Top 10 Things To Like About The Tax Relief Act Of 2010

Been so busy with the Holidays that you missed all the new tax law changes that will take effect on January 1, 2011?  For all the details, visit – www.selfemployedtaxdeductionstoday.com

Christmas Gift Ideas That Will Slash Your Taxes

Have you bought anything for yourself yet?  Check out http://selfemployedtaxdeductionstoday.com/christmas-gift-ideas-that-will-slash-your-taxes/

How to Drive the IRS Crazy

Believe it or not, IRS just increased one of your best tax deductions, effective Jan. 1, 2011.  Read all about it here -- http://selfemployedtaxdeductionstoday.com/how-to-drive-the-irs-crazy/

How to Reduce Your Taxes by Being an S Corporation

Looking for an effective tax reduction strategy for your small business?

Check this out –

http://www.SelfEmployedTaxDeductionsToday.com/how-to-reduce-your-taxes-by-being-an-s-corporation

Are You Still Filing a Paper Income Tax Return?

Do you know what percentage of income tax returns are still filed on paper?

Find out the answer here:

http://selfemployedtaxdeductionstoday.com/are-you-still-filing-a-paper-income-tax-return/

Extreme Makeover: Tax Blog Edition

Good News! I've given this blog a Makeover -- there's a "new and improved" version at http://www.selfemployedtaxdeductionstoday.com/ with a new look and feel, and techie enhancements that enable you to navigate the posts with greater ease.

Check it out today!

Is It Too Late This Year To Incorporate Your Sole Proprietorship?

As the year comes to an end, perhaps you've been wondering whether you should form a corporation for your sole proprietorship. Another popular option is to form a limited liability company (LLC) and choose to have the LLC taxed as a corporation.  You've probably heard about the potential benefits of incorporating, such as tax savings and liability protection.

But the year is almost over. Is it too late to make the switch?

It is not too late to incorporate your small business and have the incorporation take effect before the end of the year. However, the effective date of your new corporation or LLC cannot be retroactive to January 1.

For example, let's say you decide to incorporate your sole proprietorship this year and you file the paperwork with your state on December 1, the official date of incorporation.   The end result is that you must file two business income tax returns for this year – a Schedule C for January 1 through November 30, and a corporate income tax return (Form 1120 or Form 1120S) for December 1 through December 31.

So any tax advantages of incorporating will only be available to you for the month of December.  In other words, incorporating this late in the year does not enable your business to be treated as a corporation for the entire year. Of course, you have done what is necessary to get your corporation up and running, and you'll be all set to realize tax savings for all of next year. 

You must ask yourself these questions: What are the potential benefits of your business being a corporation for the last few weeks of the year? And will those benefits outweigh the time and expense of filing two business income tax returns? 

Also, don't forget that when you incorporate, there's a formidable mountain of tax-related paperwork. You must obtain a new federal identification number as well as new state account numbers. If you already have employees, you must begin issuing paychecks and making payroll tax payments under the new federal and state ID numbers.  And you must start paying yourself as an employee of the corporation (assuming you are doing work for the business).

Of course, you'll have to do all this paperwork even if you wait until January 1 to incorporate. It's simply a matter of when it makes the most sense to do it.

For many self-employed folks, it may be better to incorporate as of January 1. Then you have a "clean break" with the sole proprietorship as of December 31.

Halloween Tax Tips: How to Eliminate All Fear of the IRS

Ready for a scary tax story?  A few years ago, one of my clients (let's call him Mr. Jones) got one of those IRS "love letters" requesting more information. The IRS wanted to meet with Mr. Jones in person to discuss the situation.

Mr. Jones (a small business owner) was required to show up at the local IRS office with all his records. The IRS was questioning the legitimacy of several business deductions. The IRS was doing what it is allowed by law to do -- demand that the taxpayer prove that those deductions were valid.

Turns out that Mr. Jones lost the audit and ended up owing the IRS a significant amount of money -- the additional tax, plus penalty and interest for late payment of that tax. Why did Mr. Jones' lose the audit? Mr. Jones made two "classic" taxpayer mistakes:

MISTAKE #1: "NO RECEIPT, NO DEDUCTION"

Mr. Jones lost several deductions simply because he didn't have the proper documentation to prove the deductions. What do I mean by "documentation"?

Well, if the IRS requires you to substantiate a deduction on your tax return, you must be able to provide written proof that the deduction really happened. The easiest way to prove a deduction is to hang on to: a) The receipt or invoice, and b) Proof of payment, which can be a canceled check, cash receipt, or credit card statement.

Mr. Jones reported numerous deductions for which he simply didn't have the documentation. No receipts, no canceled checks, no nothing. Turns out that Mr. Jones was one of those "cash guys". Maybe you know what kind of guy I'm talking about -- he never wrote a check in his life, just carried a wad of cash around in his pocket. He paid for everything with cash, and never kept any of his receipts.

Every year he'd sit down with his wife and "remember" how much he spent on different things. No way to prove any of this, of course. He just had a "feel" for how much cash he had spent, and he had run his business for so many years that he just "knew" how much it cost to purchase certain things.

Well, this is the kind of taxpayer that the IRS loves! It really is true – generally speaking, except for a few rare exceptions, if you can't prove that you paid for something (with receipts, invoices, canceled checks, etc.), then you run the risk of losing that deduction in the event of an audit.

One of the most common questions I am asked by clients is this: "I know I paid for something, but I don't have a receipt. Should I still report the deduction?" My response is usually this: "You only need a receipt if you get audited."

At first, people don't know if I am joking or not. Well, I do make that comment with my tongue planted firmly in cheek, but there really is a lot of truth to it. If you don't have the documentation to prove a deduction, you can still report the deduction (if you want), because you only have to prove the deduction if you get audited.

But if you do get audited, knowing that there are undocumented deductions on the return, be prepared to lose the deduction. Fair enough?

And here's the other major mistake that Mr. Jones made:

MISTAKE #2: BOGUS DEDUCTIONS

It turns out that Mr. Jones wasn't completely honest with me about some of his deductions. He reported deductions that simply were not real deductions. Here's one example: Mr. Jones owned several rental houses. These rental houses, of course, required maintenance and repair work. Many times Mr. Jones would do the work himself rather than pay someone else to do the work.

Well, Mr. Jones would estimate what he would have had to pay someone else to do the work that he did himself, and then he would report that amount as a deduction, even though he didn't actually pay anybody to do the work.

In other words, Mr. Jones deducted the value of his time -- which is non-deductible. This is an important point -- you can never legitimately deduct the value of your time for work you did. You have to actually pay someone to do the labor.

If you ever get a letter from the IRS demanding additional information, you'll have nothing to fear if you do exactly the opposite of what Mr. Jones did. If you can properly document your deductions and assuming you have no bogus information, you'll pass the audit with flying colors.

Small Business Tax Tips - What Does it Take to Pay Zero Taxes?

How many times have you heard someone say, "I don't pay any taxes. My accountant takes real good care of me...I haven't paid a dime in taxes in years." Does that outrageous statement sound familiar?

(As David Letterman used to say, is this comment a candidate for admission into the Museum of the Hard-To-Believe?)

Maybe it's your brother-in-law, or a fellow Soccer Mom, or a co-worker at the office. And so you think to yourself, "What am I doing wrong? How come I'm paying taxes and so-and-so says he/she pays nothing? How do they do it!"

Is it really possible to pay "zero taxes"?

For purposes of this article, let's give your "no-tax" friend or relative a name. Let's call him "Charlie" (or if he is a she, just think "Charlene").

OK, what is Charlie up to? What's his secret?

Charlie has no secret. He's not doing anything that you should be doing. Do not be envious of Charlie, and here's why...

I can think of at least five reasons you should ignore whatever Charlie says about his "no-tax" situation.

REASON #1: Charlie is a liar. Every family has one, so don't feel bad. Let's face it, some people just like to indulge in fabrications to make themselves feel good. Charlie is telling you a big fat lie because Charlie has "issues." Nuff said?

REASON #2: Charlie is pond scum. OK, hear me out on this one. I don't mean to offend you if Charlie is a close and dear relative, or your best friend, but I'm going to give it to you straight: Charlie cheats on his tax return, and he cheats big time. There are plenty of folks out there like Charlie. He's one of the reasons that you and I pay so much in taxes -- he doesn't report all his income, and he deducts bogus expenses by the thousands.

He and his accountant may even be in cahoots on this. Charlie brings in his records and his accountant crunches the numbers, then calls Charlie and says, "You owe $5,000." So Charlie rummages around in his files and somehow managesto come up with another batch of expenses that miraculously reduce his balance due to zero. It's like magic!

End result: Charlie's tax return is a big lie.  And so Charlie is a thief. Charlie should be put in jail for the tens of thousands in taxes he has illegally withheld from the government over the years.

REASON #3: Charlie is stupid. Again, I'm sorry if I'm being too hard on Charlie. But some people are so clueless about taxes that if they have no balance due on their return, or if they are getting a refund, they mistakenly believe they didn't pay any tax that year.

And believe it or not, this is actually a very common misconception that thousands of people cling to. Ah, to be so blissfully ignorant!

I hope you are not so naive to think that the "bottom line" on your tax return tells the whole story about your tax liability. It doesn't.

REASON #4: Charlie is broke. Charlie may actually pay zero taxes because --are you ready for this one? -- Charlie doesn't make any money!

Charlie owns a small business or works full-time at his self-employment activity, and Charlie may rake in hundreds of thousands in income from sales of his product or service -- but Charlie's business spends more than it brings in, and Charlie's business has a loss every year.

So Charlie doesn't really have a tax problem. Instead Charlie has any number of other problems. He has a marketing problem, or a management problem, or a personnel problem. Charlie's business is failing, and paying zero taxes is just a symptom of a business that will eventually close.

REASON #5: Charlie is just scraping by. Charlie's business may not be losing money every year, but it's not really making much either. He has a small profit -- enough to keep him busy. His business may even "look" profitable, but it's really the classic shoestring operation.

So now, I ask you, do you really want to pay zero taxes? People who don't pay taxes are usually in one of these five categories: Chronic Liars, Pond Scum, Stupid, Broke, or Just Scraping By.

The purpose of business is to be profitable. The unavoidable result of a profitable business is taxes. And yes, you should do everything legally possible to reduce those taxes. But if you are going to be successful, you are going to pay some taxes.

When it comes to taxes, stay away from Charlie.

Looking For a Good Tax Preparer?

Your search is over at http://www.goodtaxpreparer.com/.

Here's a sneak peak at what you'll find on this site:

How to Find a Good Tax Preparer in 5 Simple Steps

3 Essential Qualities of a Good Tax Preparer

5 Critical Questions You Must Ask Before Choosing A Tax Preparer

Why You Want and Need An Experienced Tax Preparer
Free Tax Consultation Worth $370

Taxpayers Beware: Tax Scam Emails Are Back!

Have you received any really weird emails lately that look they are from the federal government?  I did. It's so weird, it makes you wonder what kind of person takes the time to come up with this junk.

This type of tax scam emails surface on the internet from time to time. There's only one thing you can do – delete it!  And don't even think about clicking on any links inside the email.

And always remember this:
The IRS does not initiate taxpayer communications through e-mail.

Here's the beginning of a scam email I received this week:

EXCERPT FROM TAX SCAM EMAIL

SUBJECT: LAST NOTICE: Your Federal Tax Payment has been rejected.

Your Federal Tax Payment ID: 010375250 has been rejected.

Return Reason Code R21 - The identification number used in the Company Identification Field is not valid.

Please, check the information and refer to Code R21 to get details about your company payment in transaction contacts section:

In other way forward information to your accountant adviser.

2. m i. Robert H. DOROUGH, born 10 Feb 1704 in James City County, Virginia.

EFTPS: The Electronic Federal Tax Payment System

PLEASE NOTE: Your tax payment is due regardless of EFTPS online   availability. In case of an emergency, you can always make your tax payment by calling the EFTPS.

END OF EXCERPT FROM TAX SCAM EMAIL

Amazing, isn't it? 

The rest of the email is a bunch of mumbo jumbo that makes no sense whatsoever.

For more info on internet tax scams, check out the IRS website:
"How to Report and Identify Phishing, E-Mail Scams and Bogus IRS Web Sites"
http://www.irs.gov/privacy/article/0,,id=179820,00.html?portlet=1

The Biggest Tax Increase in History May Be Coming to a Neighborhood Near You

It's true.

If Congress and the President do nothing, everyone's personal tax rates will go up on January 1, 2011. There's quite a debate in Congress about this right now, with the usual bickering and name-calling that we pay our beloved politicians to engage in.

This is because the so-called "Bush Tax Cuts" are going to expire on 12/31/10 and unless Washington passes a law to extend the current tax rates, they will revert to the higher rates in existence prior to the rates passed when Bush was in office.

What do you think Washington should do?

Let the world know by posting comments below.

And if you want to learn more about this situation, here are some fascinating articles that go into more detail . . .

From the Wall Street Journal . . .
There's a Tax War in Congress and what you should do now . . .
http://online.wsj.com/article/SB10001424052748704644404575481903960961386.html?mod=WSJ_Taxes_Taxes_2

Here's a Republican view . . .
http://politics.usnews.com/opinion/articles/2010/09/13/chuck-grassley-tax-increases-would-cause-more-unemployment.html

And here's what a Democrat has to say. . .
http://politics.usnews.com/opinion/articles/2010/09/13/sander-levin-dont-extend-bush-tax-cuts-for-the-rich.html

And even Oprah has something to say about taxes this week . . .
http://www.tmz.com/2010/09/17/oprah-winfrey-australia-giveaway-audience-gift-all-expenses-paid-no-catch-no-taxes-no-strings-attached/

What Happens If You File a Business Income Tax Return After Sept 15?

The due date for business income tax returns on extension is September 15. If that date has passed and you still haven't filed a return for your corporation, partnership or LLC that is being taxed as a corporation or partnership, what are the consequences?

The short answer is this: You will probably pay for your tardiness.

The long answer is twofold:

Scenario 1 - Balance due returns.
If the business has a balance due on the return that hasn't been paid yet, the late payment penalty and interest charge clock has been ticking since the original due date of the return (March 15 for corporations and April 15 for partnerships).

For corporations and LLC's being taxed as a corporation, the tax had to be paid by March 15 to avoid these charges. For partnerships and LLC's being taxed as a partnership, the tax had to be paid by April 15 to avoid these charges.

In addition to late payment penalty and interest, you can also be charged a late filing penalty if you did not file an extension and then file the return after the original due date, or if you did file an extension but then file after the extended due date of September 15. (More on that below.)

Scenario 2 - Zero balance due returns.
Typically, only regular corporations have tax liability on their corporate income tax returns (Form 1120). S Corporations (Form 1120S) and partnerships (Form 1065) usually have no income tax liability on their income tax returns because the profit "passes through" to the owners' personal income tax return and the tax gets paid there.

So if there's no tax, aren't S Corps and partnerships off the hook if they file a return late? Unfortunately, no.

There is a penalty for not filing a return on time. As mentioned above, there is a late filing penalty even when there is no tax due. The penalty is $89 for each month or part of a month the return is late (up to 12 months), multiplied by the number of shareholders/partners/members in the business during any part of the year for this return. Ouch!

Example: you have an S Corp or partnership or LLC that has 3 owners. You filed the extension and so now the return is due September 15. But you've all been busy and the return didn't get filed by September 15. Automatically, even if you file on September 16, you've already incurred a late filing penalty of $267 ($89 times 3).

And for every month that passes without the return being filed, you are penalized another $267. Another ouch!

Well, do I have your attention now? I hope so. If you haven't filed the return yet, do yourself a favor and save yourself hundreds of dollars and get the return done ASAP.

Is there any way to avoid paying these late payment penalties, interest charges, and late filing penalties? Yes. If the late payment or late filing is due to "reasonable cause", you can attach a reasonable cause statement to the return and request the IRS to waive the penalties and interest.

What is "reasonable cause"? There are several situations that usually qualify, such as death in the family, serious illness, theft, and natural disasters.

7 Things Every Business Owner Should Know to Avoid Running Afoul of the IRS

One of the most controversial grey areas of tax law is the "independent contractor vs employee" issue.

Most small businesses hire workers to perform services, i.e. outsourcing.

Is the person you hire an employee or an independent contractor?

Does it really matter? You better believe it does!

The answer to that question is critical. And if you don't answer it correctly, you can end up in big trouble.

If you treat someone as a contractor and that person is really an employee, the IRS can re-classify that person as an employee and you'll be responsible to pay the taxes that should have been withheld from his/her paychecks, plus the employer's payroll taxes, plus penalties and interest for late payment.

Ouch!

So it's in your best interest to get this right.

Here are some tips to help you make the correct classification, courtesy of the IRS:

7 Things Every Business Owner Should Know
About Independent Contractors vs. Employees

1. The IRS uses three characteristics to determine the relationship between businesses and workers:

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

- 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.

- Type of Relationship 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.

(As I said before.....OUCH!)

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
-- IRS Publication 1779 - Independent Contractor or Employee
-- IRS Publication 1976 - Do You Qualify for Relief under Section 530?

These publications and Form SS-8 are available on the IRS website (www.IRS.gov) or by calling the IRS at 800-829-3676.

Many Happy Returns,
Wayne

Spring Time Tax Savings Idea

With warmer temperatures upon us, here's a springtime tax savings opportunity for you and your family......

It's Yard/Garage Sale Season and perhaps you've been thinking about having one.


Here's a better idea that will:
-- get rid of all your clutter once and for all
-- save you many hours of time
-- put hundreds dollars of tax savings in your pocket
-- enable you to help others while forcing Uncle Sam to actually *pay* you for all your "old stuff"

What am I talking about?

I've written a new Special Small Report called:

"How To Save Time, Increase Your Deductions And Slash Your Taxes By Donating Your Old Stuff To Charity"

http://www.YouSaveOnTaxes.com/sr-donate-order.html

By "Small Report", I mean just that -- about 10 pages. But it's 10 of the most practical tax-slashing info you'll ever get your hands on.

Here's what you'll learn:
-- Why having a yard sale may be a terrible idea
-- 4 reasons to donate your stuff instead of having a yard sale
-- How to properly document your charitable contribution
-- How to find the right place to donate your "old stuff" (there are literally hundreds of them)
-- How to get a tax deduction for donating used items (like clothes and many everyday household things)
-- How to make sure you do the paperwork right (to keep Uncle Sam off your back and out of your life)
-- How to fill out the tax forms correctly -- the first time!

Plus you get 4 Bonuses:
How To Determine The Value Of Donated Property
Everything You Need To Know About Charitable Contributions
How To Report Non-Cash Charitable Contributions
Free Review Of Your 2009 Income Tax Return

To get your copy, click here:
http://www.YouSaveOnTaxes.com/sr-donate-order.html

The cost of the report is $10.

Need Help Figuring Out How To Pay The Tax Man?

April 15 is just a few days away. Do you owe Uncle Sam and don't know how you're going to come up with the money? Are you wondering what to do if you don't have the money to pay the balance due?

Here's some helpful tips from the IRS:

People who owe taxes but can’t pay the full amount owed by the April deadline should still file their return on time and pay as much as they can to avoid penalties and interest. If you can’t pay the full amount, you should contact the IRS to ask about alternative payment options. Here are some of the alternative payment options you may want to consider:

1. Additional Time to Pay.
Based on your circumstances, you may be granted a short additional time to pay your tax in full. A brief additional amount of time to pay can be requested through the Online Payment Agreement application at IRS.gov or by calling 800-829-1040. Taxpayers who request and are granted an additional 30 to 120 days to pay the tax in full generally will pay less in penalties and interest than if the debt were repaid through an installment agreement over a greater period of time.

2. Installment Agreement.
You can apply for an IRS installment agreement using the Web-based Online Payment Agreement application on IRS.gov. This Web-based application allows taxpayers who owe $25,000 or less in combined tax, penalties and interestto self-qualify, apply for, and receive immediate notification of approval. You can also request an installment agreement before your current tax liabilities are actually assessed by using OPA. The OPA option provides you with a simple and convenient way to establish an installment agreement and eliminates the need for personal interaction with IRS and reduces paper processing. You may also complete and submit a Form 9465, make your request in writing, or call 1-800-829-1040 to make your request. For balances over $25,000, you are required to complete a financial statement to determine the monthly payment amount for an installment plan. For more complete information see Tax Topic 202, Tax Payment Options on http://www.irs.gov./

3. Pay by Credit Card or Debit Card.
You can charge your taxes on your American Express, MasterCard, Visa or Discover credit cards. Additionally, you can pay by using your debit card. However, the debit card must be a Visa Consumer Debit Card, or a NYCE, Pulse or Star Debit Card. To pay by credit card or debit card, contact one of the service providers at its telephone number or Web site listed below and follow the instructions. There is no IRS fee for credit or debit card payments, but the processing companies charge a convenience fee or flat fee. If you are paying by credit card, the service providers charge a convenience fee based on the amount you are paying. If you are paying by debit card, the service providers charge a flat fee of $3.89 to $3.95. Do not add the convenience fee or flat fee to your tax payment.

The processing companies are:

Official Payments Corporation
To pay by debit or credit card: 888-UPAY-TAX (888-872-9829)
www.officialpayments.com/fed

Link2Gov Corporation
To pay by debit or credit card: 888-PAY-1040 (888-729-1040)
www.pay1040.com

RBS WorldPay, Inc.
To pay by debit or credit card: 888-9PAY-TAX (888-972-9829)
www.payUSAtax.com

For more information about filing and paying your taxes, visit www.IRS.gov and choose 1040 Central or refer to the Form 1040 Instructions or IRS Publication 17, Your Federal Income Tax. You can download forms and publications at www.IRS.gov or request a free copy by calling 800-TAX-FORM (800-829-3676).

Everything You Need To Know About Filing An Extension

Top Five Reasons to File an Extension For Your Personal Tax Return

Looking for a reason for put off until October 15 what you can do on April 15? Do you need some encouragement to join America's largest group of procrastinators? Then read on to discover five good reasons to join millions of other loyal American taxpayers who legally file their tax return late, without any late filing penalties and without being harassed by the IRS.


Reason #1: It's free.
Of course, if you file Form 4868 by snail-mail, it will cost you a whopping 44 cents. If you e-file it, then it is free. You can use your own tax software program to e-file the extension, or check out the IRS FreeFile website here for e-filing options:
http://www.irs.gov/efile/article/0,,id=118986,00.html

Reason #2: It's automatic.
You don't have to have a good reason, a bad reason, or any reason at all. Just send in the form and that's all there is to it. No need to come up with some lame excuse like "My dog ate my W-2."

Reason #3: It's relaxing.
Remember how you've spent April 14 or April 15 in previous years? It's way past your bedtime, coffee pot still brewing, an opened bottle of Tylenol on top of your calculator, papers strewn all over your desk, receipts everywhere. Is this anyway to prepare your tax return? Of course not. Do you really need another source of stress in your life? File the extension and now imagine what you'll be doing on April 15 while thousands of frantic taxpayers are stuck in traffic at their local post office; instead, you'll be working in your garden or reading a good book, because you've got all summer to finish your return.

Reason #4: It's easy.
As tax forms go, this is one of the easiest tax forms to complete. You put in your name, address and social security number - and you are already halfway done! Only four more lines to go: an estimate of your 2009 tax liability, the total amount of 2009 tax payments (from W-2 or 1099 withholdings and/or quarterly estimated tax payments), any balance due, and the amount you are paying with the form. A tax form can't be any easier than that.

Reason #5: It's fast.
You can e-file Form 4868. Talk about fast! You push the Enter button on your keyboard and the data gets transmitted to the IRS in a nanosecond. You'll then receive an electronic confirmation from the IRS after the form has been processed and accepted. If you use a tax professional to prepare your return, he/she should be able to e-file the form for you, and since no signature is required on this form, getting it done quickly can take as little as a 5-minute phone call.

Filing an extension sounds too good to be true.  What's the downside?  Read on!

Are There Any Pitfalls To Avoid When Filing An Extension?

April 15 is fast approaching but there's no way you can get your personal income tax return done by then. What's a procrastinator to do? File an extension, of course.


But perhaps you are wondering whether this is the best option for you. Read on to find out.

You can automatically extend the April 15 due date to October 15 by filing Form 4868, "Application for Automatic Extension of Time To File U.S. Individual Income Tax Return." So now you have six more months to file your personal income tax return.

The nice thing about Form 4868 is that simply filing this form grants an automatic, no-questions-asked 6-month extension. You don't have to have a reason. Just sending this form to the IRS on or before April 15 gets you the extra six months.

But here's another important point about Form 4868: This 6-month extension is NOT an extension to pay any tax you may owe on the tax return. Form 4868 only grants an extension of time to file the tax return.

So, if you usually get a refund on your personal tax return, you are OK. But, if you think you might have a balance due, or if you are not sure, then you should go ahead and prepare the return to the best of your ability, do the calculations, and see where you stand.

If you are getting a refund, great. If you're not in a hurry to get the refund, then file the extension form and wait until October 15 to send in the return. But if you have a balance due on the return, then you should send in your balance due with Form 4868. That way you avoid any penalty and interest for late payment of tax.

When October 15 rolls around, you send in the return, showing the Form 4868 payment as a credit. The end result is this: you paid your tax on time (April 15), and you filed your tax return legally late (October 15) because you filed the extension form on time.

Obviously, the key here is whether or not you have a balance due on your return. If you have a balance due, but don't send in the payment with Form 4868, then you will have penalty and interest charges for paying the tax after April 15.

Bottom line: Do not overlook the fact that Form 4868 does not grant you an extension of time to pay the tax. It only gives you an extension of time to file the return.

Top 9 Errors To Avoid At Tax Time

Courtesy of the IRS, here's a great list of the most common mistakes folks make on their personal income tax returns.  With April 15 less than 3 weeks away, please take note!

1. Incorrect or missing Social Security Numbers. When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.

2. Incorrect or misspelling of dependent’s last name. When entering a dependent’s last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.

3. Filing status errors. Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.

4. Math errors. When preparing paper returns, review all math for accuracy. Remember, when you file electronically, the software takes care of the math for you!

5. Computation errors. Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.

6. Incorrect bank account numbers for Direct Deposit. If you are due a refund and requested direct deposit, be sure to review the routing and account numbers for your financial institution.

7. Forgetting to sign and date the return. An unsigned tax return is like an unsigned check – it is invalid.

8. Incorrect Adjusted Gross Income information. Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from their originally filed 2008 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS.

9. Claiming the Making Work Pay Tax Credit. Taxpayers with earned income should claim the Making Work Pay Tax Credit by attaching a Schedule M, Making Work Pay and Government Retiree Credits to their 2009 Form 1040 or 1040 A. Taxpayers who file Form 1040-EZ will use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Tax Credit. The credit is worth up to $400 for individuals and $800 for married couples filing jointly. Many people who worked during 2009 are slowing down the processing of their tax return by not properly claiming this credit.

How To End All Your Record Keeping Frustrations

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The Ultimate Small Business Tax Reduction Guide
www.SmallBusinessTaxReductionGuide.com


Go for it!
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And Many Happy Returns,
Wayne Davies
www.YouSaveOnTaxes.com

Where to Find a Boatload of Free Tax Advice for the Self-Employed

Believe it or not, there's a boatload of tax resources available for self-employed folks at the IRS website.

If you are reluctant to spend a dime on tax advice, this is a good place to start looking for help:

Self-Employed Individuals Tax Center
http://www.irs.gov/businesses/small/article/0,,id=115045,00.html

Small Business & Self-Employed Tax Center
http://www.irs.gov/businesses/small/index.html

Small Business Forms & Publications
http://www.irs.gov/businesses/small/article/0,,id=99200,00.html

Small Business Tax Workshops, Phone Forums and Webinars
http://www.irs.gov/businesses/small/article/0,,id=99202,00.html

e-file for Business and Self-Employed Taxpayers
http://www.irs.gov/efile/article/0,,id=118520,00.html

Small Business Products (these are free too!)
http://www.irs.gov/businesses/small/article/0,,id=101169,00.html

S Corporations
http://www.irs.gov/businesses/small/article/0,,id=98263,00.html

And if you are willing to spend a few dollars to get help with your tax return or to get answers to your tax questions, check out my new Tax Return Coaching Service:
http://www.YouSaveOnTaxes.com/tax-return-coaching.html


Either way.....Many Happy Returns!

How To Deduct Anything

Looking for an easy way to know exactly what you can and cannot deduct on your income tax return? Knowing what is deductible and what isn't deductible has mystified self-employed people for decades. This post should help you see the big picture.

What's deductible? Believe it or not, anything is deductible. Anything? Yes, anything. Let me explain.

Anything is deductible, provided that it is specifically mentioned in the tax code as deductible. It's as if Uncle Sam is saying, with a big smile on his face, "This particular item is deductible, no doubt about it."

Anything is deductible, provided that it is not specifically mentioned in the tax code as non-deductible. There are deductions that are specifically disallowed. Again, imagine Uncle Sam (this time with a frown) telling you, "Sorry, but this particular item is not deductible, no doubt about it."

But what most taxpayers do not realize (and the IRS is in no hurry to tell you this) is that most deductions are not specifically mentioned anywhere in the tax code. By that I mean this: most allowable deductions are not said to be deductible or non-deductible.

Getting confused? Bear with me....

For example, where does it say in the tax code that paper clips used in your office are deductible? Guess what - it doesn't. How about staples? Same thing -- there isn't really a specific reference to that either. But neither does it say that paper clips (or staples) are non-deductible.

Then how do we know what is deductible and what isn't? Because the tax code does provide some general rules about what is deductible, and these general rules can be boiled down to this famous statement: Anything is deductible, provided that it is an ordinary and necessary business expense. Any expense that meets that two-part requirement is deductible. Let's unpack that concept.

Here's how the IRS defines these two requirements: By "ordinary", the tax code simply means an expense that is "common and accepted" in your type of business. Is it common for an office to use paper clips in the normal course of business? Obviously. How about staples (not to mention the stapler)? Of course.

Not only are basic office supplies commonly used in virtually every business, but it is an accepted practice for these items to be a normal part of a typical business, right? I think you get the idea. And you should also now see why the tax code doesn't specifically mention paper clips or staples in it's list of legitimate business deductions.

By "necessary", the tax code means an expense that is appropriate and helpful for your business. Now apply that concept to office supplies. Are paper clips and staples appropriate and helpful? Naturally.

One more key concept: An expense does not have to be indispensable to be considered necessary.

Do you have specific questions about what's deductible and non-deductible?  Looking for a way to get those questions answered quickly while you are preparing your 2009 income tax returns? 

Check out my new Tax Return Coaching Service:
www.YouSaveOnTaxes.com/tax-return-coaching.html

Many Happy Returns!

3 Important Tax Deadlines Are Upon Us

DEADLINE #1 - Feb. 28
February 28 is the last day you can contribute to Haiti earthquate relief efforts and deduct the contribution on your 2009 return. (Of course, you can still donate after February 28 and deduct the contribution on your 2010 return.) For details, see 1-29-10 blog post below, "How To Deduct Haiti Donations on 2009 Return."

DEADLINE #2 - March 1
March 1 is the deadline for filing Form 1096 with Copy A of Form 1099-MISC. You should be doing this if you sent 1099's to independent contractors to whom you paid at least $600 in 2009.  For details, see 2-3-10 blog post below, "What Do You Do If You Forgot To Send Out 1099's By Feb 1?"

DEADLINE #3 - March 15
This is the due date for 2009 corporate income tax returns, both "S" Corporations (Form 1120S) and "regular" Corporations (Form 1120).  Should you not be able to file by March 15, be sure to file an extension via Form 7004 and get an additional 6 months to file.

Got questions about your 2009 corporate income tax return?  You can get fast, accurate, time-saving answers to those questions by taking advantage of my new "Tax Return Coaching Service", which begins on March 1.  For details visit:
www.YouSaveOnTaxes.com/tax-return-coaching.html

How To Get Fast Answers To All Your Tax Questions

Announcing:

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This new service begins on March 1 and continues until April 15, so check it out today!

Many Happy Returns,
Wayne

Critical Tax Forms for the Self-Employed

All Sole Proprietors must prepare Schedule C as part of their federal personal income tax return. But it's likely that you can't stop there. As the old saying goes - "That's not all!" There's a pretty good chance that by filing a Schedule C, you must also file several other forms that are related to Schedule C. Here's a list of those forms and their relationship to Schedule C.



Schedule SE, Self-Employment Tax.


Go to Schedule C, Line 31. If you have a profit on this line of $400 or more (i.e. your income is greater than your expenses), you will also have to file Schedule SE in order to calculate your federal self-employment (SE) tax, aka the "dreaded" self-employment tax. SE tax is the sole proprietor's version of the employee's social security and medicare tax, which are automatically withheld from an employee's paycheck by the employer. You take the amount from Line 31 of Schedule C and transfer it to Schedule SE, Line 2.




Form 4562, Depreciation and Amortization.


If you purchased any equipment or other so-called "depreciable fixed assets" for use in your business, you will probably have to complete Form 4562 to report those purchases. "Depreciable fixed assets" include both personal property like computers and peripherals, printers, office furniture, office equipment such as fax machines and telephones, other business machinery, as well as real estate such as business buildings. The rules for filling out Form 4562 are quite complex and you'll definitely want to get some help here. (i.e. Don't try this at home!) The end result is that your total expense for purchasing business equipment is transferred from Form 4562 to Schedule C, Line 13, Depreciation and Section 179 expense.




Form 8829, Expenses for Business Use of Your Home.


The so-called "Home Office Expense" is one of the best tax breaks for the Sole Proprietor. But it doesn't come without jumping though some very specific recordkeeping hoops. To get this deduction, you must complete Form 8829. Don't let the complexity of this form stop you, though. It could be well worth the time and effort. After doing Form 8829, transfer the amount from Line 35 (Allowable expenses for business use of your home) to Schedule C, Line 30.

Looking for more self-employed tax tips? For a free copy of the 25-page Special Report "How to Instantly Double Your Deductions" visit http://www.yousaveontaxes.com/.

Did You Get A 1099-MISC? Now What?

Did you receive a Form 1099-MISC and aren't sure what it means and/or what to do with it? This post will answer that question.

Form 1099-MISC is one of the most common tax forms in the world of the self-employed. And it's most common use is to report income made by sole proprietors who have performed services for other businesses. By "sole proprietor" I'm referring to self-employed people such as independent contractors, consultants or free-lancers who are in business for themselves but do not run their business as a corporation, partnership or multi-owner limited liability company (LLC).

If you fit that description of a self-employed person and performed services for another business, and that business paid you at least $600 during the year, the other business is required to send you a Form 1099-MISC by January 31 of the following year. The January 31, 2010 due date happens to fall on a Sunday, so the deadline for issuing 2009 1099's is automatically extended to the next business day of Monday, February 1, 2010. So you may have already received a Form 1099-MISC for 2009. If not, you could still get one soon.

If and when you get the 1099, take a look at Box 7, "Nonemployee compensation." This is the place on the form that your annual income from this other business will be reported. And this is the income that you must be sure to include on your Schedule C, because not only did you receive that 1099, but so did the IRS. In effect, then, the 1099-MISC serves the same function for the self-employed as a W-2 does for the employee - it tells you and the IRS how much income you made from one particular source.

Now that you know the basic purpose of the 1099-MISC, you probably have some questions, such as:

1. What do I do if I don't receive a 1099 from a business, when I know I performed services and received over $600 for the year? Whether or not you received a 1099, you are required to report all income.

2. What do I do if I don't receive a 1099 because I made less than $600? Sorry to sound like a broken record, but you are required to report any income you made, whether or not you received a 1099. Even if you made less than $600, just because you didn't get a 1099 does not excuse you from reporting the income.

Not getting a 1099 does not mean you don't have to report the income. If you made it, you're supposed to report it on your Schedule C. That's the law. And if you don't report all your income, you are part of the underground economy. (Shame on you!)

3. What do I do if the amount of income reported on the 1099 is incorrect? You should contact the business who issued the 1099 to resolve the discrepancy. If they made a mistake, they must issue a corrected 1099 to both you and the IRS. To be safe, you should wait until you receive the corrected 1099 before filing your tax return. You want to be sure that the 1099 amount agrees with your Schedule C income amount. If there is a difference between the total income on all your 1099's and the amount of income on your Schedule C, the IRS will eventually catch it and send you a letter demanding an explanation. Not good.

4. What do I do if I receive a 1099 after I filed my return? If you included the 1099 income on your return, do nothing, because you did report the income and there should be no problem. But if you didn't report the 1099 income on your return, you must amend your return to include the previously unreported income. This will result in additional tax you must pay, plus the possibility of late payment penalties and interest, depending on how much additional tax you owe and whether you pay it late.

What Do You Do if You Forgot to Send Out 1099's by Feb 1?

Are you a small business owner or self-employed person who hires independent contractors? If so, you may be required by the IRS to send out a Form 1099-MISC to those people. This post will help you determine your obligation to issue those 1099's.


The basic rule works like this: Form 1099-MISC is used to report total annual payments made to independent contractors who made at least $600 during the previous calendar year. This 1099 must be given or mailed to the contractor by January 31 of the following year.

Note: Since January 31, 2010 was a Sunday, the deadline was extended to the next business day (Monday, Feb. 1, 2010).

The key here is whether or not the person who worked for you is self-employed. Obviously, this excludes employees. If you have employees, you give them a Form W-2 by January 31 (or Feb. 1) to report their compensation (wages, salaries, bonuses, and withholdings). And this also means you don't have to send out a 1099-MISC to corporations who provided services to your business.

The purpose of the 1099-MISC is similar to that of the W-2, but the goal here is to report income made by non-employees, not employees. And this is why the annual total income of self-employed contractors is reported in Box 7 of the 1099, "Nonemployee compensation."

In other words, the IRS is expecting you to provide a way to help them track the income of the self-employed. Does all income earned by sole proprietors get reported on 1099's? Of course not. Who knows how much is unreported. And self-employed people know that if they don't get a 1099, it's difficult and almost impossible for the IRS to figure out how much income a particular self-employed person made. And so many self-employed people take advantage of this situation and only report income if they get a 1099.

And so there are many self-employed people who make plenty of money but receive no 1099's, and report no income, even though the law says they are supposed to report the income whether or not they receive a 1099.

But back to you, the business that paid the money to the contractor. Do you really want to be part of the underground economy? If you take a deduction for payments to independent contractors but don't issue the corresponding 1099's, and you get audited, you are asking for trouble. Don't go there. Do the right thing and issue the 1099's.

What if the February 1 deadline has already passed? Go ahead and issue the 1099's anyway. Give the contractor a call right away and tell him you are sending him a 1099 as soon as possible. Why not do the right thing?

For details on how to comply with the 1099 reporting rules, download the Form 1099 instructions from the IRS website or consult with your tax professional. You'll want to send Form 1099-MISC Copy B to the self-employed person right away and Form 1099-MISC Copy A, along with Form 1096, to the IRS by March 1, 2010.

Here are the IRS links for 1099-MISC instructions:

http://www.irs.gov/pub/irs-pdf/i1099msc.pdf

http://www.irs.gov/instructions/i1099msc/index.html

How to Deduct Haiti Donations on 2009 Return

This just in from the IRS:

If you are donating to charities providing earthquake relief in Haiti, you may be able to claim those donations on your 2009 tax return. Here are 10 important facts the Internal Revenue Service wants you to know about this special provision.


1. A new law allows you to claim donations for Haitian relief on your 2009 tax return, which you will be filing this year.

2. The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti.

3. To be eligible for a deduction on the 2009 tax return, donations must be made after Jan. 11, 2010 and before March 1, 2010.

4. In order to be deductible, contributions must be made to qualified charities and can not be designated for the benefit of specific individuals or families.

5. The new law applies only to cash contributions.

6. Cash contributions made by text message, check, credit card or debit card may be claimed on your federal tax return.

7. You must itemize your deductions in order to claim these donations on your tax return.

8. You have the option of deducting these contributions on either your 2009 or 2010 tax return, but not both.

9. Contributions made to foreign organizations generally are not deductible. You can find out more about organizations helping Haitian earthquake victims from agencies such as the U.S. Agency for International Development ( www.usaid.gov).

10. Federal law requires that you keep a record of any deductible donations you make. For donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution, and the amount given. For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check or a receipt from the charity. Receipts should show the name of the charity, the date and amount of the contribution.

For more information see IRS Publication 526, Charitable Contributions and Publication 3833 , Disaster Relief: Providing Assistance through Charitable Organizations. To determine if an organization is a qualified charity visit IRS.gov, keyword "Search for Charities". Note that some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

Are You Ready for the Feb. 1 Tax Deadline?

Self-employed folks tend to focus on the April 15 tax deadline. But there's another deadline that is just a few days away.

Are you ready for the Feb. 1 deadline for filing 4th quarter payroll tax returns, year-end payroll forms like W-2's, and perhaps the most common self-employed tax form of all, the beloved 1099-MISC?

(NOTE: normally this deadline is January 31, but whenever a federal tax deadline falls on a Saturday, Sunday or legal holiday, the deadline is moved to the next business day.)

Let's spend some time today answering the question:

Who Should Receive A Form 1099-MISC?

Addressing this question will enable you to know if you are required to send out 1099's.  And this post should give you a good idea as to whether you can expect to receive any 1099's.

Virtually every tax rule has a potentially long list of exceptions, limitations and otherwise mind-boggling list of finer points. Such is the case with the Form 1099-MISC reporting requirements. Ask a simple question: To whom am I required to send a Form 1099-MISC? Get a simple answer: Read the 8-page document entitled "Instructions for Form 1099-MISC" and watch your head spin.

What's a small business owner to do? The purpose of this post is to give you an introduction to the wild and wacky world of Form 1099-MISC do's and don'ts. Even then, this article will focus only on who gets a 1099-MISC for "non-employee compensation" that gets reported in Box 7.

Let's start with the basics. Fortunately, there are two basic rules that are somewhat easy to understand:

1. Only report payments to a given individual when the annual total is $600 or greater.

2. Only report payments made for services rendered to you in the course of your trade or business. Personal payments are not to be reported. Example: you can forget about payments to your lawn care man or other independent contractor who works on your home (electrician, plumber, appliance repairman, handyman, etc). But if you hire an accountant or attorney to do work for your business, and annual total is $600 or more, then you've got to issue a 1099-MISC to that service provider.

Now comes the fun part. There are many exceptions to the above general rules. For example, there's a long list of payments for which a 1099-MISC is not required, such as:

1. Payments to a corporation. Sole Proprietors, independent contractors, and self-employed people are the folks the IRS is trying to keep an eye on here.

2. Payments for merchandise. The main concern is services rendered not products sold.

3. Payments of rent to real estate agents.

4. Payments of wages to employees. Those go on Form W-2.

And then there are exceptions to the exceptions. For example, generally speaking, payments to corporations are excluded. But there are certain payments to corporations that should be reported on 1099-MISC, such as:

1. Medical and health care payments (these go in Box 6, not Box 7)

2. Fish purchases for cash. (See the next paragraph for more amazing facts about this one).

3. Attorney's fees. (Doesn't that one make you smile?)

And then there are aspects to 1099-MISC that are just plain fishy! Note that even though the main concern of Form 1099-MISC is payments for services rather than products, if you are in the fish business and purchase fish for resale, you are required to report annual cash payments of $600 or more to anyone who is in the business of catching fish. Cash payments include the following: coin, currency, cashier's check, bank draft, traveler's check, or money order. A cash payment does not include a check written against your personal or business account.