Tax Filing Season Starts January 30th

A late start due to late law passage

“We have worked hard to open tax season as soon as possible.”

- Acting IRS Commissioner Steven T. Miller

The IRS recently announced that it is targeting January 30^th as the first day it will begin processing 2012 tax returns. This delay in filing is due to the late passage of the Tax Relief Act during the first week of January. Here is what you need to know.

Paper or Plastic (digital). It makes no difference if you e-file or send in a paper tax return. Both processes will begin on January 30^th.

Don’t Wait. A number of tax returns will not be allowed to process until late February or early March. Because of this, procrastinators could pay a heavy price in getting their returns processed and refunds paid versus other tax years. So get your information in as soon as possible.

Software Updates too. Just because the IRS says they anticipate processing tax returns on January 30^th does not mean all returns will be processed on that date. The software vendors must also update their programs AFTER the IRS provides revised specs for their tax forms.

Some Returns will need to wait. A number of tax returns will not be filed until late February or early March. This includes tax returns that have the following:

·         Residential Energy Credits

·         Qualified Adoption Expenses

·         Depreciation of Property

·         General Business Credits

·         Domestic Production Activity Deductions (DPAD)

Remember, just because the processing of your tax return may be delayed does not mean you should delay the preparation of your return. Send in your tax information as soon as possible. Having your tax return ready when the processing window is open will help ensure the timely filing of your return and the receipt of any potential refunds.

2012 Tax Laws Finalized..... IN 2013!

Here is the late breaking news

During the wee hours of January 1, 2013 the final touches were made to 2012 tax laws. While the rest of us could not realistically make plans during 2012 for laws passed in 2013, perhaps there is a clause or two that may help you when you file your taxes in the next few months. Here is what you need to know:

1. Alternative Minimum Tax (AMT). The recently passed tax package includes both a patch for the AMT and a permanent fix to keep the AMT from impacting 20 million plus more taxpayers.

Impact: If you paid AMT in 2011 you will probably pay it once again. If not, you probably won’t …unless your income or deductions change significantly.

2. Educators Expense Deduction is back. You may once again deduct up to $250 in out-of-pocket expenses if you are a qualified teacher. This provision also applies to 2013.

Impact: Hopefully you kept track of your out-of-pocket classroom expenses. If not, start digging through your receipts.

3. Tuition and Fees Deduction is back. This too was extended from 2011 to 2013.

Impact: One more educational deduction option to consider in addition to the Lifetime Learning Credit, the American Opportunity Credit, Coverdell Savings, 529 plans and more.

4. Charitable Contributions from seniors’ qualified retirement plans. This too, expired in 2011 and has been extended through 2013.

Impact: Good luck with this one for 2012 as the change is made after the year ended. Use this as a planning tool for your 2013 donations.

5. Itemized Deduction Code Extensions. The optional general sales tax deduction instead of state income tax itemized deduction was extended through 2013. So too is the ability to treat qualified mortgage insurance premiums like qualified interest.

Impact: This should help maximize your itemized deductions. If you made any large purchases during 2012 that paid sales tax you may wish to collect the receipts.

Stay tuned, many more changes were made to tax laws that will impact you in 2013. The changes noted here will have the greatest impact on your 2012 tax liability.

How to ensure your business is not deemed a hobby

You Can't Deduct that Loss. It's a Hobby.

You’ve loved dogs all your life so you decide to breed them and start a dog training business. Is this a business in the eyes of the IRS or a hobby? Knowing what the IRS is looking for and properly positioning your small business can save taxes and headaches if you are ever questioned by the IRS.

Why should you care?

If your activity is a business your income can be reduced by all your qualified business expenses even if it results in a loss. If your activity is a deemed a hobby, no losses are allowed on your tax return. Furthermore, your hobby expenses are treated as miscellaneous itemized deductions and do not count until they (and other miscellaneous expenses) surpass 2% of your income.

Tips to make it a clear business

Here are some simple tips to ensure full deductibility of your expenses against your business income.

1. Profit motive. You must show that you intend to make a profit with your activity. The old rule of thumb was to show a profit at least three out of the past five consecutive years to safely qualify your activity as a small business. But this is no longer the case. Although more difficult to substantiate, you can show profit motive without ever showing a profit by your ongoing activities around the business.
2. Active participation. You need to be actively involved in your pursuit for success. If you simply invest money in the dog business, but are never there to care for them or give lessons, you will have a hard time justifying the business nature of the activity.
3. Be professional. Businesses have separate checkbooks, business cards and stationery. They have financial statements and show the same disciplines one would find in a “for profit” venture of the same type of activity you are pursuing.
4. Pleasure factor management. If your business has a large enjoyment factor, you will need to be even more cautious about having proper records. Ideally the pleasure factor is secondary to running your business. If you claim to be a golf pro giving lessons, but then spend all your time playing golf, you will have a hard time justifying the activity as a true business.
5. Have multiple customers. If you only have one or two customers, who also happen to be relatives, your activity may be deemed a hobby. Having a number of customers, even without profits, can make all the difference in allowing for expense deductions.
6. Showing profit motive without profits - Part II. How else can you show profit motive when no profit is to be found? Advertising is one way to do this. Keep copies of all ads trying to drum up business. Keep a daily diary of business activities, noting who you meet and for what purpose. Create and keep sample product, even if it is not yet sold.
7. Understand your risk. There are certain business types that are under the IRS microscope when it comes to hobbies. Key among these are multi-level marketing businesses like Amway, Tupperware and Avon. It also includes the thousands of part-time sellers of goods on internet sites like e-bay. If you are in one of these business activities you will need to prove the business nature of your involvement and be prepared to be challenged.

Quick Checklist

Wondering if your business activity may be considered a hobby? Review this checklist. The more yes answers, the better your chances of defending your position.

• Conducted activity in business-like manner?
• Have expertise in your activity?
• Put time and effort into the activity?
• History of income/profits?
• Have had prior success in a similar activity?
• Is there a low element of pleasure/recreation involved?
• Are there appreciating assets or an expectation that there will be?

Remember, having a business activity reclassified as a hobby can mean a big tax bite at tax time. But by keeping proper records and pro-actively knowing the pitfalls, you can avoid most problems.

Hurricane Sandy Relief

Help get the word out

The devastation caused by Hurricane  (now Superstorm) Sandy is widespread. And while you may not have been impacted directly by the storm, you may know of someone who was. Fortunately, the relief wheels are in motion, albeit never fast enough. In an effort to help those impacted and to help get the word out to those who may have been impacted here are some tips.

• Qualified Disaster Area. The first step is to understand if you or someone you know is in a Designated Disaster Relief area. Counties in New York, New Jersey, Connecticut, and Rhode Island have been included in the Disaster Area for Sandy. Please go to the Federal Emergency Management Agency and review the covered areas. You may have to check often as the covered areas continue to change.
• What do I Qualify for? There are so many programs, how do you know what aid is available to you? FEMA has a number of resources available to help work through the maze of programs. Here is a link to these tools; http://www.fema.gov/apply-assistance. If someone you know has lost power or is dislocated, consider helping them walk through these tools.
• Relief Payments Received May Not be Income. Employers may donate money directly to an employee impacted by Superstorm Sandy without creating taxable income for the person receiving money. As long as the person receiving money qualifies, and the money is used for qualifying expenses not reimbursed by insurance, it is not considered taxable income. This also includes money received from individuals. While payments directly to an individual may not qualify as a charitable deduction for the donor, at least they are not deemed income to those in need.
• Qualified Expenses. Qualified expenses per the IRS include amounts to “cover necessary personal, family, living or funeral expenses not covered by insurance. They also include expenses to repair or rehabilitate a personal residence.”
• Tax-exempt Status Safe Harbor. Employer-sponsored private foundations can also provide disaster relief to their employee-victims without jeopardizing their tax-exempt status. Guidance on how to do this correctly can be found in IRS Publication 3833.
• Consider Donating Your Vacation. Employees can donate vacation, sick, or personal leave time off for employer cash payments to qualified tax-exempt organizations providing Sandy relief. The forgone time off is not considered income to the employee. In addition, your employer may deduct the amounts paid. This special tax benefit can be applied for time off before 1/1/2014.
• Tax Deadline Assistance. The IRS has postponed a number of tax and payment filing deadlines starting in late October and now gives impacted taxpayers until Feb. 1, 2013 to file the affected tax returns and pay any amounts due. The IRS will abate any late filing penalties and interest due. This includes:
• 4^th quarter individual estimated tax payments (normally due 1/15/2013)
• 3^rd/4^th quarter excise tax returns and payments (due in the 3rd/4th quarter 2012)
• Tax exempt Form 990 return filings due during this period
• The IRS is also waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster area start date and a delayed payment date. The delayed payment date is now set as November 26, 2012.
• Not in the Area? Relief is also available to a business or entity that is not located in the Declared Disaster Area but is impacted by the storm because the books, records, or tax professional is located within the disaster area. This includes those who are assisting in disaster relief activity. To receive this assistance you must contact the IRS directly (866-562-5227).
• Other Assistance. There are numerous programs available to those in need. The help includes grants for temporary housing, grants for home repairs, low-cost loans for uninsured property loses, and Transitional Housing Assistance.

Fortunately, to receive much of the aid outlined here you do not need to contact the IRS for approvals. The benefits are applied automatically. So, if you have been impacted by Sandy, or know of someone who has been impacted, please help get the word out.