Huddleston Tax Weekly

The first time homebuyer $8,000 tax credit has been extended beyond the orginal November 30th deadline.  First time homebuyers now have until April 30, 2010 to entering into a binding contact to purchase a home and must close on that home by June 30, 2010.  For qualifying purchases of principal residences, first time homebuyers can claim this credit on either their 2009 or 2010 tax return.

There is also a new credit for homeowers looking to buy a new home.  If you have lived in your home for 5 consecutive years during the last 8 year period ending on the date of the new home purchase, then you may qualify for a $6,500 tax credit.

People with higher incomes may now also qualify for one of these credits when they were not able to before.  The new phase out for single filers starts with a modified adjusted gross income of $125,000-$145,000 and for joint filers at $225,000-$245,000.

These new credits are available starting after November 6th and have several new restrictions applied to them.

1.  Purchaser must attached the settlement statement to their tax return.

2.  No credit is available if the house purchase price exceeds $800,000.

3.  Purchaser must be at least 18 years old.

4.  A dependent is not eligible for the credit.

5.  The new law gives the IRS broader authority to deny the credit claims without first having to audit the return.

Remember that these credits only apply to the purchase of your principal residence.  If you have questions about whether or not you qualify for one of these credits, please consult with your tax advisor.

When you own your own business and you are a sole proprietor, you can set up a retirement plan for yourself and your employees if you have them.  Once you have set up a retirement plan, the contrbutions that you make for yourself are deductible on your tax return.  There are a few times of retirement plans that the IRS allows for sole proprietors, such as Simplified Employee Pension plans (SEPs) and Savings Incentive Match Plan for Employees Individual Retirement Account plans (SIMPLE IRA).  Which plan you choose is up to you and you should consult your tax or investment advisor for more information.  Generally these retirement plans are such that the current contributions are deductible and are not taxable to the employee until they are distributed.

If you have net profits from either a Schedule C or a Schedule F, then you may qualify for a deduction of your contributions to your retirment plan.  The deduction is the total cotributions to the plan.  You deduct this from your gross income on your tax return.  There are limits on this deduction.  There are also maximums that you are allow to contribute to self-employed retirement plans.  For more information about self-employed retirement plans you can see IRS Publication 560 or contact your tax professional.

When an officer of an S Corporation performs services for the corporation and are entitled to receive payment for those services then their compensation should generally be considered wages.  Under the Internal Revenue Code, corporate officers are specifically included in the definition of an employee for federal tax purposes.  Because of this, when an S Corporation officer receives these payments for services, they should be treated as wages and not distributions of cash, property, or as loans to shareholder.

The IRS wants to make sure that officers of S Corporations are not avoiding paying employment taxes on officer compensation by treating it as a distribution or loan rather than as wages.  Courts have repeating found that S Corporation officers who provide more than minor services to the corporation and receive payments need to be treated as employees whose wages are subject to federal employment taxes.  There is a exception to this provided by the Treasury Regulations for officers who do not perform any services or provide only minor services that do not entitle him or her to compensation.  These officers should not be considered employees.

 

The IRS requires that S Corporation officers that should be treated as employees take a “reasonable salary” each year for their services.  There is not guidance in Codes or Regulations that say what a “reasonable salary” is and the courts have ruled that it depends on the facts and circumstances of each case. 

 

The following are some of the factors that have been considered by the courts in determining a “reasonable salary”:

 

-Experience

-Responsibilities

-Time devoted to the business

-Wages paid to non-shareholder employees

-Wages paid by comparable businesses for similar services

 

If you need help determining what a reasonable salary is for your business it is best to consult your tax advisor.

Jessica Chisholm, CPA
Seattle/Bellevue Tax Accountants

Is it possible that your business is actually just considered a hobby by the IRS?  Is it possible that your hobby is actually a for profit business in the eyes of the IRS?  IRS code section 183 limits deductions that can be claimed when an activity is not actually engaged in for profit.  This is often times referred to as the “hobby loss rule”. 

When you have a business you are generally able to deduct ordinary and necessary expenses needed to engage in your trade or activity in order to produce income.  If you are generating a lot of expenses and little to no income then it is possible the IRS will consider your business to be just a “hobby”.  The following factors may help you determine whether or not your activity is a for profit business.

1.  Do you put enough time and effort into the activity so that it indicates your intention to make a profit?

2.  Do you depend on income from the activity?

3.  Were any losses that were incurred due to circumstances beyond your control or during the start-up phase of your business?

4.  Have you made attempts to improve profitability?

5.  Do you have the necessary knowledge to run a successful business?

6.  Does the activity make a profit in some years?

According to the IRS an activity that has made a profit in at least three of the last five years, including the current year, is a for profit activity.  If your business has never shown a profit or only shows a small profit every few years, then it is very possible that the IRS could disallow some of your business deductions under Section 183. 

If your activity is shown to not be a for profit business then the deductions that will be allowed cannot exceed the gross income of the activity.  Deductions for a hobby are taken on Schedule A (itemized deductions) of your form 1040. 

Please consult your tax advisor if you have questions about whether or not your business is a for profit venture or a hobby.

Nearly everyone enjoys eating, so an obvious and fun way to entertain your business prospects and to motivate your employees is with food.  However, if your record keeping is inadequate or simply incorrect, you could run into trouble in an audit.  There are several important requirements you must meet in order to deduct your business meals with confidence. 

First, you must have a legitimate business discussion. The meal should have been arranged for the purpose of conducting business, and your client or employee must reasonably expect a business discussion.  If you happen to talk about your business with your waitress, your meal would not be deductible.  A deductible business meal involves a pre-arranged meeting with a substantial business discussion.

Second, the meal should take place in surroundings favorable to having a business discussion.  If you decide to meet at a noisy nightclub, the setting would be inappropriate for a decent conversation.

Third, you need to be able to answer the following questions:

1. Who was entertained?
2. Where did the meal take place?
3. When did the meal take place?
4. Why did the meal take place? (This is the most important.  You need to be specific about what you discussed and why you met.  Simply saying, “Dinner with a client” is not enough information.)
5. How much did it cost?

You can answer most of these questions by keeping the receipt.  You don’t need to keep receipts for meal expenses that are less than $75, but auditors love to see receipts, and you can avoid most problems in an audit if you have them.  A simple way to record answers to these questions is to write them on the back of the receipt after your meal and then to record them in your tax organizer.

These are some simple tips to help you audit-proof your deductions for business meals.  Please consult your tax advisor if you have any questions that specifically relate to your business.