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Job Search Expenses are Deductible

To qualify for a deduction, the expenses must be spent on a job search in your current occupation. Expenses incurred while looking for a job in a new occupation are not deductible.

You can deduct employment and outplacement agency fees as well as amounts spent for preparing and mailing copies of résumés to prospective employers as long as you are looking for a new job in your present occupation.

If you travel to look for a new job in your present occupation, you may be also able to deduct travel expenses to and from your destination; however, you can only deduct the travel expenses if the trip is primarily to look for a new job. Note that the amount of time spent on personal activity unrelated to your job search compared to the amount of time spent looking for work is important in determining whether the trip is primarily personal or  primarily to look for a new job.

If there has been a substantial break between the end of your last job and the time you begin looking for a new one, you cannot deduct job search expenses. You also cannot deduct job search expenses if you are looking for a job for the first time.

Finally, job search expenses are claimed on your tax returns as miscellaneous expenses. Your deduction will be limited to the amount that the total miscellaneous expenses exceeds 2% of your adjusted gross income.

6 Facts about Exemptions and Dependents

 

I recently talked to a taxpayer who received a notice from the IRS requesting him to file an ammended 2010 tax  return because he had claimed an exemption for his son on his return and the son, who also filed a return, claimed an exemption for himself.

From the IRS’s viewpoint, there is no double dipping in exemptions. Each person is allowed one exemption.  The best way to have handled a situation like this would have been to compute the tax returns for both parties and see which scenario generates the most total benefit from using the exeption. In any case, here are are some important facts about dependents and exemptions to keep in mind.

Six Important Facts about Dependents and Exemptions

Even though each individual tax return is different, some tax rules affect every person who may have to file a federal income tax return. These rules include dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2011 tax return.

  1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,700 on your 2011 tax return.
  2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.
  3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an exemption.
  4. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe.
  5. If you are a dependent, you may not claim an exemption. If someone else – such as your parent – claims you as a dependent, you may not claim your personal exemption on your own tax return.
  6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

 

 

Source: IRS  Tax Tip 2012-07

Doing Business As a S Corporation

The S Corporation election is a very attractive form of business organization. Let’s examine some of its advantages and disadvantages over other forms of business organization like Sole proprietorships, Partnerships and C-Corporations.

Advantages:  

  1.  Just like C-Corporations and LLC (Limited Liability Company), shareholders of a S-corporation are not personally liable for the corporation’s debt. If there is ever insolvency or bankruptcy, the shareholders are protected from having creditors come after them personally for the debt of the corporation
  2.  Unlike a C-Corporation however, S-Corporations do not pay taxes.  C- Corporations have to pay taxes on their earnings whereas  S corporation’s earnings are passed through to its shareholders instead. Shareholders get a K-1 at the end of the year to show their share of the S-Corporation’s earnings.
  3. Distributions, or dividends received from S corporations are not subject to income taxes.  Distributions received from C-Corporations are taxable to the recipient. Although you pay taxes at the personal income tax rate for the income from a S-Corporation, you avoid the so called “Double Taxation” of the tax on dividends that owners of C-Corporation have to pay.  Depending on the size of S-Corporation’s distributions, the savings here can be huge.
  4.   S-Corporations save  money on Payroll Taxes.  C-Corporation have to pay employment taxes on wages it pays to employees.  The IRS says that if any shareholder in a S-Corporation provides services that help generate earnings for the corporation, they should be treated as  employee-owners and the S- Corporation should pay them a reasonable salary and will also have to pay the related payroll taxes. There is obviously some leeway here for the S-Corporation. As long the amount of “reasonable salary” to the employee-owner can be justified and you pay the payroll taxes related to that salary, the difference between the wages and payroll taxes a C-Corporation would pay to a similar employee and what the S-Corporation will pay can result in significant tax savings.

Disadvantages:

  1.  Compared to Sole proprietorship, more recordkeeping is involved. Financial statements such as Income Statement and Balance sheet need to be kept.
  2.  Compared to Sole Proprietorship, S-Corporations incur more administrative expenses:
      • Legal –  Increased Start up costs.  Need for articles of incorporation and other filings
      • Banking fees may be higher
      • Accounting fees are higher due to more complex tax returns
      • Payroll processing may be required
      • Certain professions (e.g. contractors) may require certified financial audits which adds more costs.
  3. Ownership restrictions:Only U.S citizens or permanent resident can be shareholders of S Corporation;  anyone can be a sole proprietor
  4.  Income must be distributed based on each shareholder’s basis. In contrast, regardless of each partner’s contribution into a business, a Partnership can have any kind of distribution agreement it wants
  5.  The maximum number of owners in S-Corporation is limited to 100.  There is however no limitations on C-Corporation or Partnerships. They can have as many partners or shareholders as needed.

 

Finally, to elect to be treated as a S-Corporation,  form 2553 must be filed with the IRS within 2 months and 15 days of the tax filing date of the return.

If you or anyone you know is running their business as an S-Corporation, or  thinking of electing to be an S corporation. please contact me for ideas and recommendations on how to maximize the benefits that S-Corporations offer its shareholders.

Use these 5 Tips To Protect Against Fraud

Small businesses are very vulnerable to employee fraud.  This is usually due to failure in having  the right kind of controls in place. As the saying goes, an ounce of prevention is better than a pound of cure. Owners need to make fraud prevention a top priority, especially in these tough times of depressed revenues, slim margins, and tight cash flow. Use the following tips to prevent thieves from stealing you blind.

1. Hire The Right Employees

Make sure you do thorough background checks on employees. This should include employment and education verification, as well as drug screening.  Mistakenly hiring a cashier with a drug or gambling addiction is like having the rooster watching the hen house.

2. Make employees who accept, deposit or record monies take their annual vacation

Employees stealing from you will make every effort to cover their tracks and one of the ways they’ll do this is by finding reasons to be constantly at the job so that no one can discover their dirty deeds.  Many business owners are surprised when they find out that the perpetrator is their “conscientious” or “loyal” employee who has never called in sick, or taken time off.  While employees are on vacation, owners should have someone else review their work, and look for discrepancies and any evidence of malfeasance.

3. Maintain strong internal controls

 Segregate employee roles to ensure that no single employee can handle money and also record or reconcile the money transaction. That means that a cashier receiving money from customers or through the mail should not be allowed to also deposit the money or record the transaction in the books. This also means that an employee writing checks to pay bills for the company should not be the one to sign the checks or reconcile the bank statement from the bank. Think about the damage that can be done if an unscrupulous employee is able to write and sign company checks and also reconcile the bank statement to the accounting books.

4. Conduct surprise audits of sensitive roles such as cashiers and accounts payable

Letting employees know right off the bat that periodically, the company may conduct these audits will go a long way in letting them know that the company takes employee fraud very seriously.

5. Make sure you understand your books

Get involved. As a business owner, you should be familiar with your company’s bookkeeping and record keeping system.  This way, you can easily review the books and ensure everything is in order. If however, you are not comfortable with the idea, you can take classes to gain the knowledge or, you can work with a good outside accountant. Besides helping to compile financial data and filing your company’s taxes, a good accountant offers value in the ability to teach clients how to read and interpret their financial results.

 Have any other ideas and thoughts on ways to guard against the different types of business fraud?  Let’s hear them.

 

Use KPIs to stay on top of your business

Business owners need business and financial plans so as to have targets to which actual results can be compared. Included in these plans should be the company’s key performance indicators (KPIs).  KPIs measure what a business owner has identified as critical business success factors to track the company’s direction, overall  strategy and goals.

KPIs are very important to a business because they help measure how the company is performing and reveal where corrective actions are needed in order to achieve the intended company objectives. At the end of each month, quarter or year, actual results are compared to the targets. If there are any gaps, they are investigated, analyzed, and corrective actions are implemented.

Here are some examples of KPIs:

Human resources

  • Percentage of vacancies filled within x time
  • Recruiting fee as percentage of annual salary

Financial

  • Accounts Payable Turnover
  • Accounts Receivable Collection Period
  • Accounts Receivable Turnover
  • Percentage of financial reports issued on time
  • Percentage of invoices disputed

Sales

  • Average Sale $ per Customer per transaction
  • Units per Customer per transaction

For Medical Profession

  • Claims Denial Rate
  • Patient Turnaround

Construction Industry

  • Unapproved change orders
  • Labor productivity
  • Schedule variance

In closing, remember to use KPIs to track and measure what is important to your business and most importantly, take action to correct the underlying issue.

What are some of the KPIs you use to track how your business is doing?

All Work and No Play

Time is the currency of life. Each of us has been granted a finite amount of time to spend as we please in this life. We don’t know when our time will be up but one would think that how, and where we spend it, should reflect the value we place on the activities we choose. In this current 24/7  fast paced business environment, one has to wonder if the price we are paying is worth it. Here is a perspective on the matter.

Is the Life You’re Living Worth the Price You’re Paying to Live It?

Tony Schwartz

Tony Schwartz is the president and CEO of The Energy Project and the author of Be Excellent at Anything. Become a fan of The Energy Project on Facebook and connect with Tony at Twitter.com/TonySchwartz and Twitter.com/Energy_Project.

 

What toll does it take, over time, if you get too little sleep; skip breakfast or settle for something unhealthy; struggle with a relentlessly challenging commute; attend meeting after meeting with no breaks in between; pump yourself up through the day with multiple cups of coffee or sugary snacks; deal with hundreds of emails that accumulate in your inbox; remain at your desk for lunch if you eat lunch at all; push through fatigue in the afternoon; head home at night feeling exhausted, but continue to check email through the evening; work on the weekends; and limit your vacations to no more than a week or two, if you vacation at all?

Consider the story of the boiling frog. It may or may not be true, but the point it makes certainly is. Toss a frog into a pot of boiling water and it instinctively jumps out, self-protectively. Next, place the frog into a pot of cool water. Not surprisingly, it swims around, happily. Now heat the water up very gradually and what does the frog do? It acclimates to untenable circumstances  –  and slowly cooks. The frog doesn’t notice what’s happening to him, until it’s too late.

We’re experiencing the same phenomenon. Facing ever more demand, complexity and uncertainty, our initial response is to push ourselves harder and more relentlessly, without taking account of the costs we’re incurring.

Physiologically, we move into hyperarousal –  flooding our bodies with stress hormones such as adrenalin and cortisol. It’s an automatic response to the experience of threat, and it provides an instant source of energy.

Allostatic load” is a term coined by the neuroscientist Bruce McEwen that refers to the physiological consequences  –  most especially on the brain  –  of chronic exposure to relentless demand. When fight-or-flight hormones circulate in our body for too long, keeping our arousal high, they become toxic  –  not just physically, but also emotionally and mentally.

The most immediate problem with the fight-or-flight state is that our pre-frontal cortex begins to shut down. We become reactive rather than reflective. We lose precisely what we need most in these complex times: the capacity to think analytically and imaginatively; to embrace nuance and paradox rather than choosing up sides; and to take a long-term perspective rather than making the most expedient choice.

It’s not good for us, and it’s not good for companies.

The antidote, well understood by trauma researchers, is to give people practical and specific ways to lower their physiological arousal  –  to get out of fight or flight. If you’re hyperaroused  –  and vast numbers of us are, much of the time  –  you must learn first how to regularly relax your body. Only then is it possible to calm your emotions, quiet your mind and make wiser choices.

In the trauma community, it’s called self-soothing. In the workplace, it’s about using simple strategies to buffer relentless demand by taking more conscious and regular care of our most basic needs.

Our most fundamental physical needs, beyond food, are to move and to rest. Sleep is the foundation of physical energy. All but a tiny percentage of us require at least 7-8 hours a night to feel fully rested and even small amounts of sleep deprivation take a significant cognitive toll.

We also operate best when we take renewal breaks at least every 90 minutes during the day. Breathing deeply for as little as a minute, for example, can completely clear the body of cortisol.

Movement is a second, more active way to change channels and to build physical capacity. The best way to move is to regularly challenge our current comfort zone  –  to push our heart rate into the aerobic and anaerobic zones at least four times a week, for at least 20 minutes at a time, and to train with weights at least twice a week.

Even if you don’t do that, it’s immensely valuable to get up and move at least several times during the day  –  and even better, to get outside. Above all, our goal should be to increase our oscillation over the course of the day  –  moving between relaxation at one end, and more active forms of energy expenditure at the other.

At the emotional level, our core need is to feel safe, secure and valued. The most reliable way to ensure that happens is to move flexibly between valuing, appreciating and taking care of others  –  which builds trust and appreciation  –  and taking care of ourselves. One without the other is insufficient. We need to regularly refuel ourselves with positive emotions just as much as we need to renew ourselves physically.

The more attentive we are to meeting these core needs, the less likely we are to feel overwhelmed and exhausted, and the more sustainably high-performing we’re capable of becoming.

Reprinted from Harvard Business Review

Eliminate Your Cash Flow Problems

Cash is King

 

Talking with a banker the other day, the conversation came around to how banks are doing regarding lending money to small business. His comment was that banks generally are willing and ready to lend money to small business. The issue is that most small business have been battered by the economic storm and therefore struggle to qualify for loans. Small business sales and profits are down and most have cash flow problems, which in turn puts their ability to repay the loans in question. Without needed cash, small businesses continue to fail.

There are many ways to look at how businesses end up in this situation. Sure, we’ve been in a global recession and customers have held on to their money and not bought as much. There is however an argument that can be made that if a company is well run, it should be able to survive the ebb and flow of the market. After all, to use people as an analogy, smart people plan for “rainy days” by saving money. Smart people minimize their risk by buying insurance, they take steps to protect their credit, they spend according to a budget and, they adjust their spending when dictated by the realities of life.

A well run company should have a business plan for running the business. The plan should include a marketing plan, which is how it will attract customers now, and in the future. It should include a sales plan, which is how much business it expects to have in the coming months and, there should be a financial plan that details how much money it expects to take in, and how much it expects to spend to generate its sales. These plans should be living documents that are reviewed and adjusted up or down to reflect current and forecasted economic conditions. Just as individuals adjust their spending decisions accordingly, a small business ought to be able to do the same. By using its business plan as a compass to help it navigate the rough seas of the economy, a well run company should be able to avoid or minimize its exposure to cash flow problems.

What are some of the ways you or your company have used to avoid cash flow problems?

 

Self Employment Tax

Anyone who has ever received a pay stub from an employer should be familiar with FICA taxes because it’s an amount that’s hard not to notice. In addition to the amounts deducted for federal and state income taxes, the FICA tax is also a big amount that’s withheld out of one’s gross pay to fund social security and medicare. FICA, which stands for the Federal Insurance Contributions Act, is comprised of two separate taxes, social security and Medicare taxes. Employers withhold and pay their employees’ share of the FICA taxes and also pay the employer share.

If you are one of the millions pursuing the American dream as an entrepreneur and operating a business as a self-employed person, such as a sole proprietorship or independent contractor, you are responsible for paying what the IRS calls a Self-Employment Tax, the equivalent of FICA. The self-employment tax rate of 13.3% % (10.4% for Social Security and 2.9% for Medicare) applies to the first $106,800 of your self-employment income earned in calendar year 2011 and should be factored into the calculation of your estimated quarterly tax payments since you will be subject to penalties if you underpay. The social security portion of the tax no longer applies to self-employment income beyond $106,800 but the 2.9% for medicare continues on.

Since the self employed end up paying the equivalent of the employee and employer portions of the FICA tax, the IRS allows a deduction for half of the self employment tax in figuring out their adjusted gross income.

 

Have you made your quarterly tax payments?

 

www.i-meridian.com

Entertainment Expenses

The IRS allows a deduction for ordinary and necessary entertainment expenses incurred in the conduct of business.  It requires you to have documentation that proves the business purpose, the amount of each expense, the date, place of the entertainment, and the business relationship of the persons entertained.  Generally, only 50% of food and beverage (“meal”) and entertainment expenses are allowed as a deduction.

Employees who are reimbursed for business entertainment are not allowed a deduction except for when their expenses actually exceed the amount they are reimbursed for. In this case, as well as in the case where they are not reimbursed at all, they may claim a deduction for Unreimbursed Employee Expenses. Unfortunately, these deductions are limited based on their adjusted gross income.

The IRS also requires the entertainment location to be conducive to business and not just for entertainment purposes only, e.g. golf courses, night clubs, resorts, etc. In addition, the cost of the meal and entertainment has to be reasonable, not ‘lavish and extravagant’.

Tax Hint:   Conduct business before or after the entertainment and be able to prove that the conduct of business is the main reason for being at the event.  Also,  be mindful of what may be perceived as ‘lavish and extravagant’.

Give us your comments. What are some of the different places you have conducted business with entertainment?