Wyoming Entrepreneur Blog

Averting the "Fiscal Cliff"?

Congress Approved Eleventh-Hour Agreement with the American Taxpayer Relief Act 2012! 

Yesterday, January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012, averting the "Fiscal Cliff."  The Act allows the Bush-era tax rates to sunset after 2012 for individuals with income over $400,000 and families with incomes over $450,000; permanently "patches" the alternative minimum tax (AMT); revives many now-expired tax extenders, including the research tax credit and the American Opportunity Tax Credit; and provides for a maximum estate tax of 40 percent with a $5 million exclusion.  In addition to an extension for most taxpayers of the lower individual income and capital gains tax rates, marriage penalty relief, and more than 50 other tax benefits popularly referred to as the "Bush Tax Cuts," the legislation makes over 100 changes to the Internal Revenue Code.

Highlights of The American Taxpayer Relief Act of 2012 include:

• 39.6% tax rate for incomes above $400,000 ($450,000 families)
• All other Bush-Era Tax Rates extended
• 20% Maximum Capital Gains/Dividend Tax Rate
• Permanent AMT Patch
• Five-Year Extension of American Opportunity Tax Credit
• One-Year Extension of Business Tax Extenders
• And more!

According to Commerce Clearing House (CCH, a Wolters Kluwer business)

The next battle will be over the debt ceiling: Lawmakers will have to turn to discussing how to deal with the nation's $16.4 trillion debt ceiling next, which will need to be raised as early as mid-February to prevent a default.  And, according to House Speaker John Boehner, R-Ohio,"Without meaningful reform of entitlements, real spending controls, and a fairer, cleaner tax code, our debt will continue to grow, and our economy will continue to stumble."

What is your thoughts on deficit reduction and tax simplification?

Do I pay sales tax when I buy a business?

By Leonard Holler, CPA, CVA, CGMA – Regional Director in Casper.

“I want to buy a business, but someone told me that I will have to pay sales tax on the purchase of the business.  Is that right?” – Bruce in Wheatland.

Depending on the terms of the business sales transaction, it may be.  If you are purchasing at least 80% of ALL of the assets of the business located in Wyoming and you continue to use the tangible personal property in the operation of the ongoing business in the state, it is excluded from the statutory definition of a “sale” subject to tax.  Therefore, it would not be subject to sales or use tax.  If the sale includes vehicles and you meet that 80% threshold, those vehicles would be exempt from sales tax when you go to license them at the county treasurer’ office.

However, sales tax would be charged on the sales price of the “tangible personal property” if the sale is for less than 80% of ALL assets of the existing business.  By definition, if the sale is for less than 80%
of ALL the assets, it would still exclude accounts receivable, inventory items for resale, goodwill (and other intangibles), and real estate, but could include furniture, fixtures, vehicles and equipment used in the business.  You, as the purchaser or successor of the business, also retain the obligation to pay the tax until the former owner produces proof of the payment (certificate of no tax due) from the Department of Revenue of the sales tax owed.

The seller should file a return within 30 days after discontinuing or selling the business and you, as successor, should probably withhold enough money from the purchase price to pay the taxes until the proof of payment (certificate) is received indicating that there is no further taxes due.

For more questions about the terms of your sales transaction, you can call the Department of Revenue at (307)777-2459 or e-mail them at [email protected].

Electronic Payment of Taxes - Probably Not an Option Anymore!

    Previously, once your business’s federal tax liability (including all taxes) during a calendar year exceeded $200,000 or your payroll tax deposits exceeded $50,000, you were required to use EFTPS or Electronic Federal Tax Payment System, in the second succeeding calendar year.  However, under a proposed rule from the U.S. Treasury (REG-153340-09), any business with a tax deposit requirement would have to make deposits electronically as of January 1, 2011.  The Financial Management Service (FMS), a Bureau of the Treasury Department, beginning in 2011, is eliminating the system that enables the processing of Federal Tax Deposit (FTD) coupons.  Accordingly, these proposed regulations require the use of EFTPS for all FTDs, effective January 1, 2011, which is not that far away.  Designated federal taxes include employment taxes, corporate income taxes, social security taxes, FUTA tax, excise taxes and various other types of non-payroll withholding.
    EFTPS, or Electronic Federal Tax Payment System, is provided FREE by the U.S. Treasury Department for payment of federal taxes via the Internet or by phone 24/7.  It is handled by a secure government website that uses the highest level of security.  The system can only be accessed through a secure Internet browser with 128-bit encryption.  When you enroll or to gain access to your account, you must provide three forms of unique information – a taxpayer identity (EIN or SSN), EFTPS Pin#, and a password.  They claim it is secure, fast, accurate, convenient, easy to use and reduces penalties.  Once enrolled, business taxpayers can use the system to make all their federal tax payments via the Internet or by phone.  Both methods are interchangeable.  Via the Internet you can initiate a tax payment 24 hours a day, 7 days a week.  Also, you can conveniently schedule tax payments up to 120 days in advance of a tax due date.   It takes about two weeks after you enroll to receive an enrollment confirmation, so plan ahead.  For more information about enrolling in EFTPS, visit www.eftps.gov to get started.
    So get ready to make the change and (maybe) get rid of those paper FTD coupons, you probably won’t be able to use them after the first of the year. 

What is Federal Unemployment Tax and why do I have to pay it, too?

The Federal Unemployment Tax Act, or FUTA directs both the states and federal government to run the unemployment tax program for the nation.  The program provides payments to workers who have lost their jobs, such as what we have been experiencing during this recession.  The states create the actual employment insurance systems and the federal government pays the administration costs of the state programs.  It is a joint program and your first responsibility is to the state program.  Then, payments made to your state program qualify you for a credit against the federal tax.  This tax, just like the state unemployment tax, is the sole responsibility of the employer. 
Some of your employees may be exempt and/or if you do not meet the requirements, your company may be exempt from the tax.  You should check the requirements by referring to IRS Publication 15 (go to www.irs.gov) for exemptions and limitations.  For example, there are special rules for farm workers. 
The tax rate is 6.2% and is figured on the first $7,000 of each employee’s wages.  If you have paid into your state fund on a timely basis you can take a tax credit of 5.4% of the total FUTA wages against the federal tax rate.  That makes the actual tax rate only 0.8%. 
The tax is reported on Form 940 and is due on January 31st, for the previous tax year; however, tax deposits may need to be paid on a quarterly basis depending on your total FUTA tax liability.  Deposit dates are April 30, July 31, October 31, and January 31, following each calendar quarter.  If your accumulated unpaid tax at the end of any calendar quarter is $500 or less, you do not have to make a deposit, but instead, you can add it to the next quarter’s tax liability.  The deposit rules are also changing after December 31, 2010, so make sure you are ready to make electronic tax payments for 2011 and beyond.   

I may be hiring some part-time help occasionally for my handyman business. Will I have to make these individuals employees, or can they be independent contractors? Steve L., Casper

Most new businesses tend to shy away from hiring employees, due to the complexities of doing payroll and submitting payroll taxes.  Before you write a check to someone as an independent contractor, be sure that you understand how the IRS defines “contractors” vs. “employees.” 

In defining the relationship between an employer and an employee or independent contractor, “degree of control” is important.  Questions to consider are:

1. Does the company control or have the right to control what the worker does and how the worker does his/her job?

2. Are the business aspects of the worker’s job controlled by the payer?  Are expenses reimbursed?  Who provides the tools/supplies used on the job?

3. Is the company providing any employee benefits to the individual?  Will the relationship continue?  Is the work performed a key aspect of the business’ operations? 

The general rule is that an individual is an Independent Contractor if the person/business for whom the

services are performed has the right to control or direct only the results of the work, not what will be done

and how it will be done.

According to the IRS, there is no “magic” collection of factors that automatically define a worker as an employee or independent contractor.  They look at the entire relationship and consider the degree of direction and control to make each individual determination. 

At the point that you determine that the individual you are paying can be classified as an independent contractor, you should have the contractor fill-out a FormW-9, Request for Taxpayer Identification Number and Certification.   On this form, you will collect the correct name and Taxpayer Identification Number (TIN) of the worker.  A TIN can be either a Social Security Number (SSN) or an Employer Identification Number (EIN).  The IRS advises that you keep the W-9 form in your files for four years. 

At year-end, businesses are required to file a Form 1099-MISC to report payments made in the course of a trade or business to others for services.  If you pay someone who is not your employee (subcontractor, attorney, accountant) $800 or more for services provided during the year, you are required to send a form 1099-MISC to the independent contractor by January 31^st of the year following payment.  You must also send a copy of this form to the IRS by February 28.   

One important thing to consider if you are hiring independent contractors is liability in the event of injury.  If you hire an independent contractor to do a job that could conceivably result in injury, you may want to check to see if the contractor carries his own Workers’ Compensation Insurance. 

As a new business owner, what taxes am I responsible for on the income I earn? Sarah A., Casper

 

Individuals who are sole proprietors, partners, or members of an LLC compensate themselves by taking a “draw” out of their business.  The draw is your income from self-employment, and has no taxes deducted by the company.  Individuals must pay Estimated Taxes personally on any income over $399 not subject to withholding.  The federal government has a “pay-as-you-go” policy, and Estimated Taxes must be submitted on a quarterly basis.  Included in Estimated Taxes are both income tax and self-employment (SE) tax (Social Security and Medicaid).  If you do not submit enough tax to the IRS by the due date of each payment period, you may be charged penalty and interest, regardless of whether you owe tax at the end of the year. 

 

The amount of estimated tax to deposit each quarter is usually based on an individual’s earnings for the previous year.  As a new business, you probably had no previous self-employment earnings.  There are; however, some rules that can help you determine whether you should be making quarterly Estimated Tax payments.   Generally, you have to pay estimated tax if you expect to owe at least $1,000 in tax, after subtracting your withholding and tax credits or if you anticipate that the amounts that are being withheld for you are less than 100% of the total tax paid on your previous year’s return.  If you or your spouse receives wages from another business, then you can avoid paying estimated taxes by asking your employer to deduct more tax from your earnings.  To do this, you must file a new Form W-4 with your employer.  There is a special line on that form where you can enter the additional amount you want your employer to withhold.  If you had no tax liability last year, you do not have to pay estimated taxes this year.  Beware; however, even if you are not required to pay Estimated Taxes quarterly on earnings from your new business, you may owe some taxes at the end of the year.

 

Immediate Health Care Bill Impacts for Small Business

Much of the health care reform legislation doesn’t really kick in for another four years.  However, as a small business there are some good things on the immediate horizon in the form of a tax credit to offset health insurance premiums.  This provision of the bill takes force immediately.

As a small business owner, you will join millions of other owners who will be getting a  postcard from the IRS in the next few months.  This card will prompt you to check and see if you are eligible for the 2010 tax credit.

Eligible businesses must have fewer than 25 full-time equivalent employees, pay an average annual wage of less than $50,000 and they must cover at least 50% of the cost of health premiums for their workers.  There are also caps on how high the qualifying premiums can be and the credit uses a sliding scale with businesses with fewer than 10 employees and average wages less than $25,000 maxing our, while larger firms and larger payrolls will receive a lower credit.

The credit available for tax years 2010 through 2013 covers up to 35% of a company’s expenditures on health insurance premiums, increasing to 50% in 2014.  The credit is available for a maximum of 6 years (2010 through 2015).   If you have a non-profit, the credit is available as a refund, even if the company has no taxable income.  For- profit companies must apply the credit to offset actual federal income taxes due for the year, with any remaining credit can be carried forward to future years.

Some examples from the IRS show how the credit will work
1.  Main Street Auto Mechanics 

• Employees: 10
• Wages - $250,000 total or $25,000 per worker average
• Employee Health Care Costs:  $70,000

 2010 Tax Credit: $24,500 (35% credit)
 2014 Tax Credit: $35,000 (50% credit)

2.  Downtown Diner

•  Employees: 40 half-time employees (20 full-time equivalents)
•  Wages: $500,000 total or $25,000 per full-time equivalent worker
•  Employee Health Care Costs:  $240,000

 2010 Tax Credit: $28,000 (35% credit with phase-out)
 2014 Tax Credit: $40,000 (50% credit with phase-out)

Will your business be applying the tax credit?

Hobby or business? What does the IRS Consider?

The Internal Revenue Service looks at unprofitable businesses with a doubtful eye. The laws and regulations, however, do not provide a specific definition of what constitutes a trade or business because no single definition can apply to all cases. Generally, a trade or business must be an activity that is carried on with a profit motive and have economic activity conducted. The problem is that the "burden-of-proof" is the business owner's.

There are several key factors the IRS considers in determining whether activities are engaged in for a profit. Some of those criteria are: it must be done in a business-like manner similar to other activities of the same nature that operate profitably; the expertise of the business owner; time and effort toward the business; relying on profits from the business for personal living expenses is also an indicator; start up losses may be present and do not control distinction, but continued losses without any attempts to improve or correct the business might indicate you are not engaged in it for a profit.

There must be a good faith objective and expectation of making a profit to have the business taxed as such. If your business is struggling—seek advice, consider its effect on your business's profitability and if you think it will make your business more profitable, why not implement the changes. It will help support your argument that you are in BUSINESS and it is not a HOBBY.

Leonard Holler, CPA, CVA, Regional Director for the Wyoming Small Business Development Centers in Casper.

Want some late night reading that will put you to sleep? - Not really?

I recently ran across some interesting information that I thought I would share. While I was preparing a case study for a business certification, I needed some accounting and financial information about the construction industry. In my packet of data from the certifying organization was some “Helpful Industry Data”. To my surprise it was an IRS Construction Industry Audit Guide. It is used by IRS auditors to understand the construction industry and it had A LOT of information about the industry, glossary of terms, types of contracts, types of contractors, definitions accounting methods, accounting requirements, and way more than I ever really wanted to know. The neat part was that it got me to thinking. Are there other audit guides out there? Can I get them off of the Internet? The answers were “YES” and “YES”.

I knew that the IRS has a lot of information regarding business taxes, but they also have a whole lot more. Check out www.irs.gov/businesses/ and see what I mean. They have information on business tax issues from starting a business to closing it, but they also have information in their “Audit Technique Guides” from Aerospace to Veterinarians – and a lot in between. Have you had trouble sleeping at night? Check out this website and let us know what you think. There is enough there to put you to sleep, right?