Small Business Tax Articles
Update on Bonus Depreciation
The “Fiscal Cliff” deal extends beneficial key cost recovery provisions. Bonus depreciation, which was set to expire December 31, 2012, was extended to qualified properties acquired and placed in service prior to January 1, 2014. The additional deduction is equal to 50% of the acquired value of the qualifying property. The law also extended the definition of qualified 179 property to include qualified leasehold improvement property, restaurant property and retail improvement property. It also applies to most types of tangible personal property and computer software. Qualifying property is MACRS property with a recovery period of 20 years or less.
Fraud Risk Self Assessment-Good Yes/No Questions to Ask Yourself
1. Does the person who handles incoming cash receipts also record transactions?
2. Is a cash register used in the business?
3. Is a bank lockbox used for processing customer payments?
4. Are deposits made daily and secured prior to depositing in a safe?
5. Are incoming checks restrictively endorsed?
6. Is the monthly bank statement received and reviewed by someone other than the person handling the cash and checks?
7. Is the monthly bank reconciliation completed by someone other than the person handling the deposits or with check-signing authority?
8. If there are discounts/coupons, are they approved by management?
9. Are returns, voided transactions, and credit memos greater than 10% of all sales transactions?
10. Do cash transactions exceed 20% of all sales transactions?
11. Are actual, itemized receipts required for reimbursement?
12. Is a detailed list of names of guests and the type of business activity or entertainment required for expense reimbursement?
13. Are employees encouraged to report concerns about fraudulent activities?
The Threat of Occupational Fraud is Universal
By: Mark Gardiner, CPA, CFE, Partner| email
Occupational fraud is a scheme in which an employee abuses the trust placed in him or her by an employer for personal gain. Its formal definition is: The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.
Asset misappropriation schemes were the most common type of occupational fraud, comprising 87% of the cases reported to the Association of Certified Fraud Examiners in their 2012 Report to the Nations on Occupational Fraud and Abuse. Financial statement fraud schemes made up 8% of these cases but caused the greatest amount of losses. Corruption schemes occurred in approximately one-third of the cases.
Nearly half of the organizations reporting to the Association of Certified Fraud Examiners did not recover any losses that they suffered due to the fraud. The very nature of fraud involves efforts at concealment, with many of the frauds never being detected, and of those that are, the full amount of losses might never be determined or reported.
External audits should not be relied upon as an organization’s primary fraud detection method. Such audits were most commonly implemented control in their study; however they detected approximately 3% of the frauds reported and ranked poorly in limiting fraud losses. Providing individuals a means to report suspicious activity is a crucial part of an anti-fraud program. Fraud reporting tools for an organization, such as hotlines, should be set up to receive tips from both internal and external sources and should allow anonymity and confidentiality. Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees within the victim organization.
Talk to your audit team to discuss ways to implement anti-fraud measures.
Reprinted with permission – The Association of Certified Fraud Examiners
American Taxpayer Relief Act of 2012
By: Chuck Telk, CPA, Partner| email
The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. This new law modifies or extends many business tax breaks, and also contains many changes to individual income tax. There are substantial additional changes in this act, but the following are most likely to impact you and/or your business.
For Businesses:
- Bonus Depreciation: The new law extends the 50% first year bonus depreciation for additional years to cover qualifying new assets that are placed in service in calendar year 2013 (December 31, 2014 for certain assets). Bonus depreciation has been a useful tool for many of our cooperative and business clients, and the new law enables us to utilize this benefit for all tax years beginning in 2013– provided the qualifying asset is placed in service by December 31, 2013.
- Section 179: The new law restores the maximum Section 179 deduction to $500,000 for tax years beginning in both 2012 and 2013, and restores the Section 179 deduction phase out threshold to $2,000,000 for those years as well. While many of our clients place too many assets in service in a tax year to qualify for this deduction, for those clients that qualify, this presents another tool to help manage and reduce your federal tax bill.
- Work Opportunity Credit: This credit has been extended to cover qualifying hiring that occurs in 2012 and 2013.
- Research Credit: This credit has also been extended to cover qualifying expenses paid in 2012 and 2013.
- Alternative Fuel Vehicle Refueling Equipment: This credit has been extended to cover qualifying property placed in service in 2012 and 2013. The per-location cap of $30,000 has been retained.
- Railroad Track Maintenance Credit: This credit has also been extended for qualifying expenditures to maintain railroad tracks for years beginning in 2012 and 2013.
- Employer Educational Assistance Plans made permanent: Section 127 of the Internal Revenue Code allows employers to set up plans that provide up to $5,250 in annual federal income tax free educational assistance to each eligible employee. This new act makes this provision permanent.
- Standard Business Mileage Rate: The Standard Business Mileage Rate for 2013 has been increased to 56.5 cents per mile effective January 1, 2013.
- 1099 and W-2 Reporting: Remember that 2012 1099’s and W-2’s are generally due to the recipient by January 31, 2013. Even if you have a fiscal year end, these forms are based on calendar year 2012 amounts. Also, these forms are not due to the government until the end of February (March in some cases). Be sure to wait until the due date to file the forms with the government– that will give the recipient a chance to review the forms and get any errors fixed. It is far easier to fix the mistake prior to the forms being sent to the government.
I know that the temptation is there to get the forms sent in to the government as soon as the recipient copies are mailed. However, you should wait to file the forms with the government until the due date.
For Individuals:
- Tax increases for higher-income individuals: The maximum federal income tax rate has been increased to 39.6% for those that have taxable incomes above $400,000 (single) and $450,000 (married filing joint), $425,000 (Head of household) and $225,000 (married filing separate). These income levels will also cause your tax rate on long term capital gains and qualifying dividends to increase from 15% to 20%. And finally, these income levels may subject a taxpayer to the new 3.8% Medicare surtax on investment income and the new 0.9% Medicare tax on wages and self-employment income. These 2 new taxes were previously imposed to help pay for the Patient Protection and Affordable Care Act (PPACA), commonly called Obamacare.
- Phase-out rules reinstated: This means that higher-income taxpayers will lose a portion of their itemized deductions and personal exemptions at adjusted gross incomes above $250,000 (single), $300,000 (married filing joint), $275,000 (head of household) and $150,000 (married filing separate). The specifics of these rules are too complex to cover here in detail, but if your AGI exceeds these limits, then this is a method of increasing your federal income tax without increasing tax rates.
- Alternative Minimum Tax: The exemption has been increased and made permanent. This change, which used to be fixed on an annual basis, will keep an estimated 30 million filers from paying the Federal Alternative Minimum Tax.
As with the business tax changes, there are many additional items effecting your personal taxes– far too many to discuss here. If you have any questions regarding the American Taxpayer Relief Act of 2012 and how it affects your business or personal taxes, or if you have questions regarding 1099 forms and W-2 reporting, please contact me at our Des Moines, Iowa office.
Fraud Controls Lacking at Organizations with Fewer than 100 Employees
Organizations with fewer than 100 employees significantly trail their counterparts in the implementation of formal antifraud controls, according to a worldwide survey by the Association of Certified Fraud Examiners (ACFE). Antifraud experts say formal controls can help small businesses prevent and detect instances of fraud that, left undiscovered, could lead to costly losses and possibly to bankruptcy. Antifraud controls don’t have to be expensive. Experts say instituting a formal code of conduct, having management review processes and controls, and providing antifraud training to employees are cost-effective ways to help small businesses with limit resources prevent fraud.
The median loss caused by the occupational fraud cases in the ACFE survey was $140,000 and more than one-fifth of the cases caused losses of at least $1 million. Organization with job rotation and mandatory vacation policies had a significant reduction in the average duration of fraud before detection. Antifraud measures such as code of conduct, employee training programs, and formal management review of controls and processes can be implemented at marginal costs in many small organizations.
Some of the larger behavioral “red flags” of perpetrators:
- Living beyond their means
- Financial difficulties
- An unusually close association with a vendor or customer
- Control issues or unwillingness to share job duties
- Divorce or family problems
- Addiction problems
Talk to your audit team about codes of conduct and antifraud measures that you can put into place.
Source: ACFE 2012 Report to the Nations on Occupational Fraud and Abuse, acfe.org
1099 Reporting and IRS Penalty Notices
The Internal Revenue Service is sending out penalty assessments regarding what they are referring to as improper reporting of taxpayer identification numbers on forms 1099. They are assessing penalties at the rate of $50 per occurrence. Many cooperatives issue thousands of 1099′s and are receiving notices indicating problems with in excess of 150 1099′s. Penalties are being assessed in excess of $7,500 in some cases.
I have previously written regarding the importance of form W-9 and how form W-9 is used in the 1099 reporting process. I continue to strongly urge all taxpayers to continually update their W-9 forms for all non-employees that you issue a check to. It must be legible and signed. If it is not legible, an error could result on form 1099 which eventually may (will) appear in the form of an Internal Revenue Service penalty assessment.
When you receive a letter from the Internal Revenue Service expressing a potential problem with forms 1099, please take the following steps:
1.) Forward a copy of the letter to us.
2.) Review the problems listed on the IRS listing. The IRS provides a listing including the name and the EIN of those that they have identified as being incorrect. From what I have seen, some of the “errors” can be as minor as “John Q Smith” being listed as “John Q. Smith.” Compare to your records and summarize the errors into missing EIN’s, incorrect EIN’s, incorrect names and of course those are not correct.
3.) Immediately request a legible, signed W-9 from those listed on the IRS letter. This request is referred to by the IRS as a “B” notice. This notice must include the threatening language that “the failure to return this form by a certain date (say two weeks out) will result in backup withholding.” The IRS requires that this language in included.
4.) Provide us at least two copies of these “B” notices. I should be able to send these to the IRS along with a letter of explanation to get any penalties waived.
It is possible that additional correspondence will be required in order to have the IRS abate the penalty including a summarization of the problems referred to in #2 above, as well as the new W-9 forms that have been received. It seems like each situation is different and requires different action even though the issue is the same.
Should you have any questions regarding this issue, and certainly if you receive an IRS letter indicating a problem with your 1099′s, please call Charles Telk in our Des Moines office.
A Word About Forms
By: Charles L. Telk Jr., CPA, Partner | email
Forms 1096 and W-3: These are the transmittal forms that you send to the IRS or SSA accompanying your 1099 and W-2 forms each year. Typically, they are not due until the end of February, at the earliest, depending on the number of W-2s and 1099s you file, and the media with which you file them.
Please note: while many taxpayers issue W-2s and 1099s to recipients by the end of January, and then immediately send their 1096s and W-3s to the IRS or SSA, you should consider filing these documents closer to their respective due dates.
The reason the government has allowed time between when these sets of forms are due to the recipient and when they are due to the government is so the recipient has a chance to examine their reporting forms and point out any errors to you, presumably before you have filed these documents with the government.
If you haven’t yet filed forms 1096 or W-3 with the IRS or SSA, it will be easier to fix a mistake on them without the need to file amended returns. However, if you have already filed forms 1096 or W-3 with the government, and there are errors on those forms, then you will also have to file amended reports which can be complicated and time consuming. So, file those 1096s and W-3s closer to their due date to avoid potential amended return filings.
Forms W-9 and W-4: As the 2011 filing season concludes, now would be a good time to examine your member and vendor files for updated and legible W-9 forms. Remember that a W-9 form is the document you need in order to first determine if a 1099 should be issued, and then to obtain the necessary information to properly fill out form 1099. It would be beneficial at this time to update your employee’s W-4 forms as well.
Employees vs. Independent Contractors
By: Charles L. Telk Jr., CPA, Partner | email
The issue of whether a worker is an employee of your company or an independent contractor is very complicated, and it can be confusing to make the correct determination. Properly classifying a worker as an independent contractor can save a company payroll tax dollars, but an improper classification can subject the company to back payroll taxes, penalties and interest.
Recently the IRS launched a new program with the goal of allowing many employers to resolve worker classification issues. This program gives employers the opportunity to come into compliance by agreeing to classify workers as employees and making a reduced payment to cover past payroll tax liabilities.
This new program is referred to as the “Fresh Start” initiative and it coincides with a new Department of Labor program that will crack down on employers who incorrectly classify employees as independent contractors. The two organizations have signed a memorandum of understanding and have agreed to share information and coordinate enforcement efforts.
The intent here is fairly obvious: offer a reduced back payroll tax burden free from audit, penalties or interest as the incentive while providing for increased audit and enforcement actions as the consequence.
Under this program, eligible employers can reduce their past payroll tax obligations by prospectively treating workers as employees. To be eligible a company must:
- Consistently have treated workers in the past as non-employees.
- Have filed required forms 1099 for these workers for the previous 3 years.
- Not currently be under audit by the IRS, DOL or a state agency.
Once accepted, employers will pay only 10% of the amount of payroll taxes that would have been due from the most recent tax year. No interest or penalties will be due. Audit protection will be afforded in regards to payroll tax issues for prior years. But, for the first 3 years of the program, employers will be subjected to a 6-year statute of limitations instead of the usual 3-year rule.
Depending on your situation, this program may be worth checking into. Please call me at the Des Moines office should you have any questions regarding the “Fresh Start” initiative.
1099 Reporting Update
By: Charles L. Telk Jr., CPA, Partner | email
With the recent “relaxation” of the new tougher 1099 reporting requirements, there seems to be a misconception that 1099’s are no longer required. This misconception could prove costly to you and your organization. Make no mistake about it – 1099’s are still required in certain circumstances. Improperly reporting 1099’s to the IRS can cost your organization thousands of dollars in penalties and professional fees.
Several of our clients have recently received penalty notices from the IRS regarding incorrect taxpayer identification numbers. Issues range from names not matching the FEIN, erroneous FEIN’s, missing FEIN’s, etc. The IRS assess a $50 penalty per occurrence and the sum of the penalties in several cases approached $8,000.
This type of IRS action is increasing as the IRS looks for proper reporting and additional revenue.
Therefore, it remains important for your accounting department to have a current, signed and legible W-9 form on hand for all members as well as for any non-employee who receives a check from you. Of course, you should also have a current, signed and legible W-4 form for all employees. An illegible W-9 form can cause an error on form 1099 which can trigger a penalty. We recommend that you update your files on an annual basis to ensure you have the appropriate W-9 form on hand, without exception.
We realize that obtaining these forms can be problematic. I’ve heard every excuse in the book as to why a W-9 form is not required, such as: “We’re a non-profit,” “We’re a corporation,” “We’re a trust,” “We’re a governmental entity,” etc. But the bottom line is this: If you are issuing a check to a non-employee, you should have a current, signed and legible W-9 form on hand without exception. This is not to say that everyone who receives a check from you will also receive a 1099. But by having the W-9 on hand, you will have the information necessary to issue a 1099 should it be required.
This is an important issue that will continue to receive IRS attention. We are available to answer your questions regarding form W-9 and 1099 reporting. Please call me in the Des Moines office at 515-270-1446 should you have any questions or concerns.
Filing Requirements and Sales/Use Tax
By: Chris Coldiron, CPA, Tax Manager | email
Recent surveys indicate that individuals and businesses purchasing goods over the internet are not properly remitting sales or use tax, many times in violation of state law (the estimated non-compliance rate in California was greater than 98%). With states becoming more desperate for revenue sources to offset record deficits, this area becomes an easy target for state auditors. If you are unsure of your state’s laws regarding the payment of sales or use tax for internet purchases, please contact us so that we may research the matter and advise you accordingly.
State auditors are also on the lookout for businesses that might have a filing requirement in their state that is not being met. If your business engages in transactions outside your home state and you are unsure if this activity generates additional filing requirements, please contact us so that we may help you make that determination.