By now most business owners and independent contactors in the US are well aware of the new 1099 reporting requirements that were included in the 2010 Patient Protection and Affordable Care Act.

This expansion of 1099 reporting, included to help cover the costs associated with the healthcare reforms, now requires businesses to issue the form 1099 to individuals and corporations providing more than $600 in goods and services in a calendar year. In the previous years 1099s only had to be issued to individuals and not to corporations.

So what does this mean to you?

This means that every business MUST meet this new reporting requirement for 2011. To put that another way; this includes everybody and every business that you purchase $600 or more from including companies where you buy office supplies, gas, office furniture, raw materials, etc.  Yep. Every time you buy a new computer or a desk for your office YOU have to ask that company to give you a W9. Sounds like fun, right?

The general guideline is that you should not give a person or a business payment for goods or services until they give you a filled out and signed W-9 so you can issue the person or company a 1099-Misc form.

Here are a few recommendations to help you get a head start:

1. Send all current vendors that you that you know you will do $600 or more business with in 2011, a form W-9: http://www.irs.gov/pub/irs-pdf/fw9.pdf .
2. For all new vendors or vendors that you make large purchases with that you will pay $600 or more within 2011 you will need to have them fill out a W-9 as well.
3. It is very important to keep track of all payments for each person or company that you have to send a 1099 to.  You should have accounting software for this that is capable of tracking your 1099 vendors, giving you year-end summaries for each vendor and has the capabilities of producing the 1099-Misc.  Using an accounting program such as QuickBooks Desktop will save a lot of time, frustration and money.
4. All 1099-Misc must be mailed to your vendors by January 31^st of each year and a copy of the 1099-Misc and the 1096 must be mailed to the IRS no later than February 28^th of each year (except for a leap year in which the due date is February 29^th).  Some other exceptions apply to the IRS due dates based on holidays and weekends.  Please go to www.irs.gov for more information.

Fortunately, there are a lot of people, business’s and tax professionals that see the disastrous avalanche of paperwork ahead and are speaking out against this new 1099 law. Currently Congress and the President are working on the details of how to repeal Section 9006 from law.

Unfortunately, removing a bill is not simple these days with Republicans and Democrats adding on self-serving amendments that threaten to derail the repeal. But we can cross our fingers and hope they come together on this issue. If Section 9006 is repealed then all of the work above may not be needed and we may be back to the old rules which do not include corporations. If it isn’t repealed, give us a call if you need some help keeping things straight.

Last week we went over the individual tax payer’s record keeping requirements, this week I want to discuss what business owners should be holding onto and for how long.

Obviously businesses have a more extensive list of record keeping requirements than individual do but it’s an important detail not to be overlooked as it will help you to avoid unpleasant surprises in an audit.

Businesses are all different, but in this case documentary evidence for business deductions, those that are reasonable and ordinary in the course of business, is generally the same for all types of business entities.

One big mistake a lot of smaller businesses make is not having a separate business checking account. This is a big “no-no”. Get your business checking account set up if you don’t have one and use it for all transaction to prove gross income and business expenses.  If faced with an audit, you can bet the auditor will probably reconcile this account and if any personal deposits or disbursements appear, you’d better have the paperwork to back that up.

What to keep for business deductions:

• Receipts
• Canceled checks
• Bills
• Petty cash slips
• Bank statements (bank statements are very important for electronic receipts)

Receipts should list the name and location of vendor, dates, itemized charges, number of people, and written explanation of the expense to prove its business purpose.  For entertainment expenses, you must document the business relationship of those attending.

Canceled checks are very important for proving amounts, but do not necessarily prove business purpose.

Business expenses should be recorded as close as possible to the actual time of the expense.

There are a few exceptions for Travel, Meals and Entertainment where documentation is relaxed:

1. Under an accountable employee reimbursement plan that adopts the per diem method, which is a fixed daily reimbursement amount
2. A travel expense (except for lodging) less than $75
3. A receipt for transportation is not available (e.g. taxi fare)

I would highly recommend NOT making estimates, they are rarely allowed (except in extraordinary situations where records are destroyed). This is especially true for Travel, Meals and Entertainment, and deductions related to listed property (items commonly used for personal use), all of which have very strict deductibility requirements.

Fred’s Fast Tax Tip: Records for business assets should be retained through the statute of limitations for the tax year in which the assets are disposed of. This is important for audits that investigate depreciation expense.

Employment records must be retained for 4 years after the tax is due or paid, whichever is later.

As important as proper record keeping is for successfully responding to tax audits, record keeping is just as important for effectively managing a business (small or large) in terms of cash flow, short-term working capital needs, and profitability over the long-run.

Record keeping and analysis of accounting reports ultimately reveal where a business needs improvement and where growth opportunities exist. So, you’ve got even more good reasons to keep on top of your business record-keeping! If it all gets to be too much, and you’re losing the battle then I would recommend you find a qualified bookkeeper to help you whip your books in shape. Then kick back, put your feet up on the desk and give yourself some much deserved praise for being such a savvy business owner!

The senate recently passed a small business tax bill that included $12 Billion in tax benefits aimed to help small business grow and is expected to pass the House and be signed by the president  as soon as possible.

This bill is similar to the bill passed earlier this year (Small Business Jobs and Credit Act of 2010, H.R. 5297) except it has more to offer for small business growth. This bill includes the following:

• An extension of the 50% Bonus Depreciation through December 31, 2010.
• Bonus 1 year of depreciation for qualified 10 year property, transportation property to transport people or property and specific aircraft through December 31, 2010.
• An increase of Code SS179 Expensing to a maximum of $500,000 and the investment limit to $2 million for 2010 and 2011.
• A 100% exclusion on Qualified Business Stock if it is held for at leat 5 years, it is purchased inbetween the bills enactment date and by December 31, 2010.
• Relief of FICA tax on Self Employment Income when a self employed person deducts his or her health insurance costs from self employment income in 2010.
• Start-Up Deductions Enhanced to $10,000 in 2010 with the phase-out for start-up costs at $60,000.
• Incentives for Retirement Savings by giving taxpayers more options in designating Roth IRA contributions and retirement savings in non-qualified annuities.

And more….

These are just some of the items that the bill offers for small business which is great….but. With every tax incentive there is always a price tag.

So what are the costs associated with this new bill?

• Information reporting of certain rental income and rental payments (this is permanent)
• Information Return Failure-to-File reportable transactions penalties raised significantly and permanently
• Corporate estimated tax payments will be raised once again

And more…

I want to emphasize that a lot of the tax breaks are for 1 year and the revenue raisers are either permanent or long term in nature thus raising taxes in the long term.

In the end, consumers (taxpayers) pay the tax embedded in the price tag for the rental expense payment reporting, the companies that have to pay the penalties for a Failure-to-File timely, corporations that have to make higher estimated tax payments and all of the other revenue raisers in this bill.

While I agree that small business needs help right now, most of these so called incentives only increase the deduction amount that can be claimed now vs. the future when taxes will more than likely be higher. The other small business incentives are short term in nature and frankly meaningless if you are a business looking at the long-term.

Haven’t really heard much about it yet? Well, if you’re a small business owner or a small corporation you need to understand the full impact of this new requirement—it has the potential to put you out of business or at the very least, severely limit your business growth.

This law seems to have been written to favor large corporations, credit card companies and credit card processors while placing a large financial burden, causing undo harm, to small businesses across the country.

Since the economy has been brought to its knees by major corporate interests, it stands to reason that financial reform efforts would be best focused on addressing the lack of regulation, oversight and reporting requirements for those institutions rather than aiming at small businesses.

It also stands to reason that a great deal of effort should be made to produce legislation designed to buoy small businesses as they are the backbone of many local economies and provide jobs for millions of Americans.

So take this opportunity to share your thoughts with the IRS on this situation-who knows, they might even listen!

Here are a few highlights from the new 1099 Reporting Requirements:

• Smaller companies will be forced to limit their vendors due to increased cost of reporting requirements
• The cost to employ specialized staff or professionals to meet reporting requirements puts an unfair burden on small business
• Credit card processors stand to benefit greatly by forcing companies to charge transactions to credit cards, paying transaction fees ranging from  1.5-4%
• Why aren’t bank transactions excluded like credit card transactions? There is plenty of documentation for bank transactions that would seemingly preclude the need for additional reporting
• Some small companies my deliberately seek only vendors that will accept credit cards which will hurt smaller, cash-only businesses
• Quickbooks, which has 90% of the market, does not currently offer any 1099 reporting that filters by payment type, addressing this would require a major update to the program
• No solution was included to deal with erroneous 1099 forms; currently the burden of proof lies with the tax payer regardless of vendor’s willingness or ability to review and reissue an incorrect 1099
• Discrepancies involving fiscal year versus calendar year and cash basis versus accrual basis have not been considered

If you would like to voice your concerns the IRS is asking for public comment on the issue. You can contact them three ways:

• E-mail to: Notice.Comments@irscounsel.treas.gov. Include “Notice 2010-51” in the subject line.
• Mail to: Internal Revenue Service, CC:PA:LPD:PR ( Notice 2010-51), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
• Hand deliver to: CC:PA:LPD:PR ( Notice 2010-51), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.

The deadline to comment is Sept. 29, 2010.

Please tweet this, email it, blog it, whatever you have to do to let all of your friends and colleagues who own businesses know about this and encourage them to provide their input as well.

Many people don’t think they make enough to worry about tax planning, but what they don’t realize is no matter what your income level, tax planning can help you make adjustments that will significantly reduce your tax liability.

If given the choice, would you rather owe $148.67 or be getting a check for $352.10? See, not bad, huh?

With a little planning, knowledge and effort on your part, you could actually be looking forward to tax day for once!

Here are some ways the Average Joe can save on taxes:

1. Self-employed? Make sure you’re taking full advantage of tax deductions including most ordinary business expenses which can include money spent generating business, retaining clients, vehicle expenses, health insurance and capital expenditures.
2. IRAs. If you’re like a good amount of American’s you’ve seen your retirement savings sucked dry by the stock market. Planning now will ensure proper handling of IRA retirement contributions including the new unlimited Roth IRA conversion provision available in 2010, and allow you to address issues with retirement plans that have declined in value.
3. Education. If you or a dependent are attending school you need to be sure to claim all credits and deductions available to you–it’s free money, don’t miss out on it!
4. Bankruptcy/Foreclosure. You’ve already suffered enough if you’ve endured bankruptcy or a foreclosure this year, so a little planning now will avoid further headaches ahead. Minimize the taxable income impact of a home foreclosure or bankruptcy petition.
5. What If? There are several big tax changes waiting for Congress to either reverse or put into action, all of which could dramatically affect your tax bill. Planning now, as best you can, for potential tax rate hikes after 2010 for ordinary income and investment income keeps you from being blind-sided in the coming months.

So, hopefully these tax saving ideas will inspire you to take a look at your own situation and get you thinking about asking for some tax advice this year. Knowing what to expect and how to maneuver your finances throughout the year for maximum tax savings is the beginning of taking control of your finances, rather than letting your finances control you.

By now you’ve probably heard quite a bit about the new 1099 reporting requirements that were included in the Health Care Reform Bill and the concerns for the disproportionate burden it will place on independent contractors, freelancers and small business owners.

If not, here’s a brief recap: Any taxpayer with business income will be required to issue 1099 forms to all vendors that have been paid $600 or more for goods and/or services.

What this means for small businesses and independents is much more finite tracking of expenses, in other words,  higher bookkeeping fees and higher accounting fees.

Because of the monumental amount of data this will generate however, the IRS has been given free rein to interpret this new rule. So there is hope yet that they will find a way to reduce the burden on taxpayers AND themselves in complying with these new measures.

The new reporting requirements begin in 2012, here’s a breakdown of the requirements as the rules exist today:

1. Companies still have to report payments totaling $600 or more for each vendor for the year, but now have to begin reporting 1099s for payments to corporations (tax-exempt corporations are still exempt from reporting).
2. Currently, most payments for goods and merchandise are exempt.  However, companies will need to start reporting both goods and services under the new reporting requirements.
3. Basically, the 1099-Misc forms are being expanded from reporting payments to independent (non payroll) contractors to reporting virtually all payments to all vendors.
4. This will greatly impact the Accounts Payable function for all companies by requiring W-9s and TIN verification for all vendors a company plans on paying $600 or more in 2012.  If a vendors fails to supply a W-9 then backup withhold will be required.
5. The fine for noncompliance increases from $50 to $250 for each 1099 not properly reported.
6. Currently, companies that issue more than 250 1099s must file them electronically.  With the new 1099 reporting requirements, many companies will be subject to this, meaning additional software, installation and training.
7. New Form 1099-K will start in 2011 which will require merchant card and payments processors to report 1099-Ks to vendors broken out by month.  This will greatly impact the online retailing industry (e.g. eBay) for merchants with sales over $20,000 or 200 transactions.  This form was introduced in the Housing Assistance Tax Act of 2008.

There are more than a few kinks that need to be worked out on this ruling. Two of these problems involve reconciling the 1099 payment reports against the gross income reported by recipients on their tax returns: (a) different bases of accounting (e.g. cash vs. accrual), and (b) calendar year vs. fiscal year.  1099s are issued on cash basis calendar year, but this may not be what the recipient uses.  This has always been a reconciling issue but with the new 1099s this problem will be much worse because of the volume.

Another problem arises with travel expenses in which non-accounting personnel fail to get W-9s from every restaurant or gas station or expense for incidentals.  It is unclear if an IRS database will be readily available to help companies with these issues, particularly in cases involving store names that are different from the actual tax reporting entity.

While the reporting burden will hit all companies, small businesses will be hit particularly hard, probably resulting in additional hiring or outsourcing, either of which is expensive.  Large companies may already have the resources in the accounting area to accommodate, but it is still an added cost burden.

We’re keeping a close watch on this one to see how the IRS decides to interpret their instructions and how this will play out for small businesses.

As a trusted tax advisor I am in the position of researching new proposed tax laws and passing that information on to my clients. Sometimes a new bill comes along that I feel is important for my clients and readers to get a heads up on due to the major tax implications. This latest bill has quietly moved through the House and is on its way up the ladder.

A bill titled “The American Jobs and Closing Tax Loopholes Act of 2010″ was passed by the house on 5/28/2010. The US House and Senate plans to raise the taxes of Small Business Owner S-Corporation’s starting in 2011 through H.R. 4213. This bill targets small personal and professional service businesses with 3 or fewer professionally skilled individuals (performing artists, athletes, accountants, lawyers, actuaries, architects, consultants, engineers, health professionals, veterinarians, lobbyists, brokers, and investment advisors) with the goal of raising over $11 billion in SECA Tax over the next 10 years!

So what does this mean to me?

The SECA tax is an additional 15.3% of taxable income earned by S-Corporations.  This is only the beginning of this far reaching SECA Tax.  If our elected officials pass this bill for small personal and professional service businesses, it is only a matter of time until a SECA tax is placed on all S-Corporations. The tax implications are huge! For example:  an S-Corporations owner who has a taxable income of $50,000 from his or her S-Corporation business could be taxed an additional $7,650 on top of the Federal Taxes.

What can I do?

It’s important to let your representative’s know how you feel about this bill, and quickly. Click the link below to contact your Senator now!  Let your Senator know if you don’t agree with H.R. 4213, “The American Jobs and Closing Tax Loopholes Act of 2010″, Section 413: the 15.3% SECA tax on S-Corporations could hurt small business in the United States.

To contact your senator:

http://www.senate.gov/general/contact_information/senators_cfm.cfm

Click here to read the white paper on this bill.

Accrual Method or Cash Method Accounting?

It’s one of the first questions you’re usually asked when setting up your accounting software and it can be one of the most puzzling. This topic is complicated and often confuses a lot of people (you are not alone if you’re stumped). Whether it is for personal finances or business, this is an important decision that will have a big affect on your financial future.

So which is right for you? Well, that depends on your goals: are you interested in a quick fix and maintaining your financial status or would you like to get out of debt, grow your business and increase your personal financial status?

The Cash Method

The Cash Method of Accounting tracks income when it is received (money is collected) and expenses when they are actually paid (money is disbursed) in a given period.  This method does not match income to expenses in a given time period.  It is a strict cash in and cash out system.  The benefit of the Cash Method of Accounting is that it reports a better representation of cash flow than the accrual method.  The downside here is that it does not match income to the expenses that the income is associated to in the appropriate time period.

Basically, the cash method for either personal or business purposes is your absolute basic method of recording your finances to meet minimum government reporting requirements. It is a quick fix that will keep you apprised of how much you have in the bank at that moment in time. What it won’t do for you is alert you to any imminent issues like runaway debt or give you a full understanding of your financial situation. If unchecked, you could find your personal or business finances getting out of control leading you to bankruptcy and loss of your home and/or business.

The Accrual Method

The Accrual Method of Accounting reports income when earned (before the cash is received) and expenses as they occur (before the cash is paid out) in a given time period.  The Accrual Method of Accounting recognizes economic events at the time the transactions occurs thus matching revenues to expense which is often referred to as “The Matching Principle”.  This method’s strength is that it gives a more accurate picture of an entity’s current financial position. The downside is that it does not measure cash unless a Cash Flow Statement is included in the Financial Statement Presentation.

Accrual Method accounting takes more effort to use, and if you are self employed or own a small business you’ll definitely need a bookkeeper to help you stay on top of things, however the benefits far outweigh the expense and inconvenience. For self employed and business owners this method can alert you to growing trends of outstanding A/R that could sink you in a matter of months. It also helps you have a more accurate picture of the growth of your business. For personal purposes, this method will help you get off the treadmill of cash in/cash out and start you on a path to financial growth.

Fred’s Fast Track Tax Tip:

If you’re considering switching to the Accrual Method for your personal or business finances, be aware that there is a bit of a learning curve.  I generally steer my non-public business clients to a Modified Accrual Method which integrates the Cash Method and the Accrual Method because it adds a level of reporting on the Accrual side that should be taken into consideration.

I would suggest finding an accountant in your area and scheduling a one hour consultation. Your investment in professional advice will probably cost a few hundred dollars and several hours of your personal time to understand the Accrual Method, but you will be more likely to understand it, stick with it and get better reporting results (lower debt, more savings) if you do.

Make sure you have your “parachute” packed when making the leap from employee to sole proprietor!

This may be your first foray into realms outside of employment with little to no understanding of the tax implications involved in such ventures. Did you know that for most Sole Proprietors as much as 50.3% of every dollar of profit that they make could be owed to the IRS, Social Security and Medicare?

We understand it can be difficult knowing where to turn for accurate advice or information to educate yourself about your new circumstances. Here at Fredrick James Accounting, we embrace the mantra “knowledge is power”. Our focus is the empowerment through education of independent contractors, the self employed and small business owners to be able to make educated decisions regarding their tax liabilities

“I guarantee anyone who takes advantage of this consultation will save $300.00 dollars in taxes at a minimum, if their income is at least $3,000.00 and they follow my instructions, or I will refund their consultation fee.” –Fred Daus, CEO Fredrick James Accounting, Tax & Consulting

Our firm is now offering a 1-hour personal consultation & informative course that can save you a minimum of $300* on your taxes, guaranteed!

New to Self Employment Business Orientation: How To Avoid Tax Problems & Pave The Way To Success.

Get answers to your questions:

Deductions: what is and is not deductible

How much should I set aside for taxes, Medicare & Social Security?

Do I have to pay State Taxes?

Do I need to charge Sales Tax?

Do I have to make quarterly payments?

Do I qualify for the mileage deduction?

What can I do to reduce my tax liability?

One hour of your time will result in big tax benefits as you make every day decisions regarding your side job, self employment or small business. In this personalized, private session with CEO Fred Daus, he will go over the main topics that could affect you, answer any questions that you have and provide you with a business tax reference guide that will help you make good business decisions that will have positive tax results.

Sign up now or call our office at 727-474-0922 for more information!
Click the button to sign up and save at least $300* on your taxes or your money back, guaranteed.

We prefer to provide this service in person, however if you are not in the Tampa Bay area we would be happy to provide your consultation via phone or web meeting. Once notice of payment has been received by our office, we will contact you to schedule your appointment, thank you!

*The New to Self Employment Business Orientation will save you at least $300.00 dollars in taxes, if your income is at least $3,000.00 and you follow the instructions provided, or we will refund your consultation fee.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida. Visit our website www.FredrickJames.com or call 727-474-0922 for more information}