Back To School &Taxes

There is a chill in the air here in Northwest Ohio which means fall is on its way. Many people like the cooler temperatures, but I personally prefer the heat. After all, we are still in August! With fall comes colder temperatures and I fear a repeat of our epic winter from last year! Needless to say, I guess the fall-like weather makes it more believable that it is back to school time. What does back to school mean for you and your taxes?

back to schoolIf you are a college student, or the parent of one, there are various deductions and credits available for tuition payments. There is a tuition and fees deduction which reduces the amount of income that is taxed. There are also two different types of tax credits, the American Opportunity tax credit and the Lifetime Learning credit. These two credits reduce the amount of tax you owe, potentially below zero, allowing you to get a refund of taxes you did not pay. There are various stipulations required to receive these deductions, all of which would need to be discussed with your accountant based on your individual circumstance. You will receive a form 1098-T at the end of the tax year that shows how much tuition you paid to the school for the current year. Also keep in mind that any additional fees paid or costs of courses, even the cost of books, can be included. These additional expenses are ones you would need to track yourself.

Many students today finance their way through college. If you are one of those students, you can also take a tax deduction for the student loan interest paid throughout the year.

If your children or grandchildren have college in their horizon, you can save on state taxes by contributing to a state 529 plan. You can contribute as much as you would like, however, only $2,000 per child per year in Ohio is available as a deduction to your taxable income. If you contribute more than $2,000 in a year, the remainder will carry-over to be a possible deduction in future years.

If you are an educator for grades Kindergarten through twelfth grade you are eligible for a $250 deduction on your return for unreimbursed education materials purchased in the year.

If you are a parent of a school-aged child and recently purchased school supplies, I am sure you wish there was some tax incentive. Unfortunately, you only have to look forward to paying college tuition before you can get a tax deduction!

Deducting Business Website Costs

Businesses often set up websites to sell their products and attract new customers. The proper method for deducting website development costs depends on several factors, including how the website was created and whether the website was part of the company’s “start-up” costs.

 Software costs. Website designs produced with sophisticated programming languages generally can qualify as software. The IRS has safe harbor rules for deducting software costs. These rules distinguish between software produced by independent contractors and software produced by in-house employees.

Url addressGenerally, if the design was “purchased” from an outside contractor who remains at economic risk for performance of the software, the deduction for the design costs must be spread over a three-year period. However, if the website design is “developed” in-house — or by an independent contractor who does not remain at risk for performance — the company has more flexibility. One option available in this situation is to deduct the costs in the year they are either paid or accrued (depending on the company’s accounting method).

Other costs. Website design costs that don’t qualify as software are deducted over their expected useful life. The costs of producing website content that is “advertising” are generally deductible in the year paid or accrued.

Start-up costs. Website costs incurred before a business begins may be considered start-up costs. A business may elect to deduct up to $5,000 of start-up costs in the year the business begins operations and deduct the remaining costs ratably over 180 months. (The $5,000 deduction is reduced where total start-up expenses exceed $50,000.) Alternatively, a business may capitalize its start-up costs.

IRS Scams & Phishing

What to do if you get a call or email from someone claiming to be the IRS?

The IRS has seen a recent increase in local phone scams and phishing across the country. (Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate to lure in potential victims and prompt them to provide valuable personal and financial information).

These scams include many variations including callers saying that their victims owe money or are entitled to a huge refund.

Characteristics of these scams can include:

  • Scammers use fake names and IRS badge numbers. Generally common names and surnames are used to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.

irs_scamsIf you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.

If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above) then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.

If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant”  on their website. Please add “IRS Telephone Scam” to the comments of your complaint.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.

By: Jenny Furey, CPA

Don’t Let Taxes Trip You Up  

The last thing you need as a small business owner is to have to spend time unraveling tax problems you could have avoided. There are many tax issues that can trip up small business owners — here are a few.

Mixing Business and Personal

small-businessKeeping your personal bank and credit card accounts separate from your business accounts isn’t always easy. But “commingling” business and personal accounts creates a recordkeeping nightmare. When it’s tax time, you may not be able to identify all the appropriate business expenses. As a result, it could be difficult to accurately determine your business income and you might lose deductions.

Not Keeping Track

Keeping track of business expenses can be a challenge. However, you’ll need proof of purchase for any expenses you plan to deduct. Proof can be a canceled check (or legible image of the check) or a credit card, debit card, or electronic funds transfer (EFT) statement showing the payee, the amount of the purchase or transfer, and the transaction date.

You’ll also need an invoice or a receipt identifying the purchase. If the business purpose for the purchase isn’t immediately obvious, attaching a note of explanation or writing directly on the invoice or receipt can save time later should questions arise. There are specific substantiation requirements for business travel and entertainment expenses. Check with us if you have questions.

Making the IRS Wait

Employment taxes you collect should always be remitted to the IRS in a timely manner — without exception. As an employer, you’re responsible for withholding federal income tax and FICA (Social Security and Medicare) taxes from your employees’ wages and remitting them, along with your company’s FICA contributions, to the IRS. Penalties for noncompliance can be harsh.

Misclassifying Workers

Misclassifying workers as independent contractors when they are actually employees can be a thorny issue because they are treated differently for income-tax withholding and employment-tax purposes.

> Employees: You must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes.

> Independent contractors: You’re not required to withhold income tax, and the worker is fully liable for his or her own self-employment taxes. FICA and unemployment taxes do not apply.

It’s important to get it right to avoid penalties. Generally, the more control you have, the more likely it is that the worker is an employee.

Financial Statement Relief is in Sight

It seems like each year, new accounting rules are issued that make financial statements more complicated and less relevant for privately-held companies, especially those that are small and medium-sized businesses. Most of the new accounting requirements have been intended more for larger publicly-traded companies. The good news is that there has been some recent relief for privately-held companies.

financial-statement-forms

For those privately-held companies required to issue financial statements using generally accepted accounting principles (GAAP), the Financial Accounting Standards Board (FASB) issued in 2014 some amendments to accounting rules that should simplify the accounting requirements in regards to recording goodwill, interest rate swaps, and variable interest entities (such as leasing relationships that previously were required to be consolidated). These amendments become effective for annual periods beginning after December 15, 2014, with early application allowed.

For those privately-held companies whose financial statements users don’t require GAAP-based financial statements, the tax basis of accounting has always been a popular more simplified option. There is also a new non-GAAP basis of accounting available for small and medium-sized enterprises (SMEs) called the Financial Reporting Framework for SMEs. This basis of accounting is accrual-based and uses more simplified principles that don’t include deferred taxes, interest rate swaps, comprehensive income, variable interest entities, etc. that have complicated a lot of GAAP-based financial statements. This new framework basically is like an old version of GAAP before the more complicated rules came into being.

Let us know if you have any further questions. While the relief noted above doesn’t guarantee more simplified accounting for all privately-held companies, it’s definitely a step in the right direction.

By: Brent Ringenberg, CPA

Inventory Valuation Made Simple

On July 15, the Financial Accounting Standards Board proposed an Accounting Standards Update inventory valuation methods. The purpose of the update is to cut back on both the cost and complexity of accounting for inventory. This simplification can be seen as gold among the dross, as the extreme complexity of accounting standards today can be overwhelming to business owners and accountants alike.

An advantage of this proposed accounting standard is an increased consistency of inventory valuation among different companies. Consistency an important aspect to accounting standards, as their underlying purpose it to provide useful information to readers of financial statements.

Manufacturing_Inventory3

The current accounting standard for inventory measurement is by using the lower of cost or market method. As it may sound harmless enough, the complexity falls within the multiple definitions of what “market” cost can be. Market can be any one of the following three options:

• Replacement cost
• Net Realizable Value or
• Net realizable value less normal profit margin

The proposed update will change the inventory valuation method to “lower of cost or net realizable value.” This is not a complete change from the current method, but more of a simplification. Net realizable value is defined as “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.”

By eliminating the different options to “market” valuation, there will be a more consistent application of the measure of inventory. This will also prevent companies from having to make decisions on how they will choose their method for market cost.

Another additional benefit this Proposed Accounting Standards update provides is that it is very similar to the method used in International Financial Reporting Standards. With the merging of GAAP and IFRS on the horizon, any update that would help smooth out the transition will be a benefit when that time comes.

Reminder: Proposed Accounting Standards Updates are released for public comment. The entire exposure draft can be downloaded for viewing from the Financial Standards Oversight Board website at http://www.FASB.org. Electronic Feedback Forms are also available via the FASB website, or responses may be emailed to director@fasb.org or mailed to:

Technical Director File Reference No. 2014-210
FASB, 401 Merritt 7,
PO Box 5116, Norwalk, CT 06856-5116

By: Anthony Mifsud, Staff Accountant

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