Mine Your Own Business

Use It or Lose It

Probably everyone has heard of the saying use it or lose it. The term is often associated with decreased physical fitness due to lack of exercise, or declining mental abilities as we age because of not exercising our brains enough. Now comes an article that warns that small businesses are in danger of losing some new tax credits and other benefits that will expire at the end of 2010.

The article describes how not only are there some tax credits that help small businesses pay for health insurance, but also an increase the deductions for a small business startup. There is also some great information on loans for small businesses, such as a fee for a loan that used to range from 2 to 3.75 of a loan's principle will be waived. Not all of the tax or loan provisions would be applicable to your business, but read the whole article to see what might apply to your small business. Remember the clock is ticking (literally in this case) and most of these expire at the end of the year.

Small Business Credit Bill

USA Today had a recent article on the recently passed Small Business Jobs and Credit Act. Whether or not you agree with the the current Congress and Administration policies, the passage of this bill could result in some real savings to many small businesses. The article presents the following key provisions of the bill:

1. Sole proprietors can write off health insurance premiums as business expenses in 2010.
2. $30 billion fund for community banks to increase lending to small companies.
3. No fees on SBA loans and increasing SBA guarantee to 90% (from 75%).
   
4. Substantial increases in SBA loan amounts.
   
5. Zero capital gains taxes on investment in small businesses
   
6. Doubling the write-off of start-up expenses from $5,000 to $10,000 in 2010.
   
7. Increase the write-off of certain investments from $250,000 to $500,000 in 2010 and 2011 and allow "expensing" of some real estate improvements.

Read the whole article for more details if any of these provisions look like they might be applicable for your small business. Two important pieces of advice the article makes are make sure to check with your accountant and don't procrastinate, some of the provisions are only in effect for a limited time.

More Tax Tips

We promised another timely tax tip on on our Monday posting. Like it or not, the Affordable Care Act signed into law by the President in March included the small business health care tax credit. We've posted some details below. Don't miss all the links at the bottom of the page to get even more information.

IRS releases form to help small businesses claim
new health care tax credit

IRS also announces how tax-exempt organizations will claim credit

The IRS has posted a draft of Form 8941 on IRS.gov. Both small businesses and tax-exempt organizations will use the form to calculate the credit. A small business will then include the amount of the credit as part of the general business credit on its income tax return.

Tax-exempt organizations will instead claim the small business health care tax credit on a revised Form 990-T. The Form 990-T is currently used by tax-exempt organizations to report and pay the tax on unrelated business income. Form 990-T will be revised for the 2011 filing season to enable eligible tax-exempt organizations — even those that owe no tax on unrelated business income — also to claim the small business health care tax credit.

The final version of Form 8941 and its instructions will be available later this year.

The small business health care tax credit was included in the Affordable Care Act signed by the President in March and is effective this year. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

In 2010, the credit is generally available to small employers that contribute an amount equivalent to at least half the cost of single coverage towards buying health insurance for their employees. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. Beginning in 2014, the maximum tax credit will go up to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible, tax-exempt organizations for two years. The maximum credit goes to smaller employers — those with 10 or fewer full-time equivalent (FTE) employees — paying annual average wages of $25,000 or less.

The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more. Because the eligibility rules are based in part on the number of FTEs, and not simply the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals.

More information about the credit, including a step-by-step guide (pdf) and answers to frequently asked questions, is available on the Affordable Care Act page on the IRS website.

Tax Tips

Everyone likes to save money on taxes. Back in February of this year we posted A Word to the Wise describing how classifying employees as independent contractors can save on your tax burden and is perfectly legal. That is, as long as it is done correctly. We thought it might be a good idea to revisit this topic and provide exactly what is legal so there are no problems later. By the way, we'll have another timely tax tip later this week.

IRS roundup

Employee vs. independent contractor:
seven tips for business owners

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers' paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1.   The Internal Revenue Service uses three characteristics to determine the relationship between businesses and workers:

o     Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

o     Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

o     Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

2.   If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

3.   If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.

4.   Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

5.   Workers can avoid higher tax bills and lost benefits if they know their proper status.

6.   Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

7.   You can learn more about the critical determination of a worker's status as an independent contractor or employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

A Word to the Wise - Part 2

We did a posting back in February about how the IRS and several states were starting to scrutinize  companies that were changing the status of employees to independent contractors mainly for tax purposes. If you missed the posting or would like to refresh your memory you can read A Word to the Wise here. Now comes a new article titled The IRS Picks on the Little Guy from CFO.com how the IRS has reduced the amount of time they plan to spend on auditing large companies and plans to increase audits on small businesses. 

The article describes how the Transactional Records Access Clearinghouse (TRAC) conducted a study with the results that 20 years ago two out of every three large company returns were audited by the IRS. By 2005 it had dropped to 43 out of every 100 returns and by 2009 it had plummeted to 25 out of every 100. You can read the whole article for all the rationale behind the changes.

The real irony in these changes is near the end of the article where it makes the point that politicians in Washington are always making speeches on how small businesses are the foundation of job growth, yet in these  difficult times the IRS is targeting them for increased tax scrutiny. After all it is a little difficult to fully concentrate on growing your business when your in the middle of a tax audit (or just worrying about one on the horizon).

A Word to the Wise

There was a short article recently in USA Today about how the IRS and several states are keeping a close eye on companies that are changing the status of employees to independent contractors. Since many small businesses legitimately use independent contractors as mechanics, teachers, etc. we thought it might be a good idea to post something the use of independent contractors. The article describes how businesses can save up to 30% in payroll, so states are acting more aggressively during these tough times to shore up their struggling budgets.

At the end of the article are two excellent links that give some very good information on the differences between employees and independent contractors and in what situation to use each. Some of the best advice is in the article Should you hire an employee or independent contractor?. The point it makes is if you are going to use independent contractors, make sure and check with your attorney to make sure you are well within the law, and talk to your accountant to make sure all necessary tax forms are completed and done correctly. In these times the IRS and states are going to make sure small businesses are in complete compliance.

 

The Section 179 Deduction Might Save You Some Money

[Official disclaimer] Keep in mind as you read this that I'm not a tax adviser.  I've never even played one on TV.  However, I have stayed at the Holiday Inn Express.

Aparently Section 179 of the IRS code isn't widely known or understood.  In fact, it's fairly simple and can save an entrepreneur some money.  Here's the deal.  It used to be that if you bought a piece of equipment, you had to amortize the cost over several years.

Now, under Section 179, you can deduct the full cost in the year that the purchase is made.  According to Section179.org, the provision in the tax code, sometimes called the "SUV Loophle" or the "Hummer deduction" is intended to encourage small business owners to invest in their businesses. 

The site gives an example of the way 179 can be used to save money.  There are some limits, for example the maximum amount of the purchase is $800,00 which makes it a benefit for smaller companies and the web site offers a list of qualifying equipment.

If you've been thinking about buying a new truck or some other expensive piece of equipment, you might want to take a look at Section 179 and consider making the purchase before the end of the year.

IRS Appoints New Small Business Commisioner

I know you've been waiting impatiently for this news so here it is.  According to the Washington Post, the IRS has appointed Christopher Wagner to the post of Commissioner of the Small Business and Self-Employed Division (SB/SE).  Wagner replaces Kathy Petronchak, who retired in August.

From the IRS Press Release:

"SB/SE is one of four operating divisions of the IRS, has about 28,000 employees and serves roughly 55 million taxpayers. SB/SE is a major part of IRS enforcement activities, focusing on promoters of abusive tax schemes, high-income non-filers and other serious tax compliance issues."

Don't say I didn't warn you.  There are 28,000 IRS agents looking over your shoulder.

Small Business' Top 10 Complaints

The National Federation of Independent Business recently polled 3,530 of their closest friends asking them to identify their biggest concerns.  Their top ten choices were:

1. Cost of health insurance
2. Cost of fuel
3. Federal taxes on business income
4. Property taxes
5. Tax complexity
6. Unreasonable government regulations
7. State taxes on business income
8. Cost of inventory and supplies
9. Electric rates
10. Workers' compensation costs

There seems to be a pattern here.  Five of the top ten (highlighted) are directly related to the government.  You could make a good argument that the government is at least partially responsible for the other five as well.

We generally try to put a positive spin on everything here at MYOB so hopefully it will encourage you to know that everyone else worries about the same things that you do.

In case you missed it, the federal minimum wage increases to $6.55 per hour this week.  But since payroll expense isn't one of your top ten concerns (according to the survey) and since you probably aren't paying minimum wage anyway, it shouldn't add to your worries.

IRS Raises Standard Mileage Rate for the Rest of 2008

WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008, as set forth in Rev. Proc. 2007-70.

The IRS normally only makes these adjustments once a year.  But since gas prices have risen to an obscene level, we're getting a break for the second half of the year.  It won't solve the problem, but it will help.

Read the full press release here.