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S Corp Draw

January 27, 2009 by  
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Today TaxMama hears from VP in California who tells us. “I am VP of an S Corp. I do not draw a salary, but the president does. Does the dollar amount of owner’s draw affect taxes in any way?”

Dear VP,

I guess I am confused. There’s no such thing as an owner’s draw in an S corp. It’s either wages or dividends. Worst case, money drawn can be consulting fees. But that’s not the best idea.

If the company has enough money to pay the president enough to live on, the president should be on payroll. You will be attracting an audit and taxes, penalty and interest if you don’t establish a payroll – and fast.

As an officer, a Vice President, you are responsible for the company being properly administered – even if you don’t get paid. If IRS conducts an audit and determines that there should have been payroll, and all the related payroll taxes, YOU can be held personally liable for paying those taxes if the company doesn’t pay them. Incidentally, if IRS audits and determines this is payroll, you’ll owe all the same kinds of bucks to California, too. This is not a smart arrangement.

Right now, BEFORE the tax return is prepared, you need to recharacterize the money the president has taken as a draw. It should properly be payroll – you still have time to file a 4th quarter payroll tax return to fix this problem.

If not, it should be outside services – which means the president will have to personally pay both sides of the Social Security/Medicare taxes – total 15.3%, instead of the company paying their half when she’s on payroll.

It could be a loan – in which case you need a legal document spelling it out as a loan, with an interest rate, and repayment terms. And it must be repaid.

This is the kind of thing that really, really should have been worked out when you two started the company – not the following year, when it’s time to file tax returns.

Basically, you really need to have a tax professional come in and look at what you gals did with the books and clean them up before the S Corp tax returns need to be filed in March.

And remember, you can find answers to all kinds of questions about S Corporations and other tax issues, free. Where? Where else? At TaxMama.com

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

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Garnishment Scam

January 27, 2009 by  
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Today TaxMama hears from Phyllis in Florida with this problem. “Is it legal to garnish wages for 1997 state taxes? I didn’t know anything about them until recently, when I received a collection letter from an agency. I thought for sure it was a scam because so much time had lapsed.”

Dear Phyllis,

Find out from the state in question if these are really taxes you owe. Go back to source to get the proof of the taxes due.

You don’t say who is garnishing your wages. Is it a state agency? Or is it a collection agency?

A state, depending on their arrangements with the courts in your state, has the right to collect taxes as long as their statutes of limitations on collections are open. States have different time frames during which they may collect. For instance, California’s is either unlimited, or 30 years, I am not sure which. Either way, it’s a lifetime.

If it’s a collection agency, you may want to have an attorney get an injunction to prevent the garnishment. Or you may want to go to court to sue the collections agency. It’s quite possible that the collections agency does NOT have the right – if they cannot prove the actual tax liability to the court’s satisfaction. Consult with an attorney for some guidance.

There are some interesting twists in collections laws as it relates to agencies. And some agencies operate aggressively because the debtor doesn’t know enough to stop them.

And remember, you can find answers to all kinds of questions about wage levies and other tax issues, free. Where? Where else? At TaxMama.com

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

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Recessions Call For Career Changes, Right?

January 27, 2009 by  
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A gynecologist had become fed up with malpractice insurance and HMO paperwork and was burned out. Hoping to try another career where skillful hands would be beneficial, he decided to become a mechanic.

He went to the local technical college, signed up for evening classes, attended diligently, and learned all he could. When the time for the practical exam approached, the gynecologist prepared carefully for weeks and completed the exam with tremendous skill. When the results came back, he was surprised to find that he had obtained a score of 150%.

Fearing an error, he called the instructor, saying, “I don’t want to appear ungrateful for such an outstanding result, but I wonder if there is an error in the grade.”

The instructor said, “During the exam, you took the engine apart perfectly, which was worth 50% of the total mark. “You put the engine back together again perfectly, which is also worth 50% of the mark.”

After a pause, the instructor added, “And I gave you an extra 50% because you did it all through the muffler, which I’ve never seen done in my entire career.”

Courtesy of Floyd Greenman, EA in Northridge, CA

Please remember to send us your humor. Clean jokes preferred.

Read more Money Funnies here:

http://taxquips.com/index.php?cat=MoneyFunnies

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Six-Figure Job Hunt 101

January 27, 2009 by  
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From MARC CENEDELLA

Get their brand new $100K+ Job Hunt 101 Guide.
(See the link in the Resource Box below.)

TheLadders, Editor-in-Chief, Matthew Rothenberg, has collected the best writing and the best advice on making a job hunt effective and successful. There are tips on self-evaluation, “packaging” yourself, resume writing (and the even more important topic of resume sending), how to work with recruiters, how to network without being “that guy,” and lots more.

Please enjoy it, use it in good health, and yes, please do pass it along to your friends and family who are looking for some good advice on making the most out of their search for a new job. They can download the PDF for free here.

Thanks. Have a great week and Happy Hunting!

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Bartering Income

January 27, 2009 by  
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Bartering is the trading of one product or service for another. Usually there is no exchange of cash. It is the most ancient form of commerce. Any business owner or professional who has a product or service to offer can barter.

While our ancestors may have exchanged eggs for corn, today you can barter computer services for auto repair. Another example of a one-on-one, non-barter exchange transaction is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of the goods and services exchanged must be reported as income by both parties.

Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company.

Tax Responsibilities

Income from bartering is taxable in the year it is performed. The rules for reporting barter transactions may vary depending on which form of bartering takes place. Refer to Tax Responsibilities of Bartering Participants for more information about reporting income and staying in compliance.

Home-Based Online Barter Business

If online bartering turns into a business, or you have recurring barter transactions and are purchasing items to barter with the intention of making a profit, you may have started a barter business.

If Your Bartering is a Trade or Business

If you are operating a viable bartering business, you may be entitled to deduct business expenses. Do you have an established business and are augmenting your sales with barter transactions? If so, include the sales from bartering in your business income.

Bartering Depreciated Business Assets

If you barter business assets or close your business you may have capital gains, ordinary gains and depreciation recapture to report. An example is the barter of an automobile used for business for a product or service.

Bartering Appreciated Assets

Examples of appreciated assets often include art, antiques and collectibles. If you have barter transactions of property where the fair market value is more than your cost or other basis, you usually will have a reportable gain. These gains may be business income or capital gains.

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Tips for Taxpayers Making a Move

January 27, 2009 by  
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If you changed your home or business address, you’ll want to remember these six tips to ensure you receive any refunds or correspondence from the IRS.

  • 1. You can change your address on file with the IRS in several ways:

      Correct the address legibly on the mailing label that comes with you tax package

      Write the new address in the appropriate boxes on your tax return;

      Use Form 8822, Change of Address, to submit an address or name change any time during the year

      Give the IRS written notification of your new address by writing to the IRS center where you file your return. Include your full name, old and new addresses, Social Security Number or Employer Identification Number and signature. If you filed a joint return, be sure to include the information for both taxpayers. If you filed a joint return and have since established separate residences, both taxpayers should notify the IRS of your new addresses

      Should an IRS employee contact you about your account, you may be able to verbally provide a change of address

  • 2. Be sure to also notify your employer of your new address so you get your W-2 forms on time.

  • 3. If you change your address after you’ve filed your return, don’t forget to notify the post office at your old address so your mail can be forwarded.

  • 4. Taxpayers who make estimated payments throughout the year should mail a completed Form 8822, Change of Address, or write the IRS center where you file your return. You may continue to use your old pre-printed payment vouchers until the IRS sends you new ones with your new address. However, do not correct the address on the old voucher.

  • 5. The IRS does use the Postal Service’s change of address files to update taxpayer addresses, but it’s still a good idea to notify the IRS directly.

  • 6. Visit IRS.gov for more information about changing your address. You can find the address of the IRS center where you file your tax return or download Form 8822, Change of Address. The form is also available by calling 800-TAX-FORM (800-829-3676).

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Outline of Economic Recovery Package from House Ways and Means Committee

January 27, 2009 by  
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An outline of the provisions under the Ways and Means Committee’s Jurisdiction included in the Economic Recovery package follows:

Tax Relief for Individuals

· “Making Work Pay Credit”

· Expand Earned Income Tax Credit (EITC)

· Increase in child tax credit, $0 floor

Education

· Simplification of education credits w/ $2,500 credit for first four years of higher education expenses (increase income limitations), with credit partially-refundable (40% refundable)

Housing

· Remove repayment requirement on $7,500 first-time home buyer credit for homes purchased after 2008 and before termination of credit (June 30, 2009)

· Coordination provisions with new grant program for low-income housing being designed by the Financial Services Committee

Business

· Bonus depreciation

· 5-year carryback of net operating losses (excluding companies receiving TARP benefits, Fannie Mae, Freddie Mac)

· Extension of increased small business expensing

· Expand work opportunity tax credit for disconnected youth and unemployed, recently-discharged veterans

· Prospectively repeal Treasury Section 382 ruling

State and Local Governments

· Allow financial institutions to purchase State and local bonds and other changes

· Repeal AMT limits on new private activity bonds

· Taxable bond option for governmental bonds

· School construction bonds

· One year deferral of withholding tax on government contractors

Distressed Areas

· Provide tax exempt bonds and tax credit bonds to “recovery zones.” These tax exempt bonds and tax credit bonds can be used for a wide array of purposes to stimulate economic development, including job training and education. A “recovery zone” would be an area within a State, city or county that has exhibited high unemployment, foreclosures or poverty. These bonds would be allocated automatically to States and large municipal governments based on the number of unemployed individuals within that area.

Energy Tax Incentives

· Long-term extension of renewable energy production tax credit

· Temporary election to claim the investment tax credit in lieu of the production tax credit

· Coordination provisions with new grant program for renewable energy projects being designed by the Energy and Commerce Committee (sections 45 and 48 projects)

· Clean Renewable Energy Bonds (“CREBs”)

· Qualified Energy Conservation Bonds

· Energy efficiency and conservation tax incentives under sections 25C, 25D and 48

· Smart energy conservation, energy efficiency, and renewable energy R&D credit

· Refueling property credit expansions

Trade Adjustment Assistance (TAA)

Updates, modernizes and expands TAA to cover service workers, and substantially improves and extends coverage to manufacturing workers
Triples funds for job training
Unemployment Insurance (UI)

· Encourage UI Modernization

· Continue the Emergency Unemployment Compensation Program

· Increase UI checks by $25/week

Additional Temporary Assistance for Needy Families (TANF)

· Provide additional TANF Contingency Funds to serve needy families

Supplemental Security Income (SSI)

Provide a one-time additional SSI Payment to Low-Income elderly and disabled recipients
Child Support Enforcement Funding

· Restore federal funding for Child Support Enforcement for 2 years

COBRA Healthcare for the Unemployed

· Provides temporary subsidies for health insurance coverage to those who have lost their jobs.

· Extends the availability of unsubsidized COBRA coverage for older and tenured workers beyond the 18 months provided under current law

Health Information Technology (HIT)

Establishes standards, payment incentives and privacy protections to encourage the widespread adoption of health information technology.
Extends Moratorium on Selected Medicare Regulations through October 1, 2009

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Ask TaxMama Issue 488 – Ethics vs Power and Confidence

January 27, 2009 by  
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Happy Bubblewrap Appreciation Day - Monday January 26th

Dear Family,

Don’t you love to start the day with someone telling you – “You were right!”? That’s what happened yesterday, when Andrew came to work. Naturally, I know that I am often right (and sometimes wrong) – but what was I right about this time?

Ah yes, it was all over the news – Obama re-taking the oath of office.

Clearly, during the Inauguration ceremonies, it was somewhat mangled. Chief Justice John Roberts re-administered the oath, simply as a cautionary measure.(Right after the swearing in, I happened to say – well, that’s going to have to be corrected – very soon. I didn’t expect it to turn into a media spectacle. But that does make sense.)

I was wondering about the documents President Obama had signed, and the Cabinet members he’d had sworn in, etc. before the oath. But if you read the MSN article above, the administration and legal advisors didn’t think that much caution was necessary. But we all know, someday, someone will be unhappy with something and sue that something that was done or signed or decided before the re-taken oath isn’t valid. Sigh. Makes me tired. But I bet that will happen.

We had a bit of excitement this week as the confirmation hearings were going on. This hubbub over proposed Secretary of the Treasury really has the tax professional community in an uproar. At first, I thought his tax errors were simply an oversight. But, reading the documents that the Committee has gathered about Geithner’s tax history (i.e. things he SIGNED), and his own comments that he understood his responsbilities, but made a mistake. Read my – Accountingweb.com blog

But once I saw the documents, it became quite clear that this was a serious breach of ethics. And he just brushes it all aside. Essentially, his bold, strong, confident position vis-a-vis the Senate Committee panel is, forget it. Let’s move on to more important things. Whew! This fellow will be overseeing the IRS?

Oh, don’t worry, Geithner WILL get confirmed. He will be the new Treasury Secretary. After all, people like Paul Volker, Barack Obama and many legislators and others insist that he’s the only man who can do this job at this time.

There is this Fox News article by Glenn Beck that touches on this in an amusing and sarcastic fashion.

But that’s not what I want. I really wish that someone would spell out for me WHY? What are his special skills, or his brilliant vision that make him the ONLY Man? I am not being sarcastic. I’d just like to see an outline of his accomplishments and skills that make him so uniquely qualified. He’s going to be the one overseeing my professional ethics and career – and your tax liability and collections. I’d just like to feel more enthusiastic about him. Wouldn’t you?

In the meantime, everyone’s hard at work in Washington, DC.

In IRS News today, there’s an outline of the Economic Recovery Package from the House Ways and Means Committee; we get guidelines for bartering, and learn how to let IRS know when you move.
http://taxquips.com/index.php?cat=IRSNews

Today’s Money Funny we look at someone who felt the need to change his profession due to the recession…and other career considerations.
http://taxquips.com/index.php?cat=MoneyFunnies

In TaxQuips this week, we get a lesson about old laws on the books in some states about cohabitation; we learn (for federal purposes) whether a boyfriend can claim his girlfriend on his tax return; we deal with an interesting twist to the Stimulus Rebate situation; get into quite a heated discussion about s corporation ‘draws’; and learn that even after many years, and many miles, far away states can reach out and garnish your paycheck for unpaid taxes. Or may they?
http://taxquips.com/index.php?cat=TaxQuips

And finally, our Job Advice of the week gives you an e-book which is a Guide to a Six-Figure Job Hunt 101.
http://taxquips.com/index.php?cat=JobAdviceoftheWeek

Incidentally, Monday is Bubblewrap Appreciation Day. Click on the graphic at the top of today’s issue. It will take you a whole work of bubblewrap games and fun. Could be addicting!

As always, we love your feedback, opinions and ideas.
You are what makes all this fun – and interesting!

Please use the Comments link online.
http://taxquips.com/index.php?id=1091

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Hugs from your favorite TaxNerd,

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Your TaxMama is watching…out for you.

www.TaxMama.com
www.TaxQuips.com
www.IRSExam.com
www.taxnerd.net
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TAX CALENDAR 2009
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01.02.2009 File Form 2290 – Heavy Highway Vehicles

01.15.2009 4th Estimated Payment Due

Farmers and fishermen. Estimated tax for 2008 Due

01.15.2009 Employers Make Monthly Payroll tax deposit

01.31.2009 Furnish W-2s/1099/1098s to recipients

01.31.2009 File Quarterly/Annual Payroll/Sales Tax Returns

01.31.2009 Individuals – Filing personal return and pay all taxes

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Decedent 1099-C

January 27, 2009 by  
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Today TaxMama hears from Thomas in Maryland who tells us. “I was legally separated from my spouse 3 years ago. My spouse passed away 2 years ago. I just received a 1099-C tax statement addressed to her estate. Since I was legally separated, am I obligated to report the 1099-c amount on my taxes?”

Dear Thomas,

Let’s see if we can sort this out, OK?

You didn’t file joint returns after you were separated, right?

You don’t say how much the debt was, or what debt was cancelled – credit card debt, in her name; mortgage debt on her separate mortgage or a joint mortgage; debt from a car loan…? The source makes a difference.

The big question is – who inherited your wife’s estate? If you inherited, then you owned the property and had the right to dispose of it or resolve it.

If you are the trustee of the estate, you are responsible for settling the estate, including dealing with the debts. The trustee may need to file a tax return for the decedent’s trust – Form 1041 to report the cancellation of debt. Naturally, if there are no assets in the estate, you can use insolvency to reduce the debt and owe no taxes. If there were assets…that’s another story.

You do say that the 1099-C was address to your wife’s estate, not to you. So I doubt if you need to include it on your tax return. After all, you can’t file jointly anymore, even if you wanted to. She died two years ago.

However, you’ve clearly left out a lot of information. I don’t feel comfortable giving you a definitive answer. Please, sit down with a good, local tax professional and have them review all the aspects of this situation, OK? Someone needs to see the whole picture, so this doesn’t haunt you in future years.

Take care of yourself.

And remember, you can find answers to all kinds of questions about debt cancellation and other tax issues, free. Where? Where else? At TaxMama.com

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

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Asked Too Late

January 27, 2009 by  
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Today TaxMama hears from Thomas in Ohio with this question. “I have been married four years. My wife owned her own home before our marriage and we lived there for the last four years. I was never on that title. Now we purchased a home together to live in and have kept her previous home for a rental. Am I eligible for a first time homebuyer credit?”

Hi Thomas,

What you’ve done makes good financial sense.

Unfortunately, it won’t get you the First-Time Homebuyer Credit.

I wish you had spoken to a tax professional before buying this home. If you had bought it with only you on title, you would have qualified. But with both of you on title, you lose the credit.

If either of you owned a personal residence, you’re both disqualified. Unfortunately. This is something I’ve discussed at length with IRS.

http://www.irs.gov/newsroom/article/0,,id=186831,00.html
Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.

So sorry to be the one to give you this information.

That’s why I emphasize the importance of consulting with a good tax professional before making major financial moves.

And remember, you can find answers to all kinds of questions about the first time homebuyer credit and other tax issues, free. Where? Where else? At TaxMama.com

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

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