Should you lease or buy business equipment?

It’s not easy to decide whether it’s wiser to buy or lease a piece of business equipment. For most business owners, the first impulse is to buy. But there may be times when leasing is preferable.

* Capital conservation. Purchases normally require a 10% to 20% down payment, whereas equipment leases require a smaller down payment. Additionally, “soft costs” such as shipping, installation, and warranties can be built into the lease.

* Obsolescence. If the equipment becomes obsolete before the end of its useful life, leasing the equipment may allow for a “turn back” or upgrade at the end of the lease, thereby keeping the technology current and minimizing repair and replacement costs.

* Urgency. For expensive equipment that is required immediately, leasing might be the best way to obtain it quickly. If you purchase, you might be tied up with your lender for some time, providing financial statements necessary for loan approval.

* Deductions. If you find that you’re unable to expense the equipment, a lease might allow for a shorter deduction period compared to depreciation.

Sold on leasing? Don’t be. Buying has its advantages also.

* Immediate deduction. You may be able to immediately deduct up to $500,000 of the cost of qualified equipment in the year of purchase, using the first-year expensing rules. That’s significant and can reduce your taxes substantially.

* Appreciation. Some equipment actually increases in value over time. Buying such equipment can create future wealth.

* Useful life. The equipment may be valuable and productive long after the lease has expired. Purchasing will allow you to continue to use that equipment and avoid the need to return or upgrade it at the end of the lease term.

For help in deciding whether to lease or buy, give us a call.

Tax tips when you change jobs

Planning to change employers this year? As you look forward to starting your new job, you’re probably not thinking about taxes. But actions you take now can have an impact next April – and beyond.

Here are three tax-smart tips:

* Roll your retirement plan. You may be tempted to cash out the balance in your employer-sponsored plan (such as a 401k). But remember that distributions from these plans are generally taxable.

Instead, ask your plan administrator to make a direct rollover to your IRA or another qualified plan. If you’re under age 59½, this decision also avoids the additional 10% penalty on early distributions. Bonus: Your retirement money will continue to grow tax-deferred.

* Adjust your withholding. Assess your overall tax situation before you complete Form W-4 for your new employer. Did you receive severance pay, unemployment compensation, or other taxable income? You might need to increase your withholding to avoid an unexpected tax bill when you file your return.

* Keep track of your job-related expenses. Unreimbursed employment agency fees, résumé preparation costs, and certain travel expenses can be claimed as itemized deductions.

Are you moving at least 50 miles to your new job? You may be able to reduce your income even if you don’t itemize. Eligible moving expenses are an above-the-line deduction.

More tax issues to consider when you change jobs include stock options, employment-related educational expenses, and the sale of your home. Give us a call. We’ll be happy to help you implement tax-saving strategies.

Consider taxes if you rent out your vacation home

Planning to rent out your vacation getaway? When it comes to taking advantage of the tax benefits, timing is an important factor.  Here are two points to remember.

* The fourteen-day-or-ten-percent test. The IRS applies this test to determine if you use your vacation home as a personal residence. If you stay in the home more than 14 days or 10% of the total days it’s rented in a calendar year (whichever is greater), the general rule is you’re using it as your home.

Why does it matter? Because treating a vacation home as your personal residence affects your rental deductions. You’d include all the rent you receive as income on your tax return. But related expenses are generally limited to the amount of that income, meaning you can’t offset other income with a loss. Note that time spent in your vacation home by family members and certain others can count as personal use.

* The less-than-fifteen exception. Rent out your vacation home for less than 15 days during the taxable year, and the income is yours, tax-free. You don’t even have to report it on your return. Just be aware that any expenses related to the rental are nondeductible. If you itemize, you can still deduct qualified mortgage interest and real estate taxes on your vacation home.

Other tax rules, such as passive activity and capital gains reporting, can also impact the decision to rent out your vacation home. Give us a call before you put up that “For Rent” sign. We’ll be happy to review your options under the tax rules.

Saying “I do” can be expensive

June is the month for weddings. According to a survey of 19,000 brides who married in 2010, the average cost of the wedding was $21,592. This didn’t include the engagement ring (an extra $5,392 on average) or the honeymoon (an additional $4,446). The average spent on each wedding guest: $194.

Add tax savings to your summer plans

Summertime fun can be made even more enjoyable by adding tax savings. Here are some tax-saving ideas to consider.

* If you have summer travel plans and the primary purpose of your trip is business, you can deduct all the travel costs to and from your business destination and all other business-related costs even if you add on a few extra days for pleasure. You can’t deduct costs related to the pleasure portion. Including a spouse or friend on your trip is permissible, but you can’t deduct the additional costs for that person.

* If you itemize your deductions, you can deduct the mortgage interest and property taxes paid for your vacation home. A boat or RV can qualify as a vacation home if it has sleeping quarters, cooking facilities, and a bathroom. If a retreat also serves as rental property, you can control your tax deductions by changing the number of days you use it for vacation.

* If you and your spouse work, the cost of sending your children to a summer day camp may qualify for the child care credit.

* If you own a business, consider hiring your child for the summer. Your child can earn up to $5,800 tax-free this year, and your business is entitled to a deduction for the wages paid. You must pay your child a reasonable wage for the work performed.

Small companies get additional time for reporting benefits

The IRS has just announced that small companies will get an additional year before being required to report the value of employee health benefits on their employees’ W-2 forms.

Health reform legislation passed in 2010 included a requirement that employers report on W-2 forms the value of health coverage they provide to employees. The IRS had already provided relief for all businesses by making reporting optional for 2011 W-2 forms.

Now, small companies that file fewer than 250 W-2s need not report the value of benefits until filing 2012 W-2 forms early in 2013.

Reminder: Second estimated tax payment is due June 15

June 15, 2011, is the due date for making your second installment of 2011 individual estimated tax. Your check to the United States Treasury should be accompanied by Form 1040-ES. June 15 is also the due date for calendar-year corporations to make their second quarter 2011 estimated tax payment.

Be Careful when Claiming part of your home as Business use!

We all know that if you use part of your home for your business that you can use that as a tax deduction including mortgage interest, depreciation, utilities, insurance, and repairs. The amounts are figured on the amount of your home that is used for business purposes. There are some rules that you need to follow however.

Requirements:

• The home must be used in connection with your business or as an employee for the convenience of an employer. ( investment activity does not qualify)
• The home office must be used for your business regularly and exclusively and have no other fixed location where you conduct substantial administrative and management activities.

The part being claimed for business must be used:

• Exclusively and regularly as your principal place of business
• A place where you exclusively and regularly meet with clients, patients, or customers in the normal course of your business.
• If you have a separate structure that is not attached to your home must be in connection with your trade or business.
• On a regular basis for the storage if inventory or samples.

Here is how the IRS defines these words:

Regularly means on a consistent basis. A room in your home that you use only a few times a year does not qualify.

Exclusively means the specific area is solely used for business. A room that is used for business and personal use does not qualify.

 Does claiming a home office deduction increase my chances of an audit?

Yes and no, if you claim 70% of your home for business use you can probably expect a letter from the IRS, but If you claim only 10-20% of your home like most taxpayers you are less likely to be looked at.

You must have an exclusive area used only for business to fall under the “exclusivity” requirement. The exclusive rule does not apply to a day care facility in your home or the storage of inventory or samples. If your trade or business is selling products, you might be able to write off expenses involved with storing your products in your home.

Follow the rules! And audit shouldn’t lead to more taxes as long as you keep records of expenses and file a return that is accurately complete. If you sell your house before and audit is complete make sure you take pictures of the set up for your office. And if your employer requires you to have a home office it is a good idea to get something in writing explaining the requirements.

Remember to consult with your tax adviser about how your business use of a home effects your tax situation now and in the future. Deductions for a home office may affect the tax results when you eventually sell your home.

Federal –Tax-Free Retirement fund

Have you considered investing in a Roth IRA? Here are a few reasons why you may have dismissed the idea for yourself. Everyone should be looking for ways to save for retirement that will also give you a tax advantage. With a Roth IRA you can make withdrawals that are tax free after the age of 59 ½ providing that you have had at least one Roth IRA for longer than 5 years. Roth contributions are nondeductible but you can reap tax savings in the end.

If you are a successful and self-employed you may have not considered the idea because of a few reasons. Maybe you think your income is too high, or you believe you may be in a higher tax bracket now then at the time you retire, so you make maximum deductible contributions to more traditional retirement plan.

Here are some reasons why you may be wrong.

If your modified adjusted gross income (MAGI) exceeds certain levels then the ability to make contributions to a Roth IRA are phased out. Here are the limits for 2011:

Unmarried Individual MAGI: $105,000-$107,000

Married filing joint MAGI: $167,000-$169,000

This might seem like if you are self-employed with a robust income that you will be unlikely to be eligible for contributions but let’s take another look. Successful self-employed tax payers MAGI will be lower because they can have considerable deductions for:

• Curtain expenses such as deductions for rent, an office in the home, or a computer system.
• Contributions to a tax-deferred retirement plan (a SEP, a defined contribution Keogh plan or a solo 401k plan.
• Health insurance premiums
• The write-off of 50% of self-employment tax.

Your MAGI is figured after these deductions and others are subtracted. So while you might have a high gross income from your business your MAGI could still qualify for Roth IRA contributions.

Think a Deductible Plan is the Only way to go?

It is still a good idea to deduct contributions to a tax-deferred retirement plan for your self-employed business. But that doesn’t necessarily mean that they are preferable to equal amounts contributed to a Roth IRA. Look at these scenarios with your situation:

1. You will either invest the money in a taxable retirement savings account or make a bigger deductible retirement plan contribution with your tax savings.
2. You are advised to make deductible contributions to a tax-deferred retirement plan because you expect to be in a lower tax bracket when you retire.

You should look at the logistics of things. With the first you may not be disciplined to follow through, and the second can be problematic when you consider the federal budget deficit and politics. It tax rates go up and are higher during your retirement years you will wish you had made Roth contributions when you had the chance.

Summary:

Contribute to both! Even if both situations are true if you have money left over after making the maximum deductible contributions to a tax-deferred retirement plan you should still make Roth IRA contributions.

  

Haven’t filed an Income Tax Return? What to do…

Filling a past due return may not be as difficult as you think. Taxpayers should file all tax returns that are due, regardless of whether fill payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. It is important, however, to know that full payment of taxes upfront saves you money.

Here’s what to do when your return is late:

• gather past due return information and come and see us. You should bring any and all information related to income and deductions for the tax years for which a return is required to be filed.

Payment Options- Ways to make a Payment

There are several different ways to make a payment on your taxes. Payments can be made by credit card, electronic funds transfer, check, money order, cashier’s check, or cash.

Payment Options for those who can’t pay in full

Taxpayers unable to pay all taxes due on the bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be lessened. Based on the circumstances, a taxpayer could qualify for an extension of time to pay, an installment agreement, a temporary delay, or an offer in compromise.

Taxpayers who need more time to pay can set up either a short-term payment extension or a monthly payment plan.

• A short-term extension gives a taxpayer up to 120 days to pay. No fee is charged, but the late-payment penalty plus interest will apply.
• A monthly payment plan or installment agreement gives a taxpayer more time to pay. however, penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan. In terms of how to pay your tax bill, it is important to review all your options; the interest rate on a loan or credit card may be lower than the combination of penalties and interest imposed by the Internal Revenue Code. You should pay as much as possible before entering into an installation agreement.
• A user fee will also be charged if the installment agreement is approved. The fee, normally $ 105, is reduced to $52 if taxpayers agree to make their monthly payments electronically through electronic funds withdrawal. The fee is $43 for eligible low-and-moderate-income taxpayers.

What will happen if you don’t file your past due return or contact the IRS

It is important to understand the ramifications of not filling a past due return and the steps that the IRS will take. Taxpayers who continue to not file a required return and fail to respond to the IRS requests for a return may be considered for a variety of enforcement actions.

Please contact us for further information and support on your late returns.

Your TaxLady

401 Windchime Place

719-548-4924