Posts Tagged ‘bookkeeping’

Confused about when these expenses are considered to be legitimate, when a meal is classified as “travel” and when it is classified as “meals and entertainment,” whether meal and entertainment expenses are reimbursable to your employees?  Here are some guidelines in order to substantiate the expenses and make sure that reimbursements are nontaxable to employees—excluded from gross income and exempt from FIT, FICA and FUTA:

On April 5, the Senate approved H.R. 4 by a vote of 87-12.  The new law will effectively revert reporting  to the requirements in place before enactment of PPACA and the Small Business Jobs Act of 2010.

H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” was previously passed by the House on March 3 by a vote of 314-112 and will retroactively repeal the new and unpopular Form 1099 information reporting rules. The White House has indicated that the President will sign H.R. 4 into law. A press release dated April 5 declares that “Small businesses are the engine of our economy and eliminating the 1099 reporting requirement is the right thing to do.”

Before amendment by the Small Business Jobs Act of 2010 (P.L. 111-240) and the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), Code Sec. 6041 generally required payments totaling at least $600 in a single calendar year to a single recipient to be reported to IRS.

Reporting on Form 1099 was required for payments by businesses in connection with that trade or business. The type of payment that most commonly required to be reported was payment for services. The most notable exception from Code Sec. 6041’s reporting requirements under prior law was payments to corporations (which were exempt under Reg. §1.6041-3(p)(1)).

In the prior legislation scheduled to begin in 2012, Sec. 9006 of PPACA added payments of amounts in consideration for any type of  goods or services—to the list of payments subject to information reporting.

Sec. 9006 of PPACA further provided that payments to non-tax-exempt corporations—which had previously been exempt from the reporting requirement—would be subject to information reporting.

Additionally, for payments made after 2010, the Small Business Jobs Act of 2010 provided that, subject to limited exceptions, a person receiving rental income from real estate would be treated as engaged in the trade or business of renting property for information reporting purposes. In particular, rental income recipients making payments of $600 or more to a service provider (for example, a painter or plumber) in the course of earning rental income would have to provide an information return to the service provider and IRS.

For payments made after Dec. 31, 2011, the new law will repeal the provisions in Sec. 9006 that impose a reporting requirement for payments to corporations and payments for goods or other property. (Code Sec. 6041(a), Code Sec. 6041(i), and Code Sec. 6041(j), as amended by Act Sec. 2)  For payments made after Dec. 31, 2010, the Act also repeals application of the information reporting requirements to recipients of rental income from real estate who are not otherwise considered to be engaged in the trade or business of renting property. (Code Sec. 6041(h), as repealed by Act Sec. 3)

If you make payroll tax deposits for your small business at your bank using paper coupons you need to know that you will no longer be able to do so after December 31, 2010. Internal Revenue Service regulation (REG 153340-09) generally maintains existing rules for depositing federal taxes through the Electronic Federal Tax Payment System (EFTPS).  The paper coupon system will no longer be maintained by the Treasury Department after Dec. 31, 2010.

Using EFTPS to make federal tax deposits provides substantial benefits to both taxpayers and the government. EFTPS users can make tax payments 24 hours a day, seven days a week from home or the office.

Deposits can be made online with a computer or by telephone. EFTPS also significantly reduces payment-related errors that could result in a penalty. The system helps taxpayers schedule dates to make payments even when they are out of town or on vacation when a payment is due. EFTPS business users can schedule payments up to 120 days in advance of the desired payment date.

Information on EFTPS, including how to enroll, can be found at www.eftps.gov or by calling EFTPS Customer Service at 1-800-555-4477.

Some businesses paying a minimal amount of tax may make their payments with the related tax return, instead of using EFTPS. More details regarding taxes required to be deposited using EFTPS, dollar thresholds and other specific requirements are in the proposed regulations.

Additional Information:

• Publication 4132, which explains the process of enrolling and paying via the Internet
• Publication 966, The Secure Way to Pay Your Federal Taxes for Businesses and Individuals
• Publication 4169, Tax Professional Guide to Electronic Federal Tax Payment System
• Publication 4320, EFTPS Toolkit, which contains PDF(s) and descriptions of EFTPS educational materials and their intended target audience, and is for use by tax professionals and financial institutions to assist in educating their clients on the benefits of EFTPS.
• Publication 4275, Express Enrollment for New Businesses
• Electronic Payment Options Home Page

Congress just passed changes to the Federal Insurance Contributions Act (FICA) reducing the employee Social Security tax rate by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduces the Social Security tax rate under the Self Employment Contributions Act (SECA) tax by two percentage points to 10.4% percent. (Act Sec. 601)

If you are an employer, all your employees will receive a 2% increase in their paychecks on wages paid in 2011. This will cost you, the employer, nothing but there are some potential bookkeeping hassles.

As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800. The maximum savings for 2011 will be $2,136 (2% of $106,800) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings will be $4,272.

If you use a software package like QuickBooks to do your payroll, you may have to manually override the employee portion of the Social Security if the software update is not available by the time you pay your first wages in 2011. If you are one of the many small business who manually calculate payroll, you will have a few extra steps to figure the amount of your payroll tax deposits.

Proof of a deduction or business expense takes two legs.  Under IRS §162, Trade or business expenses, a taxpayer must prove that the expense:

• was ordinary and necessary for carrying on a trade or business; and
• was actually paid.

It is not enough to have bank statements showing checks written to office supply stores and the U.S. Post Office, but not a detailed record of items purchased and how they relate to your business. Conversely, you must have invoices showing the amount due and how these items related to the business and also proof that the invoices actually were paid.

If your record keeping is scant, you risk being denied the deduction because you cannot prove both key elements for each deduction.

Some expenses, such as travel, meals, entertainment and auto expenses, require more proof under §274, Disallowance of certain entertainment, etc., expenses. The IRS and courts have no flexibility on these items and deny deductions unless all the substantiation required by the regulations is provided. [Fleming v. Commissioner, T.C. Memo. 2010-60]

If you have questions regarding deductions and record keeping, consult your accounting professional and CPA.