All posts by Thomas Shelton

Apply for an EIN

No need to file a Form SS-4. We ask you the questions and you give us the answers. After all validations are done you will get your EIN immediately upon completion. You can then download, save, and print your EIN confirmation notice.

This EIN is your permanent number and can be used immediately for most of your business needs, including opening a bank account, applying for business licenses, and filing a tax return by mail. However, no matter how you apply (phone, fax, mail, or online), it will take up to two weeks before your EIN becomes part of the IRS’ permanent records. You must wait until this occurs before you can file an electronic return, make an electronic payment, or pass an IRS Taxpayer Identification Number matching program.

Important Information for Home-care Service Recipients.

If you are a home-care service recipient who has a previously assigned EIN either as a sole proprietor or as a household employer, do not apply for a new EIN. Use the EIN previously provided. If you can not locate your EIN for any reason, follow the instructions on the Misplaced Your EIN? Web page.

If you are a home-care service recipient who does not have an EIN, do not use the online application to apply for one. You must apply for your EIN using one of the other methods (phone, fax or mail). For additional information, visit the How to Apply for an EIN Web page.

Attention Tax Exempt/Non Profit Organizations.

At the beginning of the online EIN application process, you will be asked to check a box that best describes your legal structure. The legal structure for all Tax Exempt/Non Profit Organizations is found under the 7th option, “View Additional Types, Including Tax Exempt and Governmental Agencies.” Non-profit organizations include corporations, trusts, limited liability companies, and unincorporated associations that qualify for tax-exempt status under Internal Revenue Code (IRC) 501(a) as described in Publication 557 (Tax-Exempt Status for Your Organization).

This Application Is Available During the Following Hours:

Monday – Friday: 6:00 a.m. to 12:30 a.m. Eastern time
Saturday: 6:00 a.m. to 9:00 p.m. Eastern time
Sunday: 7:00 p.m. to 12:00 a.m. Eastern time

APPLY ONLINE NOW

Taxpayers Must Use e-Signatures

In an effort to make electronic filing even more secure and paperless, the Internal Revenue Service now requires all taxpayers who file their tax returns electronically to also use electronic signatures. The IRS has eliminated the paper signature document for e-filed returns.

Just as the familiar automated teller machines use personal identification numbers, so does the IRS e-signature process. If filing a joint return, each taxpayer must create and use his or her own PIN to sign the tax return. The IRS also must verify your identity so there will be personal and tax-related questions. You should have your prior year 2009 tax return on hand if it’s available.

There are two ways to create an IRS e-signature PIN: self-select PIN method and practitioner PIN method.

Self-Select PIN Method

Taxpayers who are preparing their own returns using software must use the self-select PIN method. The self-select PIN allows taxpayers to select five numbers (except all zeros) to enter as their electronic PIN signature. The IRS still must verify the taxpayers’ identities. As part of the verification process, you must provide either your adjusted gross income listed on your 2009 tax return or your 2009 PIN used to e-file your return last year. It also will ask for date of birth. For joint returns, both taxpayers must create PINs using this method.

If you have never filed a tax return before, you can still use self-select PIN by using zero as your 2009 AGI. Do not leave this field blank. However, the space for the 2009 PIN should be left blank.

Practitioner PIN Method

Taxpayers who use a volunteer or paid tax preparer may use the practitioner PIN method or the self-select PIN method. The practitioner PIN method allows you to authorize your tax preparer to enter or generate your five-digit PIN on your behalf. You must sign Form 8879, IRS e-file Signature Authorization. The practitioner retains Form 8879 but does not mail it to the IRS. Some tax preparers may use an electronic signature pad for Form 8879 this year. Taxpayers who are age 16 and younger must use the practitioner PIN method.

IRS-issued Electronic Filing PIN

For taxpayers using the self-select PIN method but who cannot recall their 2009 adjusted gross income or their 2009 PIN, the IRS will issue a temporary Electronic Filing PIN (EFP.) This EFP can be used in place of the 2009 PIN and allow taxpayers to complete the self-select PIN method once their identity has been verified. Most tax software will contain a link to the EFP tool or you can search IRS.gov use keywords “ Electronic Filing PIN Request.” You also can use an automated, self-service telephone assistant by calling 1-866-704-7388.

Follow the instructions to receive your electronic filing PIN. Again, the IRS must verify your identity so you will need to provide some personal information and some tax-related information. You will need to know the filing status (i.e. single, married filing jointly, head of household, etc.) and the address used on your 2009 tax return.

The EFP will generate a five-digit number that you can substitute for your 2009 PIN. You can then return to the self-select PIN method, use the temporary EFP in place of the 2009 PIN requirement and complete the signature process.

Ordering Your 2009 Tax Transcript

If you are unable to complete the EFP application and you cannot locate your 2009 tax return, you can order a transcript which will contain information such as your AGI that you can use to complete the self-select PIN method. There is no fee for a transcript.

The IRS has a new process for 2011 that allows you to order your transcript from IRS.gov. Just look for “online services” on the home page or search “Order a Transcript.” Your transcript will be sent to the address listed on the 2009 tax return. You also can call 1-800-908-9946 to order a transcript.

You can go to IRS.gov and print Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. The form can be completed and then faxed or mailed according to the form’s instructions. Generally, you do not need a copy of your exact tax return in order to complete the PIN process. Allow 7 to 10 days to receive the tax transcript.

Signing a joint return when spouse is not available

If your spouse is serving in a combat zone and you do not have power of attorney, you can still create a self-select PIN for your spouse and e-file the return. After e-filing your return, just submit a signed statement explaining your situation with Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, and mail according to the instructions.

If you have power of attorney for a military spouse or anyone who must file a tax return, you can use the self-selection PIN method to sign their return. You must also attach the power of attorney to Form 8453 and mail both to the IRS. Again, you should follow the mailing instructions on Form 8453.

Form 8453 can be used to submit any required paper documents in support of your tax return.

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IRS plans a late start to the 1040 filing season

The delayed passage of the American Taxpayers Relief Act of 2012 has put the IRS behind schedule. Due to several provisions of the law affecting 2012 tax returns, the IRS could not open the Form 1040 filing season for the majority of taxpayers until late January.

Those taxpayers filing Form 5695 (Energy Credit), Form 4562 (Depreciation), and Form 3800 (General Business Credit) will not be able to file until late February or possibly not until March. Apparently a large percentage of taxpayers in this group typically file later in the season because they have more complex returns.

The IRS must complete the updating of forms and computer programming and testing before it is ready to accept any filings either on paper or electronically. The IRS said that taxpayers will receive refunds faster by e-filing and using direct deposit.

If we can be of assistance to you in preparing any of your 2012 tax filings, please contact us.

Straight talk on carrybacks and carryforwards

The timing of taxable income and deductions for federal income tax purposes is relatively straightforward. Generally, income is taxable in the year it is earned and received. Likewise, deductible expenses incurred and paid this year can offset taxable income on this year’s return. The Internal Revenue Code is riddled with exceptions, but these basic rules usually apply, especially for calendar-year taxpayers.

The tax law also includes several provisions commonly referred to as “carrybacks” and “carryforwards” (or “carryovers”). As their names imply, the tax item can be carried back to a prior year or carried forward to a succeeding year.

Two items that are often carried forward by individuals are capital losses and excess charitable deductions. For instance, capital losses realized in 2012 offset capital gains plus up to $3,000 of ordinary income for the year. If you have an excess capital loss of $10,000, you can carry forward $7,000 to 2013 after offsetting $3,000 of ordinary income in 2012.

Similarly, your current deduction for charitable donations may be limited by one or more percentage thresholds in the law. For example, donations of appreciated property are generally limited to 30% of your adjusted gross income (AGI). If you exceed the 30%-of-AGI limit this year, you may carry over the excess for up to five years.

Carrybacks aren’t as common, but may also be available in certain situations. Take a “net operating loss” (NOL) sustained by your small business. If you have an NOL in 2012, you can carry back the loss for two years. Thus, you’re effectively able to reduce your tax liability for one or two of the previous years for a refund of taxes already paid. Then you can carry forward any remaining NOL for up to 20 years. If it suits your purposes, you can elect to waive the NOL carryback. For more information on carrybacks and carryforwards, give us a call. We can help you make the best tax return choices for your situation.

Dependents can be a complicated tax issue

Most taxpayers believe that a “dependent” is a minor child that lives with them. While that is essentially correct, dependents can include children and parents, other relatives and nonrelatives, and even children who don’t live with you. There is really much more to the dependent deduction than you might at first imagine.

  • · Exemptions and your taxable income. For 2012, each dependent deduction is worth $3,800, reducing your taxable income by this amount. In 2013, the deduction increases to $3,900 and is phased out for high income taxpayers.
  • · Dependents defined. It’s impossible to present all of the rules relative to dependents here, since they are so complicated. Generally speaking, if somebody lives with you and you provide more than half of that individual’s support for the entire year, there is a good chance that person is a dependent. There are many exceptions. For example, parents don’t have to live with you if they otherwise qualify, but some other relatives do. A child of divorced parents doesn’t necessarily have to live with the noncustodial spouse for the dependent deduction to apply.
  • · People who can’t be claimed. Generally, you may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.
  • · One dependent deduction per individual. If you claim yourself as your own dependent, anybody else who can truly meet the tests and claim you as a dependent will lose out. This is common for college students who file their own tax returns for their part-time jobs, while mom and dad really meet all of the qualifications to claim the dependent exemption.

While the dependent deduction might seem relatively minor, it can lead to other deductions on the tax return. In order to claim the child tax credit, the education credits, the dependent care credit, for example, you must claim the dependent deduction for the child that qualifies for the deduction or credit.

Finally dependent deductions can be negotiated, which is especially important for divorced taxpayers. In the past, the IRS would accept the language of the divorce decree to allow the noncustodial parent the dependent deduction. However, under the current rules, the IRS will no longer accept a divorce decree in lieu of IRS Form 8332 (Release of Exemption).

February tax filing reminders

  • February 28 – Payers must file information returns, such as Form 1099s, with the IRS. This deadline is extended to April 1 for electronic filing.
  • February 28 – Employers must send Form W-2 copies to the Social Security Administration. This deadline is extended to April 1 for electronic filing.
  • March 1 – Farmers and fishermen who did not make 2012 estimated tax payments must file 2012 tax returns and pay taxes in full.

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Mark these tax deadlines on your 2013 calendar

It’s time to file various tax returns once again. Among the tax deadlines you may be required to meet in the next few months are the following:

  • January 15 – Due date for the fourth quarterly installment of 2012 estimated taxes for individuals unless you file your tax return and pay any taxes due by January 31.
  • January 31 – Employers must furnish 2012 W-2 statements to employees. Payers must furnish payees with Form 1099s for various payments made. (The deadline for providing Form 1099-B and consolidated statements to customers is February 15.)
  • January 31 – Employers must generally file annual federal unemployment tax returns.
  • February 28 – Payers must file information returns, such as Form 1099s, with the IRS. This deadline is extended to April 1 for electronic filing.
  • February 28 – Employers must send Form W-2 copies to the Social Security Administration. This deadline is extended to April 1 for electronic filing.
  • March 1 – Farmers and fishermen who did not make 2012 estimated tax payments must file 2012 tax returns and pay taxes in full.
  • March 15 – 2012 calendar-year corporation income tax returns are due.
  • April 15 – 2012 federal partnership returns are due.
  • April 15 – Individual federal income tax returns for 2012 are due.

Understand “sunk costs” in making business decisions

Emotions add zest to life. They propel us to our feet when our favorite running back scores a touchdown. They warm us at an inspirational concert or movie. But in the realm of business, emotions sometimes hinder good choices. In fact, business owners and managers often let emotions dominate the decision-making process.

This is especially true when choices are based on “sunk costs.” Broadly defined, sunk costs are past expenses that are irrelevant to current decisions. For example, many firms hire consultants who sell and install software. In some cases, a company is still waiting – three or four years into the contract term – for a functional and error-free system. Meanwhile, costs continue to escalate. But are those costs relevant? Managers, especially those who initially procured the software and contractor, may reason that pulling the plug on a failed contract would be “wasting all that money we’ve spent.”

Not true. That money is “sunk”; it’s beside the point. Deciding to continue with a non-performing contract instead of staunching the flow of cash and changing course is irrational. It may be difficult to admit that a mistake was made. It may bruise the ego of the decision maker. But abandoning a failed contract is often the wisest decision. The only relevant costs are those that influence the company’s current and future operations.

Irrelevant costs

Let’s say your firm hires a new salesman. You spend thousands of dollars sending him to training seminars. You assign mentors who take time from their busy schedules to provide on-the-job coaching and oversight. But despite your best efforts, the new hire isn’t working out. He doesn’t fit your firm’s culture; he doesn’t grasp the company’s goals and procedures; he doesn’t generate adequate revenues for the business.

As a manager, what should you do? At some point, you may need to terminate that employee and start over with someone else. But what about all that time and money you spent training and mentoring the new salesman? Those costs are irrelevant; they’re “sunk.” You can’t get them back. So the best decision – as of today – may involve cutting your losses and starting anew.

Other examples of sunk costs may be found in the areas of product research, advertising, inventory, equipment, investments, and other types of business expenses. In each of these areas, companies spend money that can’t be recovered, dollars that become irrelevant for current decision making. Throwing good money after bad won’t salvage a poor business investment – or a poor business decision.

Use adjusted tax numbers in your 2013 planning

The IRS and the Social Security Administration have published some inflation-adjusted numbers for 2013. Use these numbers as you begin your tax and financial planning for 2013.

  • Social security taxable wage limit for 2013 will be $113,700. Retirees under full retirement age can earn up to $15,120 without losing benefits.
  • The threshold for unearned income a child can earn in 2013 without having the kiddie tax apply is $2,000.
  • The amount that can be given each year without paying gift tax is $14,000 ($28,000 for joint gifts).
  • The amount that can be set aside in a health savings account is limited to $3,250 for individuals and $6,450 for families. Those 55 or older can contribute an additional $1,000.
  • The maximum salary deferral for a 401(k) increases in 2013 to $17,500. The catch-up limit for those 50 or older remains unchanged at $5,500.
  • The maximum IRA contribution limit increases to $5,500; the limit for those 50 or older is $6,500.
  • The maximum salary deferral for SIMPLEs increases in 2013 to $12,000. The catch-up limit for those 50 or older remains unchanged at $2,500.

Contact our office if you have questions or wish to discuss early 2013 tax planning.

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Note these December tax deadlines

  • December 17 – Due date for calendar-year corporations to pay the last installment of 2012 estimated income tax.
  • December 31 – Deadline to complete 2012 tax-free gifts of up to $13,000 per recipient.
  • December 31 – Deadline for paying expenses you want to be able to deduct on your 2012 income tax return.
  • December 31 – Deadline for taking 2012 required minimum distributions (RMDs).

IRS gives tax relief to hurricane victims

Victims of Hurricane Sandy may be entitled to some tax relief, according to an announcement by the IRS. Certain tax filing and payment deadlines from late October on will be extended until February 1, 2013. This includes the final 2012 estimated tax payment normally due January 15, 2013 and payroll and excise taxes normally due October 31, 2012, and January 31, 2013.

The relief applies to taxpayers in the disaster area and those outside the area whose records and/or tax professional are located in the disaster area. Workers assisting in hurricane relief activities conducted by recognized government or philanthropic organizations may also qualify. For more information, contact our office, call IRS toll-free disaster assistance at 1-866-562-5227, or visit www.disasterassistance.gov.

Get a head start on your 1099 reporting

January is always a busy month for companies. You’re trying to get business off to a good start in the new year, you’re trying to close the books on last year, and there’s 1099 reporting to complete by month-end.

There are several variations of the information returns known as Form 1099. Most are specific to certain industries. But nearly every company, large or small, has to issue Form 1099-MISC. And you have to send it to recipients byJanuary 31, 2013.

In many businesses, it becomes a late-January panic. There’s a scramble to find out who needs to receive the form, their current address, and their taxpayer ID number. But if you’re smart, you can get a head start on that before year-end.

You use Form 1099-MISC to report miscellaneous payments to non-employees. This includes fees for services paid to independent contractors, such as consultants, Web designers, accountants, lawyers, and others. If you pay fees to your outside directors, they should be on the list. Generally, you don’t report fees paid to corporations, but there are exceptions. For example, you must report payments to all law firms, incorporated or not.

You obviously won’t know the dollar amount to report until after year-end. But you can start to assemble the list of recipients, verify whether they’re a corporation, and obtain their taxpayer ID information. Ideally you would have a process to collect this information when a new contract is signed. But if not, December is a perfect time to do the ground work. Then you might have one less crash project at the end of January.

Contact our office if you need more information on your 1099 reporting requirements.

IRS issues consumer fraud alert

The IRS is warning people to be aware of fraud connected with Hurricane Sandy. As is usually the case following a natural disaster, scam artists are impersonating charities to get money or financial information from those wanting to help victims of the storm. The scammers contact people by phone, social media, e-mail, or in person. To avoid falling for a scam, donate only to recognized charities, and avoid those with names that are similar to real charities. Do not give personal information to those seeking contributions, and don’t give cash donations. Contributions by check or credit card provide greater security as well as a record for tax purposes.

Focus on your strengths to improve profits

The conventional response to today’s lackluster economy is to focus on cutting business costs. That’s good advice up to a point, but eventually paring down becomes counter-productive. Once you’re done, you’re still stalled in the same economic doldrums.

Rather than restricting your strategy to cost-cutting, try playing to your strengths. What product, service, or other customer benefit do you offer that goes beyond the norm? Think about ways to build upon and expand that benefit, and then communicate it to current and prospective customers. If nothing you offer is out of the ordinary, improve your services or offer a new service that nobody else provides.

What makes you stand out? Look at your firm through your customers’ eyes. Why do they do business with you instead of your competitors? Is it the exceptional quality of your products or services, lower prices, peripheral services (such as delivery), your helpful and knowledgeable staff, a convenient location, or some combination of these reasons? Even if you think you already know the answer, double check with your customers. Ask what they like about doing business with you and what additional features or changes would enhance the relationship.

Play to your strengths. Once you’ve identified your customers’ wishes and preferences, focus on your strengths. Discontinue products or services that are indistinguishable from everyone else’s or that generate more problems than profits. Instead, emphasize or expand your existing areas of excellence. Promote activities that enhance productivity and/or reduce bureaucracy.

Thanks! We appreciate you

Thank you for selecting our firm for your tax and accounting needs. We appreciate the confidence you have shown in us, and we remain ready to assist you at any time. Also, thank you for recommending us to your family, friends, and associates. We appreciate your referrals.

Warmest wishes for a happy holiday season and a prosperous new year!

December 31, 2012, will be a very important date in the lives of taxpayers, because that is the date that many tax-saving provisions are set to expire. Congress has extended many of these provisions on a year-by-year basis. However, as it stands now, many tax-cutting provisions have already expired or will expire. Here are a few of the more important ones that could apply to you.

  • Employee’s share of social security taxes. The employee’s share of FICA taxes will return to 6.2% after 2012, up from 4.2%.
  • Income tax rates. The 10% tax rate bracket will be eliminated, and the top rate will be 39.6% (up from 35%).
  • Long-term capital gains. The maximum tax on most long-term capital gains will increase from the current level of 15% to 20%. For some low-income taxpayers, the current long-term capital gains rate can be zero. That provision will also be eliminated. Additionally, qualified dividends will no longer be taxed at the long-term gains rates (including the zero rate for lower-income taxpayers). Instead, dividends will be taxed at ordinary income rates as high as 39.6%.
  • Child tax credit. The current credit, which is $1,000 for a qualifying child, will be reduced to $500.
  • Student loan interest deduction. This deduction will be limited to only the first 60 months that interest payments are made, and there will be a much lower income limit where this deduction can be claimed at all.
  • Section 179 expensing deductions. The first-year expensing limit and qualifying property limit will be reduced to $25,000 and $200,000 (down from the 2012 levels of $139,000 and $560,000).
  • Itemized deductions. Itemized deductions are currently not reduced by the size of your adjusted gross income. That provision will expire, and itemized deductions will again be reduced for higher bracket taxpayers.
  • Estate and gift taxes. The estate and gift tax rules will revert to those in effect before 2001. That means the maximum estate and gift tax rate will increase to 55% (up from 35%), and the maximum amount of assets to be left to beneficiaries tax-free will be reduced to $1,000,000 (down from the current level of $5,120,000).

What can you do to manage your tax bill for 2012 and 2013? You should monitor the tax landscape as Congress returns toWashington. Some of the things that you’ll want to examine include the following:

  • Should you accelerate income into 2012 in order to take advantage of the current tax rates that may be lower than future rates?
  • Should you sell assets that you have held long-term (such as stocks, mutual funds, and property) to take advantage of the expected lower capital gains tax rates in 2012?
  • Should you sell dividend-paying stocks since the tax benefit for holding such stock may be eliminated?

Contact us if you would like to review these and other tax issues before year-end.

December deadline for tax-exempt organizations

Here’s an important reminder for small nonprofit organizations: If your organization had its tax-exempt status revoked for failing to file an annual return from 2007 through 2009, theIRSis giving you a chance to get reinstated.

TheIRShas issued guidance for small organizations with gross annual receipts of less than $50,000 that will allow them to regain tax-exempt status retroactive to the date of revocation. To qualify for this reinstatement and a reduced application fee of $100, the organization must submit an application postmarked no later thanDecember 31, 2012.

Contact our office if you need details or filing assistance.

IRS eases reporting requirement on health coverage

The Affordable Care Act of 2010 included a provision requiring employers to report the cost of coverage under an employer-sponsored group health plan on the employee’s 2012 W-2.

However, employers issuing fewer than 250 W-2s will not need to include the cost of health care on W-2s for 2012. For these employers, the 2012 reporting is optional. And such reporting will not apply for future calendar years until theIRSpublishes further guidance.

IRSannounces 2013 HSA limits

Health Savings Accounts (HSAs) allow taxpayers with high-deductible health insurance to set aside tax-deductible dollars that can be used tax-free to pay unreimbursed medical expenses.

If you have an HSA, you’ll be able to contribute more in 2013, thanks to the inflation-adjusted limit recently announced by theIRS. The amount you can set aside in 2013 will increase to $3,250 for an individual and to $6,450 for a family. If you’re 55 or older, you’re allowed an additional $1,000 contribution.

For 2013, a high-deductible health plan is one with an annual deductible that is not less than $1,250 for self-only coverage or $2,500 for family coverage. Annual out-of-pocket expenses cannot exceed $6,250 for self-only coverage or $12,500 for family coverage.

IRSdelays basis reporting for bonds and options

The IRS is giving brokers extra time to start reporting the basis in debt instruments and options. This requirement had been scheduled to go into effect on January 1, 2013, but brokers and other involved parties complained to the IRS that this did not give them enough time to build and test the systems required to meet this obligation. The IRS has extended the deadline to January 1, 2014. This reporting requirement was the third phase of investment basis reporting included in a 2008 tax law.

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