Taxing Times

Amnesty, audits and getting your finances together in 2012

If you’ve been hoping – or holding out – for a high-volume business year, Terry Mackin doesn’t have good news for you. A managing director of Generational Equity, he’s the guy you call when you’re ready, or forced, to sell your company, which is to say, not a sign guy.
So, why listen to him? First, because he spends all day evaluating companies, trying to match interested buyers and sellers. He knows what makes a company succeed and fail; most companies are at one of those two points when they call him, so he keeps up on the politics that impact what a company is worth. He also knows what make a company valuable beyond the owner’s personal sentiments
Several factors, Mackin said, play into the slow growth businesses can expect in 2012. “Banks are still not doing much in the way of lending, or providing business owners with lines of credit. Whatever growth you anticipate over the next couple years is going to come solely from what you’re able to draw out in net profits over the next couple years,” he explained.
In addition, Mackin said companies that have cut fat from their expenses may slowly expand, but they won’t replace their losses one-to-one. Some laid-off employees have already been replaced by new technology. Offices that once happily employed an accountant, office manager and an HR director now have a frazzled assistant and a copy of Quickbooks. This is good for bottom lines, but tough for those who crowd unemployment offices.
Technology remains our silver-lined cloud. It eliminates jobs, but saves money. It breaks and causes headaches, but simplifies processing and production. And every year, there’s more to master. “To be viable going forward, you have to understand what’s out there . . . if you’re not, at some point down the road, you’re going to be a non-factor in your own industry,” Mackin warned.
Washington D.C. raises more questions than hope for small businesses. A recent, two-month extension on payroll tax cuts means lingering uncertainty about whether the Bush tax cuts will be allowed to expire, which would effectively raise taxes for employees and employers.
However, as CPA Ryan Himmel, who runs, a tax-advice website, explained: “Congress did basically nothing [at the end of 2011]. Bonus depreciation reverted to 50%, and the Section 179 maximum deduction went from $500,000 to $139,000 [adjusted for inflation] for 2012. The only thing they did was extend the payroll tax cut of 4.2% through the next two months [February], although Congress ‘says’ it plans to extend it for the entire year.”
A little back story: the 2009 American Recovery and Reinvestment Act increased bonus depreciation to 100%, which allowed companies to write off new-equipment purchases in one year, rather than deducting a portion (previously 50%) of the purchase upfront, with smaller, annual deductions thereafter. Until this year, Congress increased or extended Section 179 (a deduction for certain business purchases of new or used equipment) and bonus-depreciation limits annually.
During their final days in session in 2011, Republicans and Democrats waged a battle over these extensions, and nearly made no decision at all. In the end, they voted for a two-month extension – a stalemate – and are set to revisit the issue as this article goes to press.
Dueling economic-recovery plans leave only one clear effect: ongoing partisanship in D.C. With Bush’s tax cuts set to expire January 1, 2013, capital-gains taxes will rise, and, as recent years have shown, a lot can change…or not.
This means that, if you want to take charge of your finances in 2012, you might need some help. Emily Vu is the founder of TTK & Assoc. (Pleasantville, NJ), a full-service CPA firm, and she specializes in fixing small-business tax errors. She has also worked with sign companies.
You can call her if you’re getting audited, if you received something intimidating from the IRS in the mail, or – as she prefers – before any of that happens.
Vu said the right CPA can act as a virtual CFO for small businesses. This means finding a CPA within driving distance who will charge a
flat rate for financial guidance and tax preparation. Concerned about cost? “Don’t go to the most established firm in your area – they may be the most expensive,” Vu counseled. She believes no business is too small for a CPA.
In fact, single-employee businesses commit one common error Vu sees: selecting the wrong business entity on tax forms. Single-member, limited-liability companies (LLCs) may elect to be taxed as a corporation, but each state has a minimum corporation tax, and filers must prepare separate tax returns for themselves and their corporations.
Vu works in tax resolution, helping taxpayers resolve all sorts of errors. She sees blunders perpetuated by “I’ve always done it this way” mindsets, and, scarily, mistakes made by unqualified tax preparers.
For example, if an LLC elects to be taxed as a corporation, this creates a dual tax liability; in other words, the owner must file separate tax returns for the individual and the corporation. “What I see in nine out of ten cases is that the [tax preparer] didn’t realize that the corporation and the individual are two separate entities, so they only filed the individual tax,” Vu said.
Another error occurs when partnerships, LLCs or corporations shut down and stop paying taxes. “Just because a business no longer has employees, it doesn’t mean the filing requirement stops,” Vu advised. If you don’t notify the state and federal government that the business no longer exists, you can incur delinquencies and late penalties.
Still, the IRS has extended one olive branch this year. The agency’s Voluntary Classification Settlement Program, launched in September 2011, encourages employers who have misclassified employees to come forward. This typically denotes workers paid as contractors who should have been classified as employees. Vu said this error is “wrong, but very common,” and said the IRS has been generous, promising not to audit companies that come forward.
Basically, if you submit 1099s for the past three years for any staff members in question, you pay just 10% of tax owed for the current year. The IRS will waive all interest and penalties. Of course, there’s some fine print for this agreement; consult your CPA. n
Disclamer: ST does not intend this article to replace the judgment of a qualified CPA. Please consult your adviser before making financial decisions.
Never Pay Taxes Again
If we could consistently avoid all tax burdens, the government would be bankrupt. This means CPAs who promise to lower your taxes or find a way to avoid them entirely are probably planning to use unscrupulous means to do so. Preparers who “share” dependents (taking them from a client who already has the maximum Earned Income Tax Credit, and giving them to another), offer trusts for a fee, deduct a personal residence as a business expense, or tell you not to withhold taxes from employees’ wages should send you running.
The IRS website is an excellent resource to double-check tax code, but slogging through the details is burdensome. Still, the agency promises, “If there are legal deductions that can reduce your taxes, the IRS wants you to know about them and use them.” If in doubt, ask your tax preparer about a second opinion. A well-intentioned CPA should be open to this suggestion.
Finally, know that promises made upfront rarely take into consider-ation your finances, and are hot air at best. Regardless of who prepares your returns, you’re responsible for their content.

Signs of the Times August 2020

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