Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Aug 20

    Hidden deep inside the massive 2,409 page health care reform bill are a few lines which will unleash a flurry of paperwork on unsuspecting businesses. Beginning in 2012 companies will have to issue 1099 forms not just to contract workers, but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.

    I expect businesses to have to issue billions of new tax documents each year.

    Currently the IRS Form 1099 is used to report income for unincorporated businesses which provide services to businesses. Primarily businesses use them to document payments to independent contractors.

    But, under the new rules, if you buy a new computer from Best Buy, you’ll have to send them a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at year end. The local restaurateur will have to send 1099s to each of his food suppliers, his linen or laundry service, his small wares supplier, his beer and liquor distributors, his electrical utility, and on and on and on.

    The new law makes two key changes on how 1099s are used. First, it expands the scope from only services to include all tangible goods and second, it requires that 1099s be issued not just to individuals but also to corporations.

    “It’s a pretty heavy administrative burden,” particularly for small businesses without an in-house accounting staff according to the National Federation of Independent Businesses.

    The IRS estimates that more than $300 billion is lost in unreported tax revenue each year. Using 1099s to document millions of transactions that now go untracked is one way they believe they can close the tax gap.

    While the notion of mailing a tax form to Office Depot or Sam’s Club each year likely seems absurd to most small business owners, some tax experts say that’s not the worst of it. The biggest headache will be gathering the names, addresses, and taxpayer ID numbers for every payee and vendor you do business with.

    According to a recent report, the SMC Business Councils had previously surveyed its members and learned that they file an average of ten 1099 forms a year, each of which takes about an hour to prepare. That’s in line with the GAO report, which found that a typical small business spent between three and five hours per year filing 1099s.

    But SMC’s survey found that extending the 1099 filing requirements to include services performed by corporations pushed the count to at least 200 filings per year – adding an estimated $6,000 to the preparation costs. The survey didn’t even consider the added burden of filing 1099s for purchases of goods because it just wasn’t on any one’s radar.

  • Aug 13

    According to IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses (Revised Jan 10, 2010), you can “generally deduct 50% of your business-related meals and entertainment expenses.” It goes on to say, “the 50% limit applies to employees or their employers, and to self–employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed.” Figure A (shown) diagrams this in flow chart form. Note that the first block in figure A says “If self-employed, count only reimbursements…not included on Form 1099 MISC.” If they are included, therefore, the answer to the question is “No” and the expenses are limited to the 50% deduction.

    There are, however, certain exceptions to the 50% limit. For the exception for self-employed persons to apply all three of the following must occur:

    1) You must incur the expenses as an independent contractor,

    2) Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform,

    3) You provide adequate record of these expenses to your customer or client.

    Here’s the sticking point, and the point at which some may say that the government sets the per diem rates and therefore they deem it necessary for meals and therefore you are entitled to write off 100% of the expense.

    However they would be in error.                                                   

    What the IRS requires is adequate records and barring an employer-employee relationship and an accountable plan, adequate records means documentary evidence (read receipts).

    If you are an independent contractor and not an employee, you cannot have an accountable plan.

    IF, however, you submit an accounting to your client/customer, i.e., provide them with the receipts in order to get reimbursed or to collect the per diem allowance, THEN you can deduct 100% of the meals expense if it is included on Form 1099 MISC, but the more accurate reporting in that case would be for your client/customer not to report it on Form 1099 MISC at all.—In that case the client/customer’s deduction is limited to 50%.

    Without adequate reporting your deduction is limited to 50% of your actual or per diem meals expense.

  • Aug 6

    When times were better, many students looking for summer employment and graduates looking for permanent jobs thought of the family business only as a last resort. In today’s economy, however, the family business may be the only place for some kids to find work. But all is not lost. Employing your child may save you some taxes regardless of how your business is organized.

    Income Shifting. Regardless of how a business is organized, the owners may be able to turn some of their higher-taxed income into tax-free or low-taxed income by employing their children. In addition to providing valuable work experience for your offspring, this arrangement can offer significant tax savings to the business. As long as the work your children do is legitimate and you follow all the rules and they receive reasonable wages, you can deduct their wages as a business expense and shift the money to your child in a (presumably) lower tax bracket.

    Example: You are in the 33% tax bracket and you hire your son, John, to help with your business full time during the summer and part-time into the fall. John earns $5,700 during the year and doesn’t work elsewhere during the year. If that $5,700 would have otherwise gone into your pocket, then you saved $1,881 (33% of $5,700) in income taxes at no cost to your son, who can use his $5,700 standard deduction for 2010 to completely shelter his earnings.

    The total taxes for your family are cut even if John’s earnings exceed the standard deduction amount. That’s because the unsheltered earnings will be taxed to him beginning at the 10% rate instead of  being taxed at your higher rate.

    As an added bonus, if your business is an unincorporated sole proprietorship or a partnership consisting of only you and your spouse and your son or daughter is under age 18, you don’t have to pay Social Security or Medicare taxes on the wages you pay.

    Example: Take the information from the example above and let’s say you usually take home $120,000 from your sole proprietorship. Now, in addition to the income tax savings above, you save $153 (the 2.9% HI portion of the $5,700) because your self-employment income is reduced and John saves $436 (.0765 x $5,700) in employee FICA just because he worked for you instead of someone else.

    Since the income earned by John is earned income it isn’t subject to the Kiddie Tax. Just be sure to file W-2 forms and other necessary tax forms for John.

    Caution. The Hire Incentives to Restore Employment Act (HIRE Act) carried two valuable incentives for employers that boost payroll this year: a payroll tax holiday for employers that hire unemployed workers and an up-to-$1,000 tax credit for keeping those new hires on the payroll for at least one year. Neither of these tax breaks is available for hiring your child.