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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.

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?

 

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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?