Accounting and Tax Tips and Information

written by Lauren Bakken, owner of Bakken CPA PC and co-author of the book, One-Income Household

Bakken CPA PC is dedicated to providing timely, professional, personalized service to businesses and individuals.

Tag Archives: lower taxes

Should You Take the Standard or Itemized Deductions?

What’s the Difference?

When clients come to our office to file their tax return, we often get asked whether it is more beneficial for them to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.

Here are six facts to help you choose:

1. Calculate your itemized deductions by adding up the cost of items you paid for during the year that you might be able to deduct. Expenses include:

  • Home mortgage interest
  • State income taxes or sales taxes (but not both)
  • Real estate and personal property taxes
  • Gifts to charities
  • If your expenses are over the minimum threshold, you can also include:
    • Medical and dental expenses that insurance did not cover
    • Unreimbursed employee business expenses
    • Cost of preparing your tax return

2. Know your standard deduction.  If you do not itemize, your standard deduction amount depends on your filing status. For 2012, the basic amounts are:

  • Single = $5,950
  • Married Filing Jointly  = $11,900
  • Head of Household = $8,700
  • Married Filing Separately = $5,950
  • Qualifying Widow(er) = $11,900

3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return.

4. Check for the exceptions.  Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions.

5. Choose the best method.  Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.

6. File the right forms.  To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on Form 1040.

For more information about allowable deductions, contact your tax preparer today.

Is Your Small Business Ready To Take On Its First Employee?

Whether you just recently started a small business or you have been up and running for a while and working as the entire staff on your own, there may come a time when you decide you need to hire your first employee.  Before you jump into adding new staff to your workforce, be sure you are ready for it, as there are things you need to have set up in order to start off correctly.

If you think you are ready to take that step, here are a few reporting and regulatory issues you should think about:

  1. Determine the General Position: Think about why you are looking to hire a new person. Is this person going to be someone that will manage the store some of the time that you will not be there?  Is he or she going to do administrative tasks to free up some of your time to do billable work? Will the new employee work full or part time? And what are you willing to pay the person for their services? These are few very important questions that you will need to think about before you even begin looking to add a new person to your business.
  2. Obtain an EIN: Before you hire your first employee you must request an Employer Identification Number from the IRS. If your company is a partnership or corporation, you will already have one, but a sole proprietor will most likely need to request one.
  3. Employer Requirements: Check to be sure your soon to be employee can legally work in the United States. Once you’ve hired someone, you must report this to your state employment department. Before you start paying the new hire, get everything ready to easily pay in income tax withholdings to the IRS and state, FICA taxes at the appropriate rates, and unemployment taxes.
  4. Decide on Benefits: Depending on your state and if your new employee is full time or part time, there may be certain requirements on benefits you must offer. Look into rules on benefits, such as sick time and health insurance.
  5. Ask a Professional: Although you can find out a lot about rules on hiring employees online, it does not always cover every detail you may need to know. You should still contact a professional, whether it is an accountant or a payroll service provider, they can guide you to making sure you have all of your bases covered. In the end, it will save you time and help you avoid penalties for non-compliance.

Contact your accountant today to set up an appointment to go over your strategy for your new hire. They know the requirements for the type of business you own as well as for the state your business is in.

Seven Ways to Keep Your Business Healthy and Profitable

The benefits of doing an annual review of your business are holding your company accountable and evaluating current performance to better plan and execute future operations. These are seven things you should look at every year for the health of your company.

  1. Review Your Business Tax Strategy – As your business grows it is always good to make sure you are using the most appropriate form of business structure, whether it’s sole proprietor, S corporation, LLC or partnership. Also, consider adjusting your taxable earnings for the year, it may be beneficial for you to accelerate expenses or delay income at year-end. This can help reduce the current year tax bill.
  2. Get a Pulse on Your Customers – An annual customer satisfaction survey is a great way to assess performance, obtain insight on potential new products or services, and to let your customers know how much you value their business.
  3. Check the Effectiveness of Your Marketing – Are your current methods and channels working well, or are you simply doing what you’ve always done? Use a system to find out how your clients are hearing about you to see if you need to focus your efforts into certain marketing strategies.
  4. Update Succession Planning for Your Business – Review your succession planning annually. You should have a specific plan for your key leadership positions, including yourself. Be prepared for short term absences or permanent vacancies. An up to date plan can be invaluable in you have an unexpected vacancy.
  5. Review Your Business Banking Relationships – Annually, you should go over your cash balances with your accountant. You should also meet with your banker and ask about new products or services that could help your company. Address any service concerns or problems you might have had throughout the year and look for ways to reduce idle cash, boost interest earned and improve cash flow.
  6. Review Your Business Insurance Coverage – Don’t just automatically write a check to renew your insurance policies when they come due. Instead, you should sit down with your insurance agent every year. Review your business operations, focusing on any changes. Discuss types of risk that could arise and ask about new developments in business insurance. Use your agent’s expertise to identify risk areas and suggest suitable coverage.
  7. Review and Update Your Personal Estate Planning – If you’re a business owner, your company is likely to be a significant part of your estate. A good estate plan is essential if you hope to pass the business on to your heirs. Your company, your personal circumstances and the tax laws are continually changing. You should take time each year to make sure your plans are current.

If you are serious about improving your business, you should consider a yearly assessment of your operations. Contact your accountant today to set up an appointment.

Getting Rid of an Old Vehicle? Consider Donating it for a Tax Deduction!

Donating a car is a good way to get a tax deduction, but increased scrutiny by the IRS means taxpayers need to have a good understanding of the rules related to the items claimed on their return. If you are looking to donate a car to a local charity, be sure to take the proper steps to ensure you get the benefit on your tax return.

There are special limitations and substantiation requirements for a charitable contribution to become an itemized deduction. Charities usually sell the vehicle through a third party and in such cases; the deduction is based on proceeds of the sale, which may be less than what you consider fair market value.

Some of the specific requirements to take a deduction for a donation of a vehicle are:

  • Donations of motor vehicles (including automobiles, boats, airplanes, and motorcycles) with a claimed value of more than $500 needs a written acknowledgement from the organization receiving the vehicle.
  • The acknowledgement must contain certain information about the vehicle and certify that they will be using the vehicle.
  • This acknowledgement must be done within thirty days of the sale or contribution.
  • It then must be attached to the tax return of the taxpayer claiming the deduction.

The deduction you will be allowed to take is the lesser of the fair market value at the time of donation or the gross proceeds that the organization receives from the sale. However, if the charity gives the vehicle to a needy individual or sells it for significantly less than its value, the gross proceeds limit does not apply.

A way to figure the fair market value of the vehicle to be donated is by using an established used-vehicle pricing guide, such as Kelley Blue Book. The vehicle’s value can then be adjusted, but not above the guide’s estimate, for issues such as body damage or engine trouble. This estimate must be reasonable, as the IRS looks closely at these transactions and misstating the value can trigger an audit.

By donating that older vehicle that you plan on getting rid of, you could help out a local cause and save yourself some tax dollars. If you think you might be interested in donating a car to a charity, contact your accountant today, to be sure you have everything in line to get the deduction for it.

Payment Options for Your Tax Bill

It is always easiest to file your returns on time and pay as much of the balance due as possible, but those that cannot pay in full are not out of options. Changes the IRS has made over the past two years have made it easier for taxpayers to qualify for alternative payment programs. Ignoring a tax bill is never a good option, and options should provide a good incentive for taxpayers to work with the IRS to resolve past due taxes.

The IRS allows you to enter into a monthly payment plan; the IRS also has the authority to settle the tax, penalties, and interest by negotiating an offer in compromise. This is a contract between the taxpayer and the government to settle the tax debt for less than the full amount owed. The IRS changed the rules governing installment agreements, making it easier to qualify for an installment agreement if the taxpayer owes $50,000 or less.

An installment agreement allows the taxpayer to pay the tax debt in monthly payments, if certain prerequisites are met.

  1. All required tax returns must have been filed.
  2. The taxpayer must also be up to date with all current year tax obligations.
  3. To stay in compliance, you must pay on time all other taxes while agreement is in effect.

The amount of money you owe to the IRS determines what form you will need to file to request an installment agreement.

  • If you owe $50,000 or less you will need to file a Form 433-F, Collection Information Statement, to report your financial information to the IRS.
  • If you owe less than $50,000 but more than $25,000, and you can fully pay your debt, you should call the IRS or apply online to request the option to pay in full. If you cannot pay in full in that time from you should file a Form 9465-FS.
  • If you owe less than $25,000, you should file a Form 9465, Installment Agreement Request with the IRS.
  • If you owe $10,000 or less, the IRS cannot reject your request if you meet the requirements to guarantee an installment agreement.
    • During the past five years, you have timely filed all income tax returns and paid all income taxes without entering into an installment agreement.
    • You must agree to pay the full amount owed within three years and comply with all filing requirements and payment of tax while the agreement is in effect.

Keep in mind that you will still have to pay any interest and penalties that the IRS assesses on the past due balance, but these are much better alternatives to ignoring the bill. If you owe the IRS taxes, there are options for ways to pay it back that can most likely meet your needs. For more information on ways to pay past due tax liabilities, contact your accountant today.