Category Archives: Arizona Taxes

Job Hunting? You May Be Able to Deduct the Expenses

Did you know that if you are trying to find work in your current occupation, the costs of your search, including expenses for preparing and sending resumes, employment agency fees and related travel expenses, should be deductible?

The deductions aren’t available in all cases.  For example, you’re not eligible to use them if you are seeking employment in a new field or if this will be your first job.  If it’s been a long time since you left your last job, your costs also may not qualify.

Don’t try to navigate the rules on your own.  If you want to learn more about these deductions, or ask any questions about your tax situation, contact us today.


Reasons to Stay in Touch With Your Tax Prepare Throughout the Year

You got married.  You got a job, had a baby, lost a job, bought a house or moved.  Your life shifted in ways that once you couldn’t have imagined.  The last thing on your mind is taxes.

Most taxpayers look up a professional tax preparer once a year, as deadline day looms.  But during a year, a lot of taxpayers also experience circumstances when they should contact their preparer; marriage or divorce, birth of a child, retirement, career change or a notice from the Internal Revenue Service (IRS) or other tax authority.  Next March or April may be too late to fix nasty tax situations.

If any of the below changes or event occur in your life, contacting us is a good idea:

 

Marital:  If you’re going through a divorce, find a tax preparer to discuss ramifications of dependents, alimony, childcare, or division of property.  Divorce decrees also sometimes contain landmine wording that produces a different, often unpleasant, tax result.

If you changed your name as a result of a recent marriage or divorce, make sure the name on your tax return matches the name registered with the Social Security Administration (SSA).  If you took your spouse’s last name, or if both spouses decide to hyphenate their last names, you may run into complications with the IRS if you don’t notify the SSA.  Informing the SSA of a name change requires filing a Form SS-5, Application for a Social Security Card, at the nearest SSA office.

Family Size:  The birth or adoption of a child can affect tax returns, and as children get older their parents may lose certain credits.  In most cases, a child can be claimed as a dependent in the year in which he or she was born.  The child must have a Taxpayer Identification Number (TIN); for children born in the U.S., the TIN is generally a Social Security Number (SSN).  Parents may be eligible for a tax credit for qualifying expenses paid to adopt a child, and credits may increase if the expenses involve adoption of a child with special needs.

Career:  Not all tax changes due to career result from a raise and a bump to a higher tax bracket.  You must also consider whether your employment is full time, part time, or contract.  Pension opportunities or excludable benefits, such as cafeteria plans and dependent care benefits, also mean you should contact a tax professional, as do any changes in work-related deductions.

Unemployment compensations generally includes state unemployment insurance benefits and benefits paid to you by the Federal Unemployment Trust Fund.  If you received unemployment compensation during the year, next spring you should receive a Form 1099-G showing the amount you were paid.  Unemployment compensation must be included in your taxable income.

Retirement:  Kicking off the golden years, whether it was your decisions or that of your former employer, may trigger penalties for early withdrawal from retirement funds or ignite taxes on Social Security benefits.  Did your company present you with an early retirement proposal or are you considering early retirement?  You may be eligible for a tax credit if you contribute to an employer-sponsored retirement plan or to an individual retirement arrangement.  Discuss options with a preparer before you sign anything.

Moving:  Consider everything from mileage rates for the moving vans to change-of-address forms to the IRS.  Generally, you can deduct moving expenses if your move is closely related to the start of work.  Your move meets the IRS distance test if your new main job location is at least 50 miles farther from your former home than your old main job location was.  Qualifying taxpayers must also meet a time test, working full time for at least 39 weeks during the first 12 months after arriving in the general area of the new job location.  Different rules may apply to members of the Armed Forces or a retiree or survivor moving to the U.S.  Your best bet is to check with a tax professional.

IRS Notifications:  If the IRS mailed you a notice after last tax season and you tossed it in a drawer, realize that the notice never really disappeared.  If you’ve received a letter from the IRS, call your tax preparer immediately.  Putting off responding will only bring more IRS letters and, likely, larger penalties.

With the right help from a tax professional, you can easily navigate the proper tax process for filing after recent changes in your life.  For more information contact us at 928-778-0079.

 

 

 


Things to Remember about Charitable Giving

All giving is valuable to those in need, but from a tax perspective, not all giving is rewarded with a tax write-off.   Here is what you need to keep in mind:

1. YOU MUST ITEMIZE FOR FEDERAL FILING TO DEDUCT CHARITABLE GIVING. You can be as generous as you want, but a tax deduction is limited to those who itemize personal deductions and forego the standard deduction amount.

2. DEDUCTIONS ARE ALLOWED ONLY FOR IRS-APPROVED CHARITIES. You cannot claim a deduction for money you give directly to individuals. Check to see that a charity is IRS-approved at www.irs.gov/Charities-&-Non-Profits/Search-for-Charities.

3. ANNUAL DEDUCTIONS ARE LIMITED WITH RESPECT TO ADJUSTED GROSS INCOME. You cannot deduct cash donations in excesss of 50% of your adjusted gross income.  Unused deductions can be carried forward for up to 5 years.

4. DEDUCTIONS REQUIRE SUBSTANTIATION. Your word or even a canceled check isn’t good enough.  If you donate $250 or more, you must obtain a written acknowledgment from the organization, specifying your gift and stating that no goods or services were received in exchange. Special rules apply for donations of vehicles.

5. SOME GIFTS REQUIRE APPRAISALS.  If you donate property valued at more than $5,000, you need a qualified appraisal.  This must be done by someone who has the credentials to be a qualified appraiser.

6. DEDUCTIONS OF APPRECIATED PROPERTY PROVIDE A DOUBLE TAX BENEFIT.  If you donate appreciated property that you have owned for more than a year, such as stock, you can deduct the value of the property on the date of the gift.  What’s more, you don’t have to report any capital gain on the appreciation; it effectively becomes tax free to you.

7. CASH DONATIONS MADE BY YEAR-END ARE DEDUCTIBLE NOW EVEN IF RECEIVED IN THE NEW YEAR. If you mail a check to the charity on December 31, it is deductible on your 2012 return, even though the charity does not receive the gift until 2013. Also, you can charge a donation to a credit card; you can take the  deduction in 2012 even if you pay the credit card bill in 2013.

8. OUT OF POCKET EXPENSES ARE DEDUCTIBLE. If you spend any money helping a charity, you can deduct those if you have substantiation. The value of your time volunteered to a charity, however, is NOT deductible. The mileage on your vehicle for driving to volunteer IS deductible at the rate of $0.14 a mile.  Be sure to keep a record of the mileage, including the date and purpose of each charitable trip.

These tips are brought to you by Schutte & Hilgendorf, PLLC, CPA’s, a Prescott firm serving the greater Yavapai County, providing audit, accounting, bookkeeping, tax preparaton and planning, Quickbooks accounting and setup, to individuals and small businesses. Contact us for a free consultation at (928) 778-0079.


Business Personal Property Taxes

Arizona businesses are required to file a Business Property Statement if they currently own any business personal property. This generally includes assets or equipment used to operate a business, but does not generally include, land, buildings, or vehicles. Many of our clients have not been receiving reports from Yavapai County over the past several years or were never setup to receive them. We wanted to make sure you are aware of your requirement to file these reports with Yavapai County.

The Arizona exemption for business personal property tax for 2012 is $68,079. Even if your total business personal property is under the exemption amount, you are still required to file the annual report. If you fail to file the annual report by the due date, you are no longer eligible to receive the exemption for that tax year. So, if the county were to audit your records for a year you did not file you would be required to pay tax on the total business personal property you owned, in addition to a 10% penalty. The County has informed us, if a business completes a report for 2012, they will not be going back to assess tax on prior years you did not file. Their goal is to get businesses on the correct path starting now. This may not be the case in future years.

Yavapai County will be mailing out the Business Property Statement reports in mid to late January 2013 and you should have one by February 1, 2013, if you are already established in their system. If you have not received a report before or in the past couple years, you can contact them at (928) 771-3220 before December 31, 2012 to be added to the reports mailed in January. If you have received the report in the past or have requested it before the end of the year, but have not received it by February 1st, you can contact the County to request a report be mailed to you.

If you would prefer to have us contact the County for you, please let us know. We will be happy to help you complete the reports to make sure your business is in compliance with the reporting requirements.

Should you have questions regarding this or any other tax and accounting services, give us a call.   Schutte & Hilgendorf is a full service CPA firm, providing auditing, accounting and tax services for individuals, small businesses, non-profits and homeowners associations throughout Yavapai County and Northern Arizona. Call us at 928-778-0079 or email info@prescottaccountants.com


Knowing when to make your Arizona Withholding Payment

How does an employer know whether to make Arizona withholding payments on a quarterly basis or more frequently?

QUARTERLY BASIS PAYMENTS: An employer must make its Arizona withholding payments on a quarterly basis if the average amount of Arizona income taxes withheld during the preceding four calendar quarters does not exceed $1,500.

MORE FREQUENT PAYMENTS: An employer must make its Arizona withholding tax payments at the same time as its federal withholding deposits if the average amount of Arizona income taxes withheld during the preceding four calendar quarters exceeds $1,500.

WHY DOES THE EMPLOYER MAKE THIS COMPUTATION? Arizona law requires an employer, at the beginning of each new quarter, to compute its average Arizona withholding tax liability for the preceding four calendar quarters. This calculation is performed to determine the correct Arizona withholding payment schedule.

HOW DOES THE EMPLOYER MAKE THIS COMPUTATION? An employer that has four full consecutive calendar quarters of Arizona withholding liability historical data must use the regular withholding payment schedule computation. An employer that does not have four full consecutive calendar quarters of Arizona withholding liability historical data must use the alternate withholding payment schedule computation. Refer to the “Arizona Withholding Liability/Payment Schedule” section of the Form A1QRT instructions for further information

Per the State of Arizona – Department of Revenue – Arizona Withholding FAQ’s

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.


IRS may recharacterize dividend payments to S shareholder-employee as wages

IRS may recharacterize dividend payments to S shareholder-employee as wages
Watson, P.C. v. U.S., (DC IA 12/23/10) 107 AFTR 2d ¶2011-305
A district court has concluded that an S corporation shareholder-employee’s $24,000 salary in 2002 and 2003 was unreasonably low, and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. The corporation will also owe employment taxes on the reclassified dividend payments.
RIA observation: This is a long standing compliance issue with IRS, which feels that many service professionals try to minimize Medicare and Social Security taxes by routing what would otherwise be self-employment income through an S corporation and then paying themselves a nominal salary. Since the amount of compensation that an S corporation pays its employee-shareholder is within the employee-shareholder’s discretion, he may have an incentive to claim less than a reasonable salary and take from the S corporation other payments (e.g., dividends) that aren’t subject to employment taxes.
RIA observation: In 2010, the House but not the Senate passed legislation that included a crackdown on service professionals who try to minimize Medicare and Social Security taxes by routing their self-employment income through an S corporation and then paying themselves a nominal salary (see Federal Taxes Weekly Alert 06/03/2010).
Facts. David E. Watson had a bachelor’s degree in business administration and a specialization in accounting. He owned a professional corporation (PC) called DEWPC that, since its inception, had elected to be taxed as an S corporation. Watson was its sole shareholder, employee, director, and officer, and was the only person to whom DEWPC distributed money during the years at issue. His $24,000 annual salary was documented in the corporate minutes. In selecting his salary, he did not look at what comparable businesses paid for similar services. For both years at issue, Watson received dividend distributions from DEWPC that totaled over $175,000 annually.
On Feb. 5, 2007, IRS assessed $48,519 in taxes, penalties, and interest against DEWPC for the eight calendar quarters of 2002 and 2003. It made these assessments after it determined that portions of the dividend distributions from DEWPC to Watson should have been characterized as wages paid to Watson that were subject to employment taxes. DEWPC later paid $4,063.93 toward these assessments and then filed a claim for refund of the payments. IRS denied the claim and DEWPC sued in district court.
Background. Employers are liable for FICA (Social Security) taxes on wages paid to their employees. (Code Sec. 3111) Fact Sheet 2008-25, August 2008 warns S corporations not to attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. Fact Sheet 2008-25, August 2008 lists these factors that courts have considered in determining reasonable compensation:
•       training and experience;
•       duties and responsibilities;
•       time and effort devoted to the business;
•       dividend history;
•       payments to non-shareholder employees;
•       timing and manner of paying bonuses to key people;
•       what comparable businesses pay for similar services;
•       compensation agreements; and
•       use of a formula to determine compensation.
DEWPC argued that IRS did not have the authority to recharacterize any of the dividend payments as compensation. DEWPC cited three federal court cases to support its argument.
Court’s ruling. The district court found that DEWPC’s position was undermined by IRS revenue rulings and case law. For example, in Rev Rul 74-44, 1974-1 CB 287, IRS concluded that dividends received by an S corporation’s two sole shareholders were wages for which the corporation was liable for FICA, FUTA and income tax withholding. In Joseph Radtke v. U.S., (DC WI 4/11/89) 63 AFTR 2d 89-1469, aff’d, (CA 7 2/23/90) 65 AFTR 2d 90-1155, a district court determined that certain funds designated as dividends were actually compensation for which an S corporation owed employment taxes. The district court was not persuaded by the rulings that DEWPC cited because in those rulings, the taxpayer was attempting to recharacterize funds, whereas in DEPW’s case, it was the government that was attempting to recharacterize the funds.
The district court said that the proper tax treatment of funds disbursed by an S corporation to its employees or shareholders turns on an analysis of whether the payments were remuneration for services performed. After reviewing the facts, the court concluded that DEWPC structured Watson’s salary and dividend payments in an effort to avoid federal employment taxes, with full knowledge that the dividends paid to Watson were actually “remuneration for services performed.” The court believed that a reasonable person in Watson’s role as DEWPC’s sole shareholder, officer, and employee would be expected to earn far more than a $24,000 salary for his services. The court pointed out that Watson was an exceedingly qualified accountant, with both bachelor’s and advanced degrees, working as one of the primary earners in a reputable firm that had over $2 million in gross revenues in 2002 and nearly $3 million in 2003.
As a result of the ruling, DEWPC will owe employment taxes, penalties, and interest on the 2002 and 2003 dividend distributions to Watson that were reclassified as salary.
RIA Research References: For S corporation dividends as wages subject to withholding, see FTC 2d/FIN ¶ H-4329; TaxDesk ¶ 532,002.
Source:  Federal Tax Updates on Checkpoint Newsstand tab 1/13/2011

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.