COLLECTING SALES TAX OVER THE INTERNET

If you run a business with a physical storefront, collecting sale tax is straightforward.You charge your customers the sales tax required by the jurisdiction where your business is located. For example, if you operate a retail store in Detroit, MI you collect sales taxes from customers buying merchandise at your store.

But suppose you start selling your products online. Does that mean you charge customers the same sales taxes that you do to those who are coming into your store? It depends.

If your business has a physical presence in a state, such as a store, office or warehouse, you must collect applicable state and local sales tax from your customers. If you do not have a presence in a particular state, you are not required to collect sales taxes. In legal terms this physical presence is known as a “nexus”. Each state defines nexus differently, but all agree that if you have a store or office of some sort, a nexus exists. If you are uncertain whether or not your business qualifies as a physical presence, contact your state’s revenue agency. If you do not have a physical presence in s state, you are not required to collect sales taxes from customers in that state.

This rule is based on a 1992 Supreme Court ruling (Quill v. North Dakota, 504 U.S. 298) in which the justices ruled that states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state. The Court reasoned that forcing sellers to comply with more than 7,500 tax jurisdictions was too complex for sellers to manage, and would put a strain on interstate commerce.

Keep in mind that not every state and locality has a sales tax. Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not have a sales tax. In addition, most states have tax exemptions on certain items, such as food or clothing. If you are charging sales tax, you need be familiar with applicable rates.

Determining which sales tax to charge can be a challenge. Many online retailers use online shopping-cart software services to handle their sales transactions. Several of these services are programmed to calculate sales tax rates for you.

You should always consult your tax advisor to determine where you should be paying sales taxes.

Portability... New Estate Tax Concept

New tax legislation signed December 17, 2010 created a new concept in estate tax planning for married couples that actually makes sense. The new concept is called “portability” of unused estate tax exemption, and it has never existed before. It has enormous, positive estate planning implications.

Everyone has an estate tax exemption that allows them to pass on a certain amount of property to a non-spouse estate tax free. Bequests to spouses, in any amount, are not taxed. If a married person left everything to the survivor, then upon the second spouses’ death only one estate tax exemption was used. A primary goal in many estate plans was to set up trusts that could, by the use of an irrevocable trust, utilize both spouses’ exemptions. This was often difficult and complicated.

Under the new “portability” law, many wealthy couples can choose the simpler route, leaving everything to the surviving spouse and still enjoy two estate tax exemptions.

Three important rules apply for this “portability” to exist:

1. First, the executor of the first spouse to die must file a timely filed estate tax return to transfer the “deceased spouse’s unused exclusion amount” (DSUEA) to the surviving spouse.
2. Second, remarriage by the surviving spouse may cut off this “portability” right. (That is beyond this post.)
3. Third, and most importantly, we simply do not know how long this “portability” law will stay on the books, as this new (2010) law was passed to last for two years only. In 2013, the estate tax laws revert back to the 2001 $1,000,000 estate tax exemption “pre-Bush Tax Cuts.”

Many in Congress want to reduce the estate tax exemption from $5.0 million to $3.5 million dollars, but retain the new “portability” concept. Only time will tell what the estate tax laws will be after 2012. It is prudent for married couples to review their estate plans, wills, and trusts to ensure that the proper clauses exist as to the death of the first spouse to die. Each case is different. For many couples, there may be compelling reasons to utilize an irrevocable trust upon the death of the first spouse.

IRS Increases Mileage Rate to 55.5 Cents per Mile

In June 2011, the Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

IRS Gives Tax Tips to Newlyweds

This might be the first time I have seen the IRS show a little humor. Truthfully, when getting married there are numerous decisions that have to be made. Remember to add taxes to the list.

The IRS informs newlyweds what they need to do tax wise after saying “I do” in this YouTube video.

New Rule for Innocent Spouse Relief

On July 26, 20110 the Internal Revenue Service announced that it will extend help to more innocent spouses by eliminating the two-year time limit that now applies to certain relief requests. After a thorough review:
• The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.
• A taxpayer, whose equitable relief request was previously denied solely due to the two-year limit, may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired.
The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

The change to the two-year limit is effective immediately, and details are in Notice 2011-70, posted on IRS.gov. This policy change will become operational in the fall and more guidance will be forthcoming

Helping Small Businesses - Section 179 Deduction

Most people think the Section 179 deduction is some arcane or complicated tax code.  It really isn't, as the following will show you. Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. Government to encourage businesses to buy equipment and invest in themselves.


Section 179 for 2011 at a glance:


2011 Deduction Limit - $500,000 (up from $250k previously). Good on new and used equipment, including new software.


2011 Credit Phase out on equipment purchases - $2 Million Dollars (up from $800k previously).


“Bonus” Depreciation - 100% (taken after the $500k deduction limit is reached). Note, bonus depreciation is only for new equipment. This can also be taken by businesses that exceed $2 million in capital equipment purchases.


Essentially, Section 179 works like this:
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example.)

Now, while it's true that this is better than no write off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it. In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting. 

Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease less than $2 million in new or used business equipment during tax year 2011 should qualify for the Section 179 Deduction.  If a business is unprofitable in 2011, and has no taxable income to use the deduction, that business can carry-forward the deduction to a year when the business is profitable.

What's the difference between Section 179 and Bonus Depreciation? 
The most important difference is both new and used equipment qualify for Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only. Bonus Depreciation is useful to very large businesses spending more than $2 million on new capital equipment in 2011.

When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business has no taxable profit in 2011 (the unprofitable business is allowed to carry the loss forward to future years).

The above is an overall, “simplified” view of the Section 179 Deduction for 2011. Please consult your tax adviser prior to implementing any strategies in this article.

Your State and Local Tax Obligations

In addition to business taxes required by the federal government, you will have to pay some state and local taxes. Each state and locality has its own tax laws. Having knowledge of your state tax requirement can help you avoid problems and your business save money. The most common types of tax requirements for small business include:

              Tax Permit

In most states, business owners are required to register their business with a state tax agency and apply for certain tax permits. For example, in order to collect sales tax from customers, many states require businesses to apply for a state sales tax permit.

               Income Taxes

Nearly every state levies a business or corporate income tax. Your tax requirement depends on the legal structure of your business. For example, if your business is a Limited Liability Company (LLC), the LLC gets taxed separately from the owners, while sole proprietors report their personal and business income taxes using the same form. Consult the General Tax Information link under your state for specific requirements.

             Employment Taxes

      In addition to federal employment taxes, business owners with employees are also responsible for paying certain taxes required by the state. All states require payment of state workers' compensation insurance and unemployment insurance taxes.

State of Michigan Tax Resources

Michigan

·                  Michigan Taxes e-Registration

·                  General Tax Information and Forms

·                  Workers' Compensation Insurance

·                  Unemployment Insurance Tax

Why Keep Records? Part 2

Part 2

Kinds of Records To Keep.  Except in a few cases, the law does not require any specific kind of records. You can choose any record keeping system suited to your business that clearly shows your income and expenses.

You must decide whether to use a single-entry or a double-entry bookkeeping system. The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone and may not give you nessessary data to run your business effectively. The Double-entry system is better because it has built-in checks and balances to assure accuracy and control.

Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. Keep them in an orderly fashion and in a safe place. For example organize them by year and type of income.

How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support an item of income or deduction on a return until the statute of limitations for that return runs out. The period of limitations is the period of time in which the IRS can assess additional tax. Generally, this is 3 years from the date of filing or 6 years if income was under reported by 25% or more. If a return is not filed or is fraudulent then the statute does not run against the IRS. Before destroying your records you should consult your tax adviser because special circumstances my require records to be kept beyond the limitation period.

Why Keep Records? Part 1

Everyone in business must keep records. Good records will help you do the following.

Monitor the progress of your business. You need good to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.

Prepare your financial statements. You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.

 • An income statement shows the income and expenses of the business for a given period of time.

• A balance sheet shows the assets, liabilities, and business expense.

Identify source of receipts. Your records can identify the source of your receipts. You need this information to separate business from non-business receipts and taxable from n

Keep track of deductible expenses. You may forget expenses when you prepare your tax return unless you record them when they occur.

Prepare your tax returns. You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statements.

Support items reported on tax returns. You must keep your business records available in the event of an audit by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. Good records will speed up the examination and hopefully save you money.

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You Received an Audit Notice, Now What?

If you are being Audited

One of the quickest ways your day can be ruined is by receiving notice of audit in the mail. An examination is an unplanned event that can inject chaos into your life. After getting over the initial shock you'll have to decide whether to represent yourself or to obtain outside assistance.

Depending on your circumstances, an audit can be confusing and lengthy. Generally, an auditor will review your income versus your deposits or request proof of expenses. Defining how the examination is going to be run and defining issues will help the audit go smoother. Hiring someone who has experience in audits will greatly increase your chances of success.

Don't speak to the Government. 

It is advisable that you do not speak to anyone at the Government, mail any correspondence, complete any forms, or sign any documents no matter how simple or straightforward they may seem. Your statements or actions could have legal significance at a later time.

Who to hire. 

The big question is who to hire. Many factors go into this decision but it comes down to hiring an attorney, accountant or an enrolled agent. I believe that either a CPA or an attorney will give you your best chance at success. Keep in mind that your communications with an accountant are also not subject to the same privilege as those with your attorney. That means that in some cases your accountant can be forced to testify about things you told him in private. Tax attorneys have received advanced training in interpreting the law and generally will provide the best representation when it comes to gray areas of the law.

Speak only to an attorney.

If you want to discuss the facts relating to the audit with tax specialists then it is best to first contact a tax attorney. If you follow this rule your communications with your attorney will remain privileged. You can speak to him or her freely about the facts of your case. Your communication will remain privileged even if you don't end up hiring that attorney.

Act quickly. 

If you receive an audit notice, act reasonably quickly so that you can respond by any dates provided in the notice. You can lose important rights if you don't act on time.

Control over tax returns. 

The preparation of any tax returns that become due during a pending audit should be placed under the control of the attorney handling your audit. This will help your attorney close your exam and will minimize the risk that an audit or other investigation expands to the current year.

You should always consult a tax adviser before implementing any strategy stated in this article. Because many issues involving taxation will involve other areas of law or the courts, an attorney will often be the best professional to protect your interests. If you are in need of help just call Bannon and Associates PC at 1-877-792-3812  for a free consultation.

Employment Taxes

Employment Taxes for Employers and Self Employed Individuals

When a new client comes into our offices one thing we stress (ok…read the riot act) that withholding needs to be done for wages paid. Whether you are an employer or self-employed, you are responsible for paying federal, state and local taxes. As an employer with employees, you must withhold certain taxes from your employees' paychecks.

Employment taxes include income taxes, Social Security and Medicare taxes, and the federal unemployment tax (FUTA).

If you are self-employed, you are responsible for paying a self-employment tax that is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.

Some clients prefer to perform all the required withholdings, tax deposits and filing of tax returns themselves. Though I don’t have personal experience with Intuits payroll services I have had several clients use this service with good results. There are several nationally franchised payroll services such as ADP or Paychex which can be extremely helpful. There are also local services and accountants which provide this service. A service we have done a lot of work with locally is Primpay.

Below are several links to the IRS website reviewing withholding requirements. You may notice that it can be complicated. Additionally, there are numerous costly penalties when the rules are not followed.

All states have their own rules. For limited list of state tax requirements see State Tax Guide.

For Self-Employed Individuals

If you are self employed or an independent contractor you will be responsible for the employees and employers share of FICA and Medicare taxes. Many taxpayers are not aware of this when they start a business and are not prepared for an additional tax of approximately 15% of earned income. Please see Self Employment Tax and Self-Employed Individuals and Independent Contractors for more guidance.

For Employers

·                  Please see Employment Taxes for Businesses which provides an overview of the federal taxes required for employers. This guide includes information on required forms (such as Form 941 and 944), filing requirements and deadlines, e-file options, and contact information for getting tax help.

·                  Please see W-4: Income Tax Withholding Q&A which

lists answers to frequently asked questions about Form W-4.

·                  Please see W-2: Social Security Taxes Filing Instructions & Information which outlines an employer's responsibilities for filing Social Security taxes.


You should always consult with your tax advisor prior to using any of the strategies mentioned in this article. If you are in need of help just call Bannon and Associates PC at 1-877-792-3812  for a free consultation.

Small Business Expenses and Tax Deductions

Guidance for the Self-Employed and Sole Proprietors

If you are starting a new business knowing how to categorize an expense is important. There are two basic tax concepts new business owners need to add to their vocabulary: business expenses and capital expenses.

Business expenses

Business expenses are the cost of conducting a trade or business. These expenses are common costs of doing business, and are usually tax deductible if your business is for-profit. For example, costs of renting a storefront, business travel and paying employees are all deductible business expenses.

Capital expenses

Capital expenses are the costs of purchasing specific assets, such as property or equipment that usually have a life of one year or more and increase the quality and quantity of products and services you can provide. For example, if you own a landscaping business and you purchase mowers and excavating equipment, these costs are capital expenses and do not qualify as deductible business expenses. However, you can recover the money you spent on capital expenses through depreciation, amortization, or depletion. These recovery methods allow you to deduct part of your cost each year so that you are able to recover your capital expenses over time.

The following information provides a brief overview of expenses that qualify as tax deductions, with links to resources that provide clear guidance on deducting and capitalizing your expenses.

Deducting Business Expenses

To be deductible, a business expense must be both "ordinary" and "necessary." An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business.

Personal Versus Business Expenses

Generally, you cannot deduct personal, living or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal portions. You can deduct the business portion.

Home Office Deduction

Are you a home based business? If you are using part of your home for business, you may be able to deduct some expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation There are two basic requirements for your home to qualify as a deduction:

1.    Regular and Exclusive Use. 

2.    Principal Place of Your Business..

Visit the IRS page on Home Office Deductions for a full explanation of tax deductions for your home office.

Travel, Meals, Entertainment and Gifts

As you know, most companies expense items such as travel costs associated with business, in addition to meals, entertainment and gifts. However, there are rules to follow for these deductions.

Generally, you can deduct all of your travel expenses if your trip was entirely business-related. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination, including tips, cab fare, and other "life on the road" expenses such as dry cleaning. Meals are the only exception. You can deduct only 50 percent of your meals while traveling.

For a full explanation of tax deductions for business travel, entertainment and gifts refer toTravel, Entertainment, Gifts and Car Expenses (IRS Publication 463).

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to the following resources for more information about using your vehicle for business:

·                  The Car Expenses Section in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

·                  For a list of current and prior year mileage rates see the Standard Mileage Rates.

Other Types of Deductible Business Expenses

There are numerous other costs of doing business that qualify as deductions. These include, but are not limited, to the following:

·                  Employees' Pay 

·                  Interest 

·                  Retirement Plans.

·                  Rent Expense 

·                  Taxes – Payroll, State and Local

·                  Insurance 

·                  Advertising

·                  Supplies

·                  Professional fees

·                  Business-Related Education 

For a clear and complete explanation of business expense deductions, refer to Business Expenses (IRS Publication 535).

Deducting Capital Expenses

There are two ways to deduct capital expenses. You can "depreciate" them by deducting a portion of the total cost each year over the useful life of an asset, or you might be able to deduct the cost in one year as a Section 179 deduction. Over the past few year accelerated depreciation has been used to stimulate the economy. These tools are similar to a 179 deduction but are specific to the facts.

Depreciation

You must spread the cost over more than one tax year and deduct part of it each year. This method of deducting the cost of business property is called depreciation.


You should always consult with your tax advisor prior to using any of the strategies mentioned in this article. If you are in need of help just call Bannon and Associates PC at 1-877-792-3812  for a free consultation.

Tax Attorneys vs CPA vs Enrolled Agent

Hiring a Tax Attorney 

Hiring the right tax attorney for your personal or business tax issues is critical. Finding an experienced tax attorney can translate into money for your bottom line. Your goal should be to form a long-term relationship with your tax attorney so you have someone to call in a time of need. Using a tax attorney for tax preparation allows the attorney to keep informed about what is happening in your business or family life so they can better advise you when issues arise. A tax attorney is very important to your future and can help avoid tax issues prior to them becoming a problem. Be sure to take the time to learn about the different types of tax attorneys and professionals and how their particular expertise can help you. 

What are the Different Types of Tax Attorneys and Professionals? 

Anyone can claim to be a tax adviser and anyone who prepares your tax returns does not necessarily have to be licensed by the IRS to do it, so be careful when choosing a tax resolution or tax services firm. 

Verify if Your Tax Attorney or Tax Service is one of the Following: 

1. Enrolled Agent. An EA is licensed by the IRS. Enrolled agents are the most affordable in the tax industry and are usually employed by the individual taxpayer. They are not tax attorneys or CPA’s and will not have the same training needed for representing you on more complex issues in the event of an audit. 

2. Certified Public Accountants. CPA is the statutory title of an accountant in the U.S. who has passed the Uniform Certified Public Accountant Exam and has met certain state licensing guidelines. Unlike Attorneys or enrolled agents a CPA can certify financial records of larger companies to assure that they were done under generally accepted accounting principles. They are excellent at accounting and business tax preparation. When an issue of legal interpretation of the tax law exists the CPA tends to think in black and white, whereas a tax attorneys training allows a more fluid interpretation of the law as it applies to the particular facts. Larger businesses usually use CPA’s in addition to tax attorneys.

3. Tax Attorneys are lawyers who have received advanced training in the area of taxation. They will have a broader understanding of different areas of taxation which will include personal, business, retirement and estate planning tax issues. Many tax attorneys have received masters in taxation. The privacy afforded because of the attorney-client privilege is the strongest professional privilege recognized by law. Many issues with the IRS may require either an appeal to a higher level in the IRS or a legal proceeding in court which requires an attorney. Because of their training an attorneys writing skills, as well as noticing the minor nuances of the law, are better than other tax professionals. This will greatly improve your chances of obtaining a favorable outcome. 

Many tax issues can affect other areas of the law. Outside of the tax area a CPA must consult with an attorney. Advising and drafting documents relating to the formation of business entities, estate planning or other contractual matter should solely be done by an attorney. For example deciding whether to elect to form an S-corporation will involve tax issues as well as liability protection and business management issues. Other than the issues related to tax the CPA should not provide service.

Because many issues involving taxation will involve other areas of law or the courts, an attorney will often be the best professional to protect your interests. If you are in need of help just call Bannon and Associates PC at 1-877-792-3812  for a free consultation.