Some deductions are available even if you don’t itemize

Posted on February 21, 2012 by maycpa

H. Riley Nelson, CPA

If you’ve given up itemizing deductions, you’re not alone. These days over half of all taxpayers find they’re better off using the standard deduction. But even if you take the standard deduction, you can also deduct some individual expenses on your 2011 tax return, including the following:

* IRA and HSA contributions

On your 2011 tax return you may qualify to deduct up to $5,000 in contributions to a traditional IRA. That increases to $6,000 if you’re age 50 or older. Income limitations may apply in some cases. You can’t deduct contributions to Roth IRAs.

Health Savings Accounts (HSAs) are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow tax-free, and you’re allowed to withdraw money in the account tax-free to pay for your unreimbursed medical expenses. The HSA contribution limit for 2011 is $3,050 for singles and $6,150 for couples. An additional $1,000 may be contributed by those 55 and older.

* Student loan interest and tuition fees

Deduct up to $2,500 interest on student loans for yourself, your spouse, and your dependents. For 2011, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.

* Self-employment deductions

If you’re self employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.

* Other deductions

Don’t overlook deductions for alimony you pay, certain moving expenses, and early savings withdrawal penalties. Teachers can deduct up to $250 for classroom supplies that they purchased with their own money in 2011.

Contact our office for more information on these and other deductions you may be entitled to take on your 2011 tax return.

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Missing some of your receipts? Don’t worry just yet…

Posted on February 15, 2012 by maycpa

Nathan Cummins, CPA

We all know that we should keep our receipts to document the deductions we claim on our tax return.  However, some taxpayers are more diligent than others and many could not produce a receipt to substantiate every expense we claim on our tax return.  Thankfully, there is some hope for those taxpayers who are less fastidious.  The Cohan rule, named for the 1930 court case Cohan V. Commissioner that established it, allows us to deduct good-faith estimates on our tax return provided that we have some factual basis on which to approximate the expense.

Recently, the tax court upheld the use of the Cohan rule in Ragassa v. Commissioner.  The taxpayer, Seifu Ragassa, claimed $3,175 in charitable contributions.  Generally, charitable contributions in excess of $250 must be substantiated by a receipt or cancelled check that shows the date, amount and recipient of the contribution.  Mr. Ragassa claimed that he put roughly $100 of cash in his church’s offering box each time he attended, in addition to donating clothes to families in need.  Although Mr. Ragassa had no documentation to substantiate the deduction, he provided the IRS with contact information for the churches he attended.  The tax court ruled that the IRS had gone too far in its blanket disallowance of his charitable contributions.  Because the taxpayer was credible, candid and forthright, the tax court relied on the Cohan rule to allow $300 in estimated charitable contributions.  In estimating the allowable expenses, the tax court acknowledges that they “bear heavily against the taxpayer whose inexactitude is of his or her own making.”

Although the Cohan rule allows taxpayers to estimate most types of expenses, this rule has its limits.  Some types of deductions have been specifically excluded from the Cohan Rule by congressional statute.  For example, expenses such as meals, travel, entertainment, mileage, and computer expenses must be contemporaneously documented in order to claim a deduction on your tax return.  Records must include not only the amount of the expense, but the business purpose for the expense.  For these types of expenses, even diligent taxpayers may not have adequate records to support the deduction because a receipt or cancelled check alone is insufficient to allow the deduction.  In order to claim the expense, the records must include (1) the amount of the expense, (2) the time and place of any travel or entertainment expense or the date and description of a business gift, (3) the business purpose of the expense, (4) the business relationship of the taxpayer to the person being entertained or receiving the gift.

For example, in Solomon v. Commissioner, a taxpayer was not permitted to deduct automobile mileage expenses due to inadequate documentation.  Jessica Solomon, the taxpayer, was employed as a salesperson for an office supply company.  She began each workday with a morning meeting at her primary office location, during which she was assigned a sales territory for the day.  She spent the day driving to different businesses within her sales territory, and she concluded the business day with another meeting at her employer’s office.  She kept a mileage log which documented her mileage at the beginning and end of each business day.  Although the tax court agreed that the taxpayer used her personal automobile for business, the court found that the mileage log was insufficient to document the deduction because it did not include information regarding where she was drove, the business purpose of the trip, and the business relationship she had with the persons she visited.  Due to inadequate documentation, the entire deduction was disallowed.

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New 1099-K forms added to the list

Posted on February 9, 2012 by maycpa

H. Riley Nelson, CPA

Many of you business owners might have received (or will be receiving soon), a new form this year.  Don’t panic when you see this new form, the 1099-K.  The 1099-K is a new IRS information return for reporting electronic financial transactions.  You should receive this form if you received payments from debit cards, credit cards, or third party payment networks in excess of $20,000 (or more than 200 transactions) per payment processor during 2011.

This new form comes courtesy of a provision of the Housing Assistance Tax Act of 2008. It’s important to note that the IRS isn’t actually imposing any new taxes with this reporting requirement.  According to the House Ways and Means Committee, some merchants fail to report accurately their gross income, (imagine that, right?) including income derived from payment card transactions.  Compliance usually increases significantly for amounts that a third party reports to the IRS.  The provision is expected to raise more than $9.5 billion over 10 years.  The IRS is simply trying to increase tax compliance by matching up tax filings with the sources of revenue.

The 1099-K form looks similar to other 1099 forms.  It contains contact information on your business and that of the payment processor.  In addition, boxes 5a-5l on the form will show the gross amount of merchant card payments the payee received during the year, broken out by month.  The gross amount for the year, located in box 1, is the amount to be reported on your tax return.  The amounts reported on the form will not be adjusted for any credits, discounts or refunds.

Now for the good news.  The good news is the IRS has deferred the requirement to report the amounts from the 1099-K for 2011 returns.  If you received a 1099-K this year, go ahead and send it in to us with your other tax information.  We still need to make sure that the amount is included in your gross receipts, but the amount will not be required to be separately reported until next year.

So what should you do to get ready for that 1099-K when it comes in the mail again next year?  Keep good records!  It’s important to have all of your fees and expenses associated with these payments in a format so that it is easy to reconcile back to the gross 1099-K amount.

If you need help on getting your records in a better format or have any other questions about the 1099-K, feel free to give us a call.

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IRS requires new information on 2011 tax returns

Posted on February 7, 2012 by maycpa

The IRS has made changes to this year’s tax return filing process that you need to be aware of. Beginning now, there are 2 new questions that will need to be answered, under penalty of perjury, when you file Form 1120, 1120-S, 1065 or 1040 with Schedule C, E or F tax return:

  • Did you make any payments in 2011 that would require you to file Form(s) 1099?
  • If yes, did you or will you file all required Forms 1099?

What exactly is Form 1099?
Generally, if you are engaged in a trade or business that operates for gain or profit, you are required to file a Form 1099 to report certain payments to the IRS and inform the recipient of the amounts reported. The most common type of 1099 filed by a business is Form 1099-MISC, whereas a business must report $600 or more paid during the tax year to an individual or partnership for services or rent. Examples of reportable amounts include professional fees paid to your attorney, accountant, janitor, computer consulting, and so on.

An exception to the 1099 reporting requirement applies if the recipient is a corporation other than an incorporated law firm. Form 1099s do not need to be filed on payments made to corporations; however, payment on services to attorneys must be reported regardless of entity type.

What does this new change really mean to me?
When you sign your tax return, it is under penalty of perjury, so it is important to accurately answer all questions that the IRS may ask you.   We expect nearly all of our business clients to meet this requirement for issuing 1099s because most of you have paid us accounting fees during 2011.   By not answering the questions or answering ‘yes’ to question 1 and ‘no’ to question 2, you may be setting yourself up for a possible audit.

What happens if I file late or not at all?
2011 Form 1099s should be sent to the recipient by January 31, 2012 and IRS copies with the Form 1096 Transmittal need to be sent by February 28, 2012. Not filing by the due date, failing to include all information required or including incorrect information can all result in money out of your pocket.

The amount of penalty the IRS will charge you is based on when you file the correct information return. Penalties are charged for the copy that should have gone to the recipient and for the IRS copy. This means you are charged twice the penalty amount stated below per late or unreported 1099.

  • $30 per information return if you correctly file within 30 days (by March 30 if the due date is February 28)
  • $60 per information return if you correctly file more than 30 days after the due date, but by August 1
  • $100 per information return if you file after August 1 or you do not file required information returns
  • $250 per information return for any failure to file due to intentional disregard of the filing or correct information requirements – that equates to a $500 penalty per unreported 1099!

If you have reasonable cause not to meet the IRS deadlines, an extension may be requested by contacting the IRS. Should you have any questions about filing 1099s or filing for an extension, please do not hesitate to contact your May & Company tax professional. We are glad to assist you in the process.

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Tax time is the right time for a financial review

Posted on January 31, 2012 by maycpa

Now is an ideal time to review your financial affairs. You have to gather information to prepare your tax return at this time. Why not take one more step and do something positive for your financial well-being?

The following suggestions will get you started on your financial review:

* Hold a discussion with your family. Spouses and children need to share and prioritize their financial aspirations.

* Write down your financial goals. How much money will you need to meet each goal? When will you need the money, and how will you get it?

* Do a net worth statement (a list of your assets and debts), and compare it to last year’s statement. Are you gaining or losing ground?

* With your goals (and the effects of inflation) in mind, review the performance of your investments.

* Take steps to protect what you already have. Goals may become instantly unobtainable if you lose your present assets or your income potential.

* Do you have adequate disability insurance coverage to replace take-home pay if you become incapacitated?

* Do you have the proper amount of life insurance if you or your spouse should die?

* Do you have replacement value property insurance on your home?

* Do you have adequate insurance for calamities such as automobile accidents or lawsuits?

* Make sure that you need all of the insurance that you have. Do not duplicate employer-provided coverage. Review your coverage annually; do not just automatically renew policies.

* Review your will and your estate plan. Did your situation change during 2011 (marriage, divorce, births, deaths, move to another state, for example)? This year, the top estate tax rate is 35% with a $5,120,000 exemption. Make appropriate changes to your will and estate plan.

* Review your credit use. Keep your credit card bills current. If you’re finding that hard to do, it’s probably time to cut up some of those credit cards and get your debt under control.

* Organize your records. If you had trouble assembling data for your financial review, you need a better system. Set one up.

For help with any aspect of your review, call us at 601.636.4762. We’re here to assist you in any way we can.

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May & Company January News

Posted on January 24, 2012 by maycpa

Great News!  Nick Reiber has passed the CPA Exam!  Nick is a Staff Accountant here at May & Company and recently completed his final section of the Exam.  Nick passed each section of the Exam on the first attempt!  Congrats to Nick on this outstanding accomplishment.

On January 14, 2012, May & Company was proud to have several of its employees participate in the 4th Annual Chill in the Hills race in historic downtown Vicksburg.   The race had a terrific turnout and the weather was fantastic (by fantastic, I mean very cold)!  May & Company had several employees to compete in this year’s race.  There were also several May & Company employees that volunteered at the water stops.  Thanks to Grace Christian Counseling Center for putting on a successful race this year.

Last but not least, we would like to remind everyone about May & Company’s extended hours during tax season.  Tax season is here and we look forward to seeing you!  Our tax season hours are as follows:

Monday through Thursday:  7am – 6pm
Friday:  7am – 5pm
Saturday:  8am – 12pm

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Last-minute 2011 deal reached on payroll tax cut

Posted on January 17, 2012 by maycpa

H. Riley Nelson, CPA

On December 23, 2011, Congress finally approved a two-month extension of the payroll tax cut for American workers. The agreement was reached after weeks of partisan bickering. Though both Democrats and Republicans wanted a one-year extension of the tax cut, they could not agree on how to pay for a year-long extension and settled on a paid-for two-month extension.

The new law extends the 4.2% social security tax on wages through February 29, 2012. Without this extension, the employee tax rate would have gone to 6.2% on the first $110,100 of wages earned in 2012.

The law also extends benefits for the long-term unemployed for two months and prevents a scheduled cut in fees paid to Medicare providers from taking effect January 1, 2012.

These extensions will be paid for by an increase in fees charged by government-backed mortgage companies (Fannie Mae and Freddie Mac) for new home loans.

Included in the agreement is a requirement that President Obama make a decision within 60 days on the construction of the 1,700 mile Keystone oil pipeline.

Finally, the law calls for a House-Senate conference committee to negotiate an extension of the payroll tax cut through the end of 2012, as well as a longer-term extension of unemployment benefits and the Medicare reimbursement to doctors.

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Savings Are Always in Season

Posted on January 4, 2012 by maycpa

JR Armstrong, CPA

Some of you may remember a new year’s resolution list posted last year by USA.gov.  I referenced it in blog article for January 2011 (check out our older blog posts for a ton of useful information!).  The list showed the most popular perennial New Year’s resolutions.  The list was updated again for this year and I bet you can guess a few of the items still on the list:  save money and manage debt.  In the spirit of many of your New Year’s resolutions, here are a few money topics to think about in the first quarter of 2012.

It is time to get that “tax folder” organized and fill in the blanks.  Many of you will receive a tax organizer in January from May & Company.  Providing us with complete and concise information also helps us get your return back to you faster so that you can plan to pay your liability accordingly.

Also, getting your return to us early can help us serve you better.  There is nothing like a well-planned organizer returned to us in January or early February.  There is also nothing like a shoebox of receipts received on April 14th!  Our clients with the later returns may be blindsided by their tax liability. We try to prevent this scenario every year with tax planning and by requesting for early information.  One of the most difficult parts of April is letting the planning-impaired know that they owe a substantial amount of money.  If you have a lot of information or are struggling to keep up with the back office of your business, we provide bookkeeping services and payroll services.  Yes, we do charge a fee for this service.  However, you will not have to hire additional employees or spend hours scratching your head and worrying about doing these tedious tasks correctly.  Those who take us up on this offer already know that the price they pay for bookkeeping is well worth the time and energy they save when tax time comes.  Your books will be organized and ready for tax preparation!  And the best benefit of our bookkeeping services is your ability to look at your finances and make good decisions throughout the year (tax or otherwise).  We are also better able to plan for your tax time and retirement when we have access to all of this information.  Many times, we can see those opportunities when we prepare your return in 2012, but it will already be too late to take advantage of a tax break at that point.

If you are struggling to get your information together in time for the filing deadline, you can always take advantage of the six-month filing extension.  We happily file extensions every year for clients.  One potentially confusing part of the extension process is that an extension of time to file is not an extension of time to PAY!  If you owe a substantial amount and choose to extend, the amount will only grow until you finally file and pay.

Although planning is completed for 2011, it is important to note that, like Christmas, planning happens every year and mostly in December.  If you have a lot of information or are having issues with organization we can help all year and project your tax liability for the coming season months in advance.  You can even pay ahead in installments when you have this knowledge.  When we make suggestions in January through April, much of them are about your organization and getting the information to us.  However, when we plan throughout the year and particularly in December, we can actually help you make informed financial decisions to lower the next year’s tax bill and improve business profitability.  If you are not a part of this process at May & Company, we strongly suggest you look into planning with us.  If you have a business you could be paying way too much in taxes!  Planning is also a paid service we provide.  But our yearly planning clients find that it more than pays for itself in your savings and ability to make smart financial decisions.  Quarterly and more frequent planning is also available for those who have extremely complex finances.

We are always available for questions in hopes that we can meet our resolution:  to serve you better each year.   Happy New Year from May & Company!

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Put Financial Gifts on your Holiday Shopping List

Posted on December 20, 2011 by maycpa

H. Riley Nelson, CPA

When planning gifts for children on your holiday list, you might want to think beyond the traditional retail offerings. Consider financial gifts that can bestow benefits for many years to come.

Some financial gift options you might consider:

* U.S. savings bonds. Savings bonds are used by many families to introduce children to the savings concept. I bonds are indexed for inflation and can provide relatively attractive rates of return.

* IRAs (regular or Roth). For 2011, you can contribute the lower of $5,000 or the earned income of the child. An early financial start can produce amazing benefits from compounded interest accumulated over several decades.

* Stocks or mutual funds. Equities are a good way to introduce a child to the investment world.

* Collectible stock certificates. Vibrant framed certificates are available for many companies. A Disney, Dream Works, or Coca-Cola stock certificate can provide a colorful reminder of the importance of investing for the future.

* Collectibles. Postage stamps or coin collection kits can provide years of enjoyment and form the basis for some life-long hobbies. An interesting gift idea is an official U.S. mint proof coin set for the year the child was born.

Please call us if you would like to review the tax issues related to any of these financial gift options, especially if you are considering a larger amount.

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Taxpayer Blueprint

Posted on December 15, 2011 by maycpa

Nathan Cummins, CPA

Cost Segregation is an asset depreciation technique that can generate tax savings and improve cash flow for taxpayers who purchase real estate.  Generally, a purchase of real property is separated into the cost of the land and the cost of the building.  The building is depreciated, for tax purposes, over a period of 39 years, and the value of the land is not depreciated at all.  Cost Segregation techniques allow you to divide the purchase of real estate into four categories: personal property, land improvements, buildings and land.  The amount of the purchase price attributable to personal property is depreciated over only 5 to 7 years, and land improvements are generally depreciated over 15 years.  Dividing the purchase in this way allows you to accelerate the depreciation of the purchase price, and realize the tax benefits sooner.

Using blueprints, building plans, and physical inspection, a cost segregation specialist will determine which parts of the property are structural components of the building and which parts are tangible personal property.  The IRS defines “structural component” as any property that relates to the operation or maintenance of a building, including the physical parts of the building itself, along with permanent coverings, components of central air or heating systems, plumbing and fixtures, electrical wiring and lighting fixtures, stairs, elevators and sprinkler systems.  Personal Property items are contained within or attached to the building, but are generally more temporary or could be removed more easily, such as cubicle partitions, carpet, display racks, handrails, and decorative lighting fixtures.  Items not attached to the building, such as curbs, drainage ditches and parking lots, classify as land improvements.

Utilizing accelerated depreciation deductions, taxpayers can save a considerable amount, and, in most cases, the savings far outweigh the disadvantages.  For example, if you purchase a property for $10 million, conventional depreciation techniques would allocate $2 million to the value of the land and $8 million to the building.  Your allowable depreciation expense in the first year would be only $196,580.  However, if you had performed a cost-segregation study that allocated $800,000 to five year personal property and $400,000 to land improvements, your first year depreciation deduction would be $347,100.  Assuming a 35% tax rate, you would save almost $53,000 in the first year alone.  For the first five years, you will experience increased cash flow of $263,200 due to the cost segregation study.

There are a few issues with cost segregation, however.  Cost segregation studies can be expensive and time-consuming to conduct, especially if the building is several years old.  There is also the potential for depreciation recapture upon disposal of the property.  Because depreciation on personal property is subject to depreciation recapture, the gain on the sale, up to the total depreciation recognized, will be taxed at your ordinary income tax rate, instead of the potentially lower rates charged for unrecaptured gains.

Cost segregation techniques can be performed on all kinds of real property, whether it is new construction, a new purchase, a building that was purchased years ago, even a building that has already been disposed of!  However, due to the cost associated with the study, we generally do not recommend this method for properties over 10 years old or below $750,000 of depreciable basis.  If you have a property that may benefit from cost segregation techniques, please give us a call.

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