed by moving the mouse over the link included in the text of the e-mail.

For those who have received a questionable e-mail claiming to come from the IRS you may forward directly to IRS. The information will assist the IRS track the suspicious e-mail to its origins and ultimately help shut down the scam. Please don’t hesitate to give dbbmckennon a call or email, to discuss any of your concerns or if you are actually subject to an IRS, California State Board of Equalization, California Franchise Tax Board, etc. audit.

What is the difference between a Certified Public Accountant (CPA) and Enrolled Agent (EA)?

For you or your business, the difference could be significant or inconsequential depending on the services you require and the experience of the professional. If you look at statistics alone, you will find there are more CPA’s in the United States than EA’s. This may lead you to believe that an EA is the more desired and difficult designation to attain; and therefore, the more valuable designation. In reality, the reason there are more CPA’s is because CPA’s can specialize in different areas (audit, income taxes, consulting, etc.), whereas EA’s only prepare basic income tax returns, primarily for individuals as opposed to corporations, trusts and estates. A CPA has general accounting and business knowledge along with a specific specialization. A CPA that specializes in income taxes will often have expertise in taxation of mergers and acquisitions, complex income tax matters, as well as multi-state tax compliance. To become an EA, you must either take a written exam based on the tax matters or have the required past experience with the IRS. A CPA on the other hand is required to have a minimum of 120-150 credit hours (differs by state) of higher education (university level), work experience in the field, and pass four rigorous exams within 18 months, which cover various subjects including: financial and cost accounting, taxes, regulation, general business, economics, IT in business, and others. Both are required take continuing education to maintain their status, which should keep them up to date on the latest trends and regulations.

But what is the difference to you the individual or small business owner?

If you are starting, or already have, a business and require annual income tax returns, tax planning, and business guidance on matters, then a CPA is likely your best choice. In addition, you may want to consider a CPA that is part of a full-service CPA firm, where there are multiple CPA’s with varying specialties including: income taxes and IRS representation, technical accounting and assurance services and consulting. Choosing a full-service CPA firm, will ensure that all your business needs can be serviced continually one firm. EA’s cannot perform assurance services, such as a compilation, review or audit of your company’s financial statements.

When determining the services you require, consider interviewing the professionals to determine their knowledge and expertise.

The IRS and Offshore Accounts

On July 15, 2010, Switzerland’s Federal Administrative Court issued a ruling rejecting a UBS account holder’s complaint that sought to prevent the release of her account information to the U.S. tax authorities. This ruling signifies the beginning of the end of the era of offshore bank secrecy. The Swiss banking system has long been a thorn in the IRS’s side. The Swiss’s bank secrecy laws provide that all account information is confidential and cannot be turned over to government officials unless a criminal act has been committed. The July 2010 ruling was in response to an agreement struck in August 2009 between the U.S. and Switzerland that sought to put an end to such practices. Under the deal, UBS agreed to provide the IRS with the names and account information of 4,450 Americans who housed as much as $20 billion in offshore accounts. The names were provided to the IRS by UBS in November 2010.

Expiring on October 15, 2009, the IRS offered a limited voluntary disclosure agreement ("VDA") program under which taxpayers were offered reduced penalties and exposure to a criminal indictment, if they came forward and voluntarily disclosed their previously unreported assets and income from foreign accounts. However, any individual included within the list provided by UBS in which had not begun the VDA program faces a high probability of facing significant penalties and potentially a criminal investigation.

This recent win is another notch under the IRS’s belt in its constant battle against tax evaders. The implications of the cooperation by the UBS and the Swiss government are vast. It is highly unlikely that the IRS will stop its crusade there. The IRS has shown time and time again that it is not a force to be reckoned with. As Ben Franklin famously said, “Two things in life are certain: death and taxes.”

The IRS requires any U.S. citizen or resident who owns a foreign financial account with a fair market value in excess of $10,000 to be reported annually on Form TDF 90-22.1. If you find that you have a foreign bank account in which has not been reported please contact us so that we may discuss the options in which you have. Over the past couple of years, dbbmckennon has represented various individuals in declaring foreign investment accounts and assisted in the preparation of the required forms.

Contractor or Employee?

One significant topic that consistently comes up….should an individual be classified as a contractor or an employee? Based on the IRS’ definition, the three aspects in determining whether an individual is a contractor or employee revolve around behavioral control, financial control, and relationship of the worker and firm. The IRS and other tax collecting agencies are auditing these classifications more frequently because the classification as an employee generally results in more income taxes by the employee and employer. The employment taxes, interest and penalties which may be assessed for incorrectly classifying an individual as a contractor will be significant. In addition, the misclassification of workers also opens the door to private causes of action from workers such as back pay, overtime pay, lost benefits and liquidated damages. The following is a brief outline of the factors that make up the three aspects:

Behavioral Control: - Do you train or instruct the worker? - Where does the individual perform services (onsite, offsite, etc)? - Does the individual work a fixed or variable amount of hours? - Can they hire for the company and who pays the hired individuals?

Financial Control: - Who provides equipment needed to perform work? - What expenses are incurred by the worker? - Is the pay fixed or variable based on other factors? - Does the firm carry workers compensation insurance for the individual? - Who has economic or financial risk?

Relationship of the Worker and Firm: - Does the worker receive benefits (i.e. Vacation, 401(K), etc)? - Does the worker provide services for other employers? - How does the firm represent the worker to customers?

There are often no bright lines in making your determination. For more guidance from the IRS, you can review the following link. If you wish to confirm a classification, you may request a free SS-8 determination letter from the IRS. If your company becomes the subject of an IRS audit, please contact us .

What is an S Corporation?

By Lynne Bolduc of Oswald & YapContact Lynne Here

An S corporation is a form of business classified for federal income tax purposes as a corporation that has elected to be taxed as a pass-through entity, in a manner similar to a partnership or sole proprietor. Unlike a regular corporation, or C corporation, an S corporation (both names derive from sections of the Internal Revenue Code) generally is"not subject to federal income tax. Instead, its income is reported on the tax returns of its shareholders, and they have the responsibility for paying the tax. If there are losses suffered by the corporation, they also pass through and are reported on the shareholders' income tax returns.

Because only the shareholders, and not the corporation, are taxed, S corporations avoid the problem of double taxation associated with C corporations. This is the biggest drawback for creating an S corporation, particularly for closely held corporations.

Shareholders in an S corporation, like shareholders in a C corporation, generally have limited liability arising from corporate matters, even though they pay taxes as if they were partners or sole proprietors. In addition, when the corporation eventually is sold, there can be reduced taxable gains, as compared with the sale of a business operating as a C corporation.

On the downside, the limitation on classes of stock in an S corporation provides less control over the company and the value of its stock. Potential outside investors likely will not be attracted by the pass-through tax characteristics of an S corporation, nor by the limit on the number of shareholders. Although corporate taxes are avoided, there is still a requirement for filing an informational tax return every year for a corporation with more than one owner. Finally, if avoiding formalities is an important consideration, it should be noted that, like any other corporation, an S corporation must follow the requirements for having regular meetings and keeping company minutes. The balancing of the advantages and drawbacks of S corporation status in any given case is sufficiently complex that it is advisable to seek professional advice before making this important choice.

1099 Changes Are Coming

Included within the 2010 Health Care Reform Bill were substantial potential changes to the current 1099 reporting requirements. Some of the key changes are as follows: • The corporate exception is ending and, with few exceptions, all corporations will need to be reported on Form 1099-Misc for payments made after December 31, 2011. • Payments for property (goods) will need to be reported on the 1099-MISC if at or above the familiar $600 annual payment threshold. These changes are effective for all payments made after December 31, 2011. • Establishment of Form 1099-K which aims targets currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year's transactions.

So how large of an impact will this have on small businesses? No one currently knows; however, the accumulation of payee data will be the area where companies will need to devote additional time to comply. Assuming the $600 threshold is met, all vendors will have to provide their name and taxpayer identification number, generally on Form W-9. Currently, many companies required such information and report payments made for services. The new law includes reporting for amounts paid for goods. For instance, a 1099 will be required to be issued if you purchased a computer at a local retailer. However, there appear to be benefits of the change due to the $600 “bright line” for all payments. Another key change is that financial firms that process credit or debit card transaction will now be required to provide that information on Form 1009-K. What does this mean? All payment processors, including Paypal, eBay, Amazon, etc that service individuals and very small businesses will be providing information to the IRS regarding processed transactions. The goal of the new regulations is to capture income that is unreported to the IRS. This requirement has the potential to cause significant tax issues for various individuals and small businesses who conduct ecommerce transactions without reporting the income. Could the impact be as big as recent Foreign Disclosure (UBS, etc.) rules? Only time will tell.

Please note that final regulations are still be interpreted by the IRS and will likely not appear until next year. However, we have been guiding our clients at dbbmckennon to be aware as the reporting requirements will affect substantially all businesses in the US and doing business in the US. Please contact us if you have any questions.