Do you sell merchandise through e-Bay, Amazon or Google checkout? Do you collect payments for goods or services through third party payers such as Paypal or Clickbank? If so, then you should be aware that starting in 2011, the IRS is going to require that these merchants begin reporting all monies paid to sellers on an annual basis on a Form 1099-K. The 1099-K is then filed annually with the IRS.

For casual sellers, this form will probably not be applicable. The 1099-K requirement is for those sellers who earn more than $20,000 and sell more than 200 transactions per year. The reasoning behind this new reporting requirement is an attempt to close the gap on unreported online earnings. This will give the IRS a way to match earnings against tax filings as they do with other tax documents like the W-2 and 1099-misc.

However, keep in mind that if you operate a small business and you collect earnings from online sales - then you are required to report those earning, whether or not you receive a 1099-K.

On November 6th, Congress passed the “Worker, Homeownership, and Business Assistance Act of 2009.”

Some of the provisions of the law primarily affect individuals.

Information for Individuals:

* Making Work Pay Tax Credit. This tax credit means more take-home pay for many Americans. To make sure enough tax is withheld from their pay, taxpayers can use the IRS withholding calculator.

* First-Time Homebuyer Credit Expands. Homebuyers who purchase in 2009 can get a credit of up to $8,000 with no payback requirement. New legislation extends and expands this credit.

* Money Back for New Vehicle Purchases. Taxpayers who buy certain new vehicles in 2009 can deduct the state and local sales taxes they paid or other taxes and fees they paid in states with no sales tax.

* Education benefits. The new American opportunity credit and enhanced benefits for 529 college savings plans help families and students find ways to pay higher education expenses.

* Enhanced Credits for Tax Years 2009, 2010. Find details on the earned income tax credit and the additional child tax credit.

* Increased Transportation Subsidy. Employer-provided benefits for transit and parking are up in 2009.

* Up to $2,400 in Unemployment Benefits Tax Free in 2009. Individuals should check their tax withholding.

* $250 for Social Security Recipients, Veterans and Railroad Retirees. The Economic Recovery Payment will be paid by the Social Security Administration, Department of Veterans Affairs and the Railroad Retirement Board.

* Energy Efficiency and Renewable Energy Incentives.

* Health Coverage Tax Credit. The credit increases from 65 percent to 80 percent of qualified health insurance premiums, and more people are eligible.

Information for Businesses

Some of the provisions of the law primarily affect businesses.

* Making Work Pay Tax Credit. Businesses should use the new withholding rates for their employees. For pension plan administrators, new optional withholding procedures are available to supplement the February withholding tables.

* Work Opportunity tax credit. This newly-expanded credit adds returning veterans and “disconnected youth” to the list of new hires covered by the credit that businesses may claim. Businesses have until Oct. 17 to request certification for the tax credit for some new hires.

* COBRA: Health Insurance Continuation Subsidy. The IRS has extensive guidance for employers, including an updated Form 941, as well as information for qualifying individuals.

* Energy Efficiency and Renewable Energy Incentives.

* Net Operating Loss Carryback. Small businesses can offset losses by getting refunds on taxes paid up to five years ago. Information on the carryback, an expanded section 179 deduction and other business-related provisions, is now available.

* Municipal Bond Programs. There are new ways to finance school construction, energy and other public projects.
(IRS.gov)

Many business taxpayers fail to deduct otherwise eligible business expenses or fail to fully deduct qualifying business expenses. Below is a listing of commonly missed deductions or deductions that you may not be fully utilizing. You may wish to carefully examine your records to determine if you may be missing any of these deductions.

*For Sole Proprietors/Filing Schedule C: Home Office Deduction: If you use part of your home as a home office, you may be entitled to deduct expenses related to the home office based on the percentage of square footage the home office occupies. Related expenses include mortgage interest, property taxes, utilities, and repairs, etc. (S Corporation shareholders and Partners in a Partnership usually cannot take this deduction.)
*General Business Expenses: If you use your personal funds for business expenses such as office supplies, these are qualifying business expenses, which you may deduct. You can fill out an expense report and have the business reimburse you. Keep all receipts attached to the expense report for supporting documentation.
*For S Corporation Shareholders: Imputed Interest on Shareholder Loans: If you have loaned money to your business, you are required to charge interest on the loan or interest will be imputed to you. While you are required to report the interest as income on your personal return, your business is permitted a deduction for the interest paid. If any of the interest amount is improperly characterized as wage income to you, your business may be overstating its employment tax liability. By recharacterizing these amounts as interest expense, your business may be able to reduce its employment taxes. (You should also have an official Note set up with terms, etc….)
*Meals and Entertainment Expenses: If you have used your personal funds to pay for meals and entertainment expenses, these expenses qualify as a business deduction, subject to limitations. Once again, fill out an expense report and have the business reimburse you. Keep all receipts attached to the expense report for supporting documentation. Also document the business purposes of the meals and entertainment expenses.
*Personal Assets Converted to Business Use: If you have contributed personal assets, such as a computer, the fair market value of these assets qualify as a business deduction, subject to depreciation limitations, beginning with the date of conversion.
*Self-Employed Health Insurance: As a self-employed taxpayer, you may deduct your health insurance premiums under certain circumstances. (check with your tax professional for further information)
*<Communications Expenses: Expenses related to the business use of your personal telephones, cellular phones, and internet connections may be deducted.
*Automobile Expenses: Mileage and other related automobile expenses may be deducted when your personal vehicle is used for business purposes.

A shareholder of an S Corporation is considered an employee of the corporation. As an owner/employee, the shareholder must take a “reasonable” salary and must pay payroll taxes on that salary. The IRS does not defiine “reasonable” and this can be interpreted in different ways. The best thing to do would be to keep track of your time and pay yourself accordingly. The corporation gets to deduct the salary expense as well as any employers payroll tax expense.

Shareholders can also take out distributions of their equity from the business. Payroll taxes are not paid on the distributions. However, it might not be a good idea to take out more in distributions than you actually pay yourself in a salary.

The number one audit risk for S-Corporations is salary and wages paid to officers of the corporation. If there is no “compensation of officers” reported on the S Corporation tax return, that could very well trigger an audit.

Effective for returns required to be filed (including extensions of time) after 12-20-07, the penalty for failing to file an S Corporation return is $85 per month/per owner for a maximum period of 12 months. And the penalty for failing to file a Partnership return is $86 per month/per partner for a maximum period of 12 months.

Therefore, the maximum penalty per shareholder in an S Corporation is $1,020. And the maximum penalty per partner in a partnership is $1,032

These penalties also apply to a failure to provide the information required on the return as well as to a failure to file a return. The penalty does not apply if a failure to file a return or to provide required information is due to reasonable cause.

An LLC with two or more members is classified as a Partnership by the IRS for tax purposes, by default. The Partnership must file a tax Form 1065 - which is due by the 15th day of the fourth month following the end of the tax year. Since a Partnership is not a taxable entity - the income, deductions and credits pass through to each partner. Each partner would receive a K-1 - which is then incorporated into the individual tax return of the partner. Currently, a penalty of $50 per month, per partner - with a $250 per partner maximum - is imposed on partnerships that do not timely file their returns. However, this penalty for “failure to file” was increased to $85 per month with new tax laws enacted in December 2007.

A single member LLC will be classified as a disregarded entity by default and will file a Schedule C for tax purposes. The Schedule C is attached to the members individual 1040 tax return and is due by the 15th day of the fourth month following the end of the tax year. (April 15th)

To change a default entity tax classification, Form 8832 (Entity Classification Election) can be filed with the IRS.

More S Corporations are undergoing intensive Audits

As an owner of an S Corporation, you should pay yourself a salary that is appropriate for your industry and position. If you do not pay yourself a market rate salary, and your firm is audited, you might be liable for additional back payroll taxes - plus penalties and interest . IRS revenue agents are beginning to audit more S Corporations and watching out for those firms that pay little or no salary to the owners to minimize payroll taxes. S Corporations are pass-through entities that issue K-1’s to all owners/shareholders at year end. Any net income or loss would pass through on a shareholders tax return as ordinary income not subject to self-employment taxes. If the S Corp tax return is examined by the IRS and they discover that the owners/shareholders were performing services for the S Corporation and did not take a reasonable salary, the IRS can reclassify ordinary income from the S Corporation and subject that to self-employment tax.

Be Prepared for an IRS challenge on Company Loans to Officers
(Tax Court Case lesson)

If you are an officer and plan to borrow money from your corporation, be sure to dot all your “I’s” and cross all your “T’s”. The loan needs to be handled like any other third party loan, including a promissory note and repayment schedule. The corporation should also pay the owner interest at the market rate. Interest due on the note can be recorded annually. There should be a clear paper trail that can answer any questions an IRS revenue agent may ask.Tax Court Case: A construction company owner borrowed money from his C Corporation to fund other business ventures. The company carried the advances on its books as loans, but the IRS slapped him with an $800,000 tax bill, claiming the advances were “constructive dividends”. However, in this case, the Tax Court sided with the owner, saying his promissory notes and extensive paperwork showed that he intended to repay this loan. (Byorick, TC Meme 88-252) Note: The most common situation that can result in a “constructive dividend” is when a corporation pays personal expenses of the shareholder. Constructive dividends occur most often with closely held corporations where dealings between the corporation and its shareholders are usually informal.