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.

HIGHLIGHTS OF THE FIRST TIME HOME BUYER TAX CREDIT

WHEN: Qualified “First Time Home Buyers” Who buy a House After April 8, 2008 and Before July 1, 2009

AMOUNT: Lesser of A) $7,500 ($3,750 if you are Married Filing Separately), or B) 10% of the Homes Purchase Price.

AGI LIMIT: $75,000 to $95,000 If Single, $150,000 to $170,000 if Married Filed Jointly.

WHO QUALIFIES:Taxpayer or Spouse Cannot Have Owned a Principal Residence in the U.S. during 3-Year Period Ending on the Date of the Purchase.

HOW DOES THE 15 YEAR PAY BACK WORK?: Taxpayer Must Pay Back the Credit Ratably over 15 Years by Extra Tax on Subsequent Tax Returns. Recapture Accelerated if Property is Sold or No Longer a Principal Residence.

NO ADDITIONAL RECAPTURE AFTER DEATH: There is No Additional Recapture Following Death of Taxpayer.

WHAT IF QUALIFIED HOME IS UNDER CONSTRUCTION?: The Home will Still Qualify for the Tax Credit if the Move In date is After April 8, 2008 and Before July 1, 2009.

If you are contemplating a change in payroll services and want to make the transition as smooth as possible, change payroll providers at the end of a calender year.

Continue with your current service until 12-31-2008. Notify this payroll provider that you plan to start a new service as of 1-1-2009, but would like for them to file your 1099’s, W-2’s and all other year end quarterly payroll tax reports for 2008.

By switching your payroll service provider on the last day of the year, you cut out the headaches of trying to put together two different provider’s payroll information in order to create 1099’s, W-2’s and year end quarterly tax reports.

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The upcoming tax filing season is expected to start on time for everyone - except those folks affected by late enactment of the IRS Alternative Minimum Tax Patch. The IRS has targeted February 11, 2008 as the potential starting date for taxpayers to begin submitting the five-related returns affected by the legislation. This delay will allow the IRS to update and test its systems.

The tax returns that include the following forms are affected by this filing delay:

• Form 8863, Education Credits
• Form 5695, Residential Energy Credits
• Schedule 2, Form 1040A, Child and Dependent Care Expenses for Form 1040A Filers
• Form 8396, Mortgage Interest Credit
• Form 8859, District of Columbia First-Time Homebuyer Credit

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.

Tax Planning is a much too often overlooked strategy for reducing an individuals tax liability. For some folks - tax planning is not really needed due to their particular income situation. Those in lower income brackets that receive a W-2 at year end with no investments and no itemized deductions - don’t really have much to work with. But for others, especially high net worth individuals - effective tax planning is a must. Whether it is deferring income or accelerating expenses, it is always good to sit down with your tax accountant or financial advisor prior to the end of the year. If it is determined that taxes will be due - then the appropriate estimated tax payments can be made on time. This can avoid having penalties and interest tacked on to your tax bill after the fact. However, waiting until year end to do this is not a good idea. Tax Planning should be done much earlier in the year for maximum benefit.

When setting up a bookkeeping system for your company, it is important to understand the definition of the cash method and the accrual method of accounting. Under the cash method, revenue and expenses are recorded according to the flow of cash in and out of the business. Under the accrual method, revenue and expenses are recorded when incurred, usually in the absence of a cash transaction. The cash basis is an easier concept to work with but does not always give you a true picture of business operations. The accrual basis will give you a more accurate picture of your company’s results of operations, but requires a bit more work.

Characteristics of the Cash Basis:

a. Deduct your business expenses when paid. ( Ex: Record expenses on the books only when cash goes out the door)

b. Record Income when you receive payments from your customers. (Ex: Recognize income on the books only when cash comes in the door)

c. At year end, only expenses paid during the year and income received during the current year will be recorded on the tax return. (Ex: If customers were invoiced a total of $75,000 late in December and payments on those invoices have not been received by December 31^st, that income does not show up on the tax return. Likewise, if invoices from your supplier totaling $75,000 are being held but not paid by December 31^st, those expenses are not deducted on the tax return)

Characteristics of the Accrual Basis:

a. Business expenses are deducted when you receive goods or services usually before they are paid. (Ex: Record expenses on the books when goods/invoices are received from your suppliers, before you send your payment.)

b. Revenue is recognized when you provide goods or services to your customers, even if payment has not been received. (Ex: Record income on the books when services are rendered to customers or goods are sold, prior to receiving payment)

c. At year end, unpaid invoices/receivables to customers could be sitting on the books which create taxable revenue for the current year, even though payment has not been received from the customer.

d. Likewise, at year end, unpaid bills to vendors/payables could be recorded on the books for expenses that have not yet been paid. These expenses will reduce taxable income.

Situations where the Accrual Method is required:There are some situations where the accrual method of accounting is required. However, for most small businesses, these situations probably do not apply. If you have a corporation that has annual gross revenue of $5million or more, you must use the accrual method. Additional if you carry inventory on the books or if your business is engaged in farming operations, you might be required to use the accrual basis.

Change in Method of Accounting:

Once a method of accounting is adopted, this method needs to be followed year after year for tax purposes. However, if there are specific reasons to change methods that might prove to be more advantageous to your business, you might consider changing methods. To change to a different method of accounting used in reporting taxable income on your business tax return, the corporation must file a Form 3115 – Application for Change of Accounting Method to receive approval from the IRS.

Small business accounting software will usually allow the presentation of the financial statements on either a cash or accrual basis. However, for tax purposes, arbitrarily switching back and forth between the two methods is not allowed.

In Conclusion, for most small business with revenue under $5 million, it is probably best to use the Cash method, especially if those businesses carry large receivable balances on the books. By carrying receivables, this means that you have invoiced customers, but not actually received payment from these customers. At tax time, those invoices are disregarded and will Not result in taxable income. Because, under the Cash method, only cash actually received during your tax year has to be reported as income on the tax return. For businesses that do not carry large receivable balances, it might be more beneficial to use the Accrual basis of accounting. This would allow deductions for business expenses that have been incurred but not yet paid. Some businesses plan on accelerated spending at year end for this purpose.