Wednesday, April 30, 2008

Civil Penalty- CTFP and Your Business

If you are a corporation (that has employees) be that an S-Corp, C-Corp,LLC where you file 941's, 940, 1120,1065, then you must file business tax returns and pay income tax and payroll tax. However, those that receive a 1099- Misc C with no employees and or an LLC with no employees;these are examples where the TP is 100% responsible for the tax liability.

A business must be compliant by this I mean at least 2 quarters of their estimated tax payments paid and the current Federal Tax Deposits up to date. For those receiving 1099, LLC , they will need to make Quarterly Estimated tax payments. Business's that are corporations or partnership's can easily be held personally liable or responsible for what is owed to the IRS. Any check signers, owners, investors (those in position of responsibility for accounting or payroll( can be held personally liable if the IRS cannot retrieve the liability from the business.

The CTPF (Civil Trust Fund Penalty) is applied when a corporation withholds a portion of the taxpayers paycheck and not making federal tax deposit each month. Corporations withhold FITW (Federal Income Tax Withholding),SS and Medicare from each employee on their payroll. If this portion, belonging to the IRS is not paid, they will be held personally liable if the IRS can't collect on the business. Therefore the persons will be assessed the trust fund portion of the tax that should have been paid to the IRS.

If you find yourself responsible or affected by this CTPF, contact a professional today that can help you settle your IRS tax debt.

Tuesday, April 29, 2008

Writing off Square Footage on a building for Business

I recently had a friend to ask me whether or not he could write off the square footage of his garage and pool for his Pool/Spa business. And the answer is yes to part of the question. As long as the business taxpayer does not use the garage for personal storage (strictly for business storage) then the entire square footage can be written off. Not only can the exterior (foundation) be written off, but the dwelling as well. This would include any tools used to carryout the business. However,unless you can prove that the pool has only been used as a "demo" you will unable to write this portion off as a business expense. You would hard pressed proving this to the IRS that the pool surroundings were not used for recreational purposes.
Even if you run your business inside of your home, you still can write off the square footage (solely used for business purposes) any 10% of the utilities used to carryout your business on your tax return.

What does 10- Averaging mean to the IRS?

What is the 10 averaging for seniors?Well, it applies to those born before 1-2-1936. This relates to only one thing, Lump Sum Distributions from pension plans. According to Tax Mama, you would use Form 4972 if this applies to you. There is a good explanation at the Tax Almanac htp://

5.3 Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.): Types of Plans
I received a lump-sum distribution when I retired. Is there any special tax averaging option on a lump-sum distribution?
If you were born before January 2, 1936, or are the beneficiary of a participant born before January 2, 1936, you may be able to elect optional methods of figuring the tax on lump-sum distributions you received from a qualified retirement plan.
A lump-sum distribution is the distribution or payment, within a single tax year, of an employee's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. The distribution must have been made under specific conditions. For details, refer to Tax Topic 412 which discusses Lump-Sum Distributions or Publication 575, Pension and Annuity Income.
If taxes are withheld from my 401(k) distribution, do I have to include the amount of the distribution as income and do I pay the 10% early withdrawal fee as well?
Yes, you need to include in income the total amount of your 401(k) distribution reported on Form 1099-R (PDF),Distributions From Pensions, Annuities, Retirement on Profit-Sharing Plans, IRAs Insurance Contracts, etc. In addition, if the distribution occurs before you are age 59 1/2, you may need to pay a 10 percent additional tax on early distributions from qualified retirement plans unless you meet one of the exceptions in Publication 575, Pension and Annuity Income. You will include the federal income tax withheld on the appropriate line of your federal tax return along with any other federal income tax. Form 5329 (PDF) and instructions and Tax Topic 558 and Tax Topic 412 are available for further guidance.

When It Comes To Paying Yourself : Business

If you own your own business, and you have questions of when to pay yourself, always have a separate bank account for your business. the following will list several cases of how you pay yourself when owning your own business.

Single Member LLC-this is the default (or automatic) option- no paycheck. You just need to draw money when you want it. All your profits be self-employment income, whether or not you draw the money or not.

Partnership- If you have a partner, or spouse who also owns the business. Again, just draw money. It will be "no-follow"self-employment income. The rest of the profits , even if you don't taken them, will still be reported on your personal tax return as self-employment income.

As a corporation- In this case, you must set up a payroll and draw wages. Any profits left in the company at the end of the year are taxed at the corporate level.Then later when you take them out, you are taxed again as dividends.

As a S-corporation- In this case, you must set up a payroll and draw wages. Any profits at the end of the year are taxed, only on your tax return.
Most business's starting out begin a an LLC. They keep this status until their business is built up. Though if you want your business to flourish, I would treat your business like a business and be wise on your choices regarding your business.

Monday, April 21, 2008

Why Should I File My Tax Return As Soon As Possible?

* Generally, if a taxpayer is due a refund for withholding or estimated taxes paid, it must b claimed within three years of the return due or risk losing the right to it. Th same rules applies to a right to claim a tax credit such as the Earned Income Credit (EIC). Self-employed persons who do not file a return will not receive credits towards Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.

What if I can Pay More?

Even if the taxpayer doesn't have enough money to pay , returns should be filed to avoid further penalties for failure to file. The IRS will assist in finding a solution to the problem.

The IRS has streamlined its policies to offer alternative account resolutions if a taxpayer cannot pay in full with the return.

* The IRS will help to set up installment agreement when the situation warrants.Installment payments allow taxpayers to pay the tax debt over time.

* The IRS will consider whether an offer in compromise is an appropriate solution.

Many people don't file returns because they don't have enough money to pay the tax they owe. They find out after completing their return that their withholding or Estimated Tax payments do not equal their tax liability.

What happns if you don't file your past due return with the IRS?

It's important to understand the ramification of not filing a past due returns and the steps that the IRS will take. Taxpayers who don't file a past due return or contact the IRS are subject to the following:

*Penalties and interest will be assessed and will increase the amount of the tax due.

*The IRS will file a substitute return for you. But this return is based only on information the IRS has from other sources. Thus , if the IRS prepares this substitute return, it will not include any additional exemptions or expenses you may be entitled to and may overstate your real tax liability.

*Once the tax is assessed the IRS will start the collection process, which can include placing a levy on wages or bank accounts or filing a federal lien against your property.

* Even if the IRS has already filed a substitute for return, it still makes sense for you to file your own return to make sure you take advantage of all the exemptions, credits, and deductions you are allowed. The IRS will generally adjust your account to reflect the correct figures.

Sunday, April 20, 2008

When Do Penalties and Interest Apply

Penalties and Interest do not apply in years in which a taxpayer is entitled to a refund. About a third of those who file returns for past years discover they have a refund coming. Penalties and interest apply to years in which money is owed. The interest charged on late paymnts changes quarterly. During the last several years th interest rate has changed from a high of 9% to a low of 4%.

Filing Late Penalty:

The penalty for filing late is generally 5% per month, or part of a month, up to 25% of the amount of the tax shown due on th return.

Paying Late Penalty:

The penalty for paying late is 1/2 of one percent per month, up to 25% of the unpaid amount due.

Waiver of Penalties:

The IRS recognizes many people drop out of the system because of personal problems, including serious illness, a death in the family, or loss of financial records in a natural disaster. Depending on the situation, informing the IRS why returns have not ben filed could result in a waiver of penalties.

*Taxes paid in a timely manner reduces the amount of penalties and interest a taxpayer may owe.

*Interest is calculated on the unpaid balance, penalties, and interest that have been charged to the tax account.

While making payments on a tax debt through an installment agreement, pnalties and interest continue on the unpaid portion of hat debt.

Obtaining a loan from the bank woud be a better option in terms of a loan versus paying the acrued penalties and interest payment.

Penalty For Underpayment

Interest compound daily, is chargd on any unpaid tax from the due date of the return unil th date of payment. The interest rate is the federal short-term rate plus 3 %. Thr rate is determined every three months.

In addition, if you filed on time but didn't pay on time, you gernerally have to pay a late payment penalty of one-half of one percent of the tax (0.5%) owed for eachs month, that the tax remains unpaid after the due date, not execeeding 25% . Howevr, you will not have to pay the penalty if you can show reasonable cause for the failure. The one half of one percent rate increases to one percent if the tax remains unpaid after several bills have ben sent and the IRS issues a notice of intent to levy.

Beginning January 1,2000, if you file a timely return and are paying your tax pursuant to an installmnt agreement, the penalty is one-quarter of one percent for each month, or part of a month, that the installment agreement is in effect.

If you did not file on time and tou ow tax, you may own an additional penaly for failur to file unless you can show reasnabl cause. Th combind penalty is 5 percent (4.5% late filing, 0.5% late paymnt) for each month, or part of the month, that your return was late, up to 25%. The late filing penalty applies to the net amount due, which is the tax shown on your return and any additional tax found to be due, as reduced by any credits for withhholding and estimated tax and any timely payment smad with the return. After five months, if you still have not paid, the 0.5 % failure to pay penalty contiunes to run up to 25%, until the tax is paid.

Tuesday, April 15, 2008

April 15 Dealdine is Here !

Just a reminder to those who have not file their 2007 tax return that April was the due date to either file your return, pay any taxes owed, or file for the automatic- six-month extension period. In addition, the April 15, 2008 deadline also applies to the following :

*Tax Year 2007 Balance- due payments: Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalty and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.

*Tax Year 2007 Contributions- To a ROTH or Traditional IRA - April 15 is the last day contributions can be made to either a ROTH or traditional IRA, even if an extension is filed.

* Individual Estimated Tax Payments for the first quarter of 2008-Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the extension of the 2008 estimated taxes are due on April 15. If you are on "extension" and anticipate a refund, all or a portion of a refund can be allocated to this quarters payment on the final return. when it is filed at a later date.

*Individual Refund Claims for 2004- The regular three- year statute of limitations expires on April 15 for the 2004 tax return. Thus, April 15 is the last day a refund will be granted for any return or amended return for 2004. Caution: The statute does not apply to balances due for unfiled 2004 returns. If we are holding up the completion of your returns because of missing information, we urge you to forward that information as quickly as possible in order to meet the April 15 deadline. Keep in mind that the last week of tax season is very hectic, and we may not be able to complete your returns if you wait until the last minute. If it is apparent that the information will not be available in time for the April 15 deadline, then let us know right away so the we may prepare an extension request and estimate tax vouchers if needed.

Installment Agreement- The IRS Way

Installment Agreement- Taxpayers wishing to pay off a tax debt through an Installment Agreement and owe:

*$25,000 or less in combined tax, than penalties and interest can apply for an installment agreement using a simplified procedure.

*More than $25,000 in combined tax, penalties, and interest may still qualify for an installment agreement, but must complete a more complex application including the submission of financial statements. The IRS user fee for settling up an installment agreement is $52 for direct debit agreement and $105 for non-direct debit agreements. Certain low-dash income taxpayers will qualify for a reduced fee of $43. These fees must be paid with the first installment. You will also be charged interest and may be charged a late payment penalty on any tax not paid by its due date, even if your interest to pay in installments is granted. Interest and any applicable penalties will be charged until the balance is paid in full.

It's Important to Pay Taxes In Full

As of April 15 deadline approaches, we begin to receive cause from tax payers who do not have the ready cash needed to pay their tax liability. There are significant penalties for failing to pay your tax liability by the April 15 due date. Whether paying with a timely filed tax return,

or filing and paying late after receiving a bill from the IRS ( and we have determined the bill is correct), taxpayers are encouraged to pay the taxes they owe in full. If taxes are not paid, and no effort is made, the IRS can ask a taxpayer to take action to pay the taxes, such as selling or mortgaging any assetts owned or getting a loan. If the taxpayer continues to make no effort to pay the bill, or other payment arrangements have not been made, the IRS could take more drastic measures, such as levying bank accounts, wages, or other income, or taking other assets. A Notice of Federal Tax Lien could be filed that may have a detrimental effect on a taxpayer's credit standing. The penalties and interest charged by the IRS are substantially than most commercial lending rates, so it is better to borrow the funds elsewhere and pay the IRS in full period. Where taxpayers cannot raise part or all of the funds to pay their taxes by conventional means, the IRS offers credit card payment and installment agreements.

Due Date Reminders

April- 10- Report Tips to Employer

If you an employee who works for tips ans received more than $20 in tips during March, you are required to report them to your employer on IRS From 4070 no later than April 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

April-15 Individual Tax Return Due

File a 2007 income tax return (Form 1040, 1040A or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call the office. CAUTION: The extension gives until October 15, 2008 to file your 2007 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty;thus if you owe money,the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. If you have a refund, there is no penalty; however you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed.

If you are looking for for a well trained tax preparer to prepare your returns, even after you are approved for the extension. Look no further, contact Effectur today for all your tax preparer inquiries.

Wednesday, April 9, 2008

April- 15 Estimated Tax Payment Due

It's Time to make your first quarter estimated tax payments for the 2008 tax year. Our Tax system is a "pay-as-you-go" system. To facilitate that concept,the government has provided several means of assisting taxpayers in meeting the pay-as-you-go " requirement. These include:

*Payroll withholding for employee;
*Pension withholding for retirees;and
*Estimated tax payments for self- employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to repay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is 2% higher than prime rate and the penalty is computed on a quarter-by-quarter basis.

Federal tax law does provide ways to avoid to the underpayment penalty. If the underpayment is less than the $1000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors:
1.The first safe harbor is based on the tax owed in the current year. If your payments are equal or exceed 90% of what is owed in the current year, you can escape a penalty.
2.The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year's tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year's safe harbor is 110%.

Sunday, April 6, 2008

2008 Stimulus Rebate Schedule

The stimulus rebate schedule was announced for those filing by April 15. Taxpayers who utilize direct deposit on their 2007 tax return will be first to receive the rebates.

Direct Deposit Payment- Based on the last two digits of your SSN, the following are the planned deposit dates into the taxpayers bank account:
00-20 May 2
21-75 May 9
6-99 May 16

For those not signed up for the direct deposit method, the dates are as followed to receive a paper check.

00-09 5/16
10-18 5/23
19-25 5/30
26-38 6/6
39-51 6/13
52-63 6/20
64-75 6/27
76-87 7/4
88-99 7/11

To accommodate people whose tax returns are processed after 4/15, the IRS will continue sending weekly payments. People who file tax returns after 4/15 and receive their economic stimulus payment in about two weeks after receiving their tax refunds, but not before the date they would have received their payment if the return had been processed by April 15. To ensure taxpayers receive their stimulus payment this year, they must file a tax return by October 15.

Items that are not Income

If you are in business for yourself, there are some cases the property or money you receive is not income. There are a couple of instances below that would apply:

Appreciation- Increase in value of your property are not income until you realize the increases through a sale or other taxable disposition.

Consignment- Consignment of merchandise to others to sell for you are not sales. The titles of merchandise remains with you, the consignor even after the consignee possesses the merchandise.Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Merchandise you have shipped out on consignment is included in your inventory or until it is sold.

Do not include merchandise you receive on consignment in your inventory. Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission , depending upon the method of accounting your use.

Who Must Pay Estimated Tax

If you owed additional tax for 2006, you may have to pay estimated tax for 2007.As a general rule, you must pay estimated tax for 2007 if both of the following apply:

1. You expect to owe at least $1000 in tax for 2007, after subtracting your withholding and credits.

2. You expect your withholding ans credits to be less than the smaller of:

a.90% of the tax to be shown on your 2007 tax return, or

b. 100% of the tax shown on your 2006 tax return. Your 2006 tax return must cover all 12 months.

Resident and non resident aliens also may have to pay estimated tax. Resident aliens should follow the rules in this publication, unless noted otherwise. Nonresident aliens should get Form 1040-ES. You are an alien if you are not a citizen of the United States. You are an alien if you are not a citizen or national of the United States. You are a resident alien if you either have a green card or meet the substantial presence test.