This is a quick tax tip inspired by a unique structure in the Portland skyline, which is currently getting pounded with torrential rain.

If you can show that your attendance at a convention benefits your business, you can deduct your travel expenses.  This requirement applies even if you are appointed or elected as a delegate of an organization.

• Make sure you keep the agenda or program materials from the convention, as these documents are the best evidence to show that the convention is connected to your business.
• Avoid conventions that are for investment, political, social, or other purposes unrelated to your business, as you cannot deduct expenses for these events.
• Finally, you might want to think twice about a foreign convention, as the IRS has a four-point reasonableness test to judge deductions for conventions outside the North American area.  Be prepared to provide a lot of detail on the purpose of the event and activities, the sponsoring organization and the residences of active members in the organization in order to prove that the convention location was reasonable.

Lastly, if you receive a shiny brochure trying to sell you on a convention or seminar on a cruise ship, just throw it away.  Cruise ship deductions are limited to $2,000 per year and the IRS has a long list of rules that disqualify many of the good cruises.  Plus, you have to attach two signed documents to your tax return.  Trust me, stick to conventions on dry land and take the cruise for your personal vacation – any tax savings are just not worth the hassle.

If you have a business structured as a sole proprietorship or partnership, and you have children that could work in your business, you could be eligible for some big tax savings.  For example, if you paid them up to $5,800 each (the amount of the 2011 standard deduction), they would not be subject to:

• Federal income taxes on the income,
• Employee social security tax (4.2% in 2011), or
• Any Medicare tax (1.45%).

In addition, your business would not have to pay the following taxes:

• Employer social security tax (6.2%),
• Employer Medicare tax (1.45%),
• Federal unemployment tax (.008% on first $7,000 of wages), and
• Possibly state unemployment tax and other state payroll taxes.

Not only is the payment exempt from almost all employee and employer payroll taxes, it also moves income that would have been taxed at your high marginal tax rate to your children’s rate, which in this case would be zero on the federal side.  Depending on the state, there may be a small amount of state income tax involved, but overall it is going to be very minimal in comparison to the tax that you would have paid at your marginal tax rate.

Better yet, the wages can be used to fund a Roth IRA, a college savings account, or school expenses that would have been paid with or without the payment for wages, so really it is a great benefit that doesn’t necessarily affect cash flow if you plan it out ahead of time.  Lastly, don’t forget the benefit of teaching your children work ethic and getting them involved in your business at a young age.  We work with many fourth-generation family-owned businesses, so this is an important benefit even without the tax exemption.

The Fine Print

What’s the catch?  Well, to make sure the payroll paid to your children will pass IRS scrutiny, the following steps need to be taken:

• Your child actually has to perform the work,
• The pay rate needs to be reasonable,
• Actual paychecks have to be given to your child from the company, and
• You need to document the work just like you would with any other hourly employee.

As to the type of work, it just needs to be ordinary and necessary for your business and reasonable considering the age of the child.  Have them clean your office or warehouse, file paperwork, or fill in on big projects that you would normally have to hire temporary workers for.  With today’s tech savvy teenagers, you can even have them help out with IT tasks or set up computers and devices.  Whatever you have them do, make sure you treat them just like an unrelated employee if you want to avoid problems with the IRS.

To qualify for exemption from employee and employer social security and Medicare taxes, your child has to be under the age of 18.  The exemption from federal unemployment tax lasts until they reach 21.  There are also many exceptions and details that apply depending on the type of business, and payroll tax reports and W-2s will have to be filed, so it is definitely something that you will need to discuss with your tax professional before starting.

The Recent Clarification by the IRS

Single-member limited liability companies (SMLLCs) are considered disregarded entities for tax purposes and are required to be reported on the member’s 1040 tax return using Schedule C, and up until this point the rules on this payroll tax exemption explicitly included sole proprietorships and partnerships.  The new proposed regulations now specifically include SMLLCs in the list of entities that can take the family employee tax exemption.  This is good news if you have a SMLLC and have been claiming the exemption, and for those that were hesitating because of the wording of the rule.

If you have a corporation, you are not eligible for the exemption; however, in most cases there would still be a tax benefit to paying wages to your children.

If you have a family-owned business in the Portland area and would like to find out more about this tax strategy and others like it, feel free to email or call me at 503.244.8844 to set up an appointment.

Health Insurance Premium Bookkeeping
Much of the tax credit calculation revolves around eligible employee hours and wages; however, once an employer is determined to be eligible for the credit, much more information is needed with regards to the employer’s health insurance premiums.  Fortunately, a few simple procedural bookkeeping changes can greatly simplify this portion of the calculation:

• Classification of owner and family member insurance – when posting health and dental insurance premium payments, make sure premiums for owners and their family members are posted to a separate sub-account of employee benefits.  These premiums are not included in the calculation, so it is important that they be separated.
• Premiums for seasonal workers – even though it is important to classify seasonal worker wages and hours separately from eligible employees, their premiums are actually included in the calculation, so make sure their premiums are included with those for eligible employees.
• Record coverage information in books – in order to finish the calculation, you have to report the type of coverage (single or family) and the number of employees with each coverage type.  To simplify this final step, be sure to note this information in the “memo” field in your books when recording the premium payment.  Typically, this information is provided on the bill from the insurance company, and it is much easier to record this each month than pull all the bills at year end.

For general information on the Small Business Health Care Tax Credit, refer to our post from last year.

1.       Vendors who provide you business professional services such as but not limited to accounting, bookkeeping, janitorial, IT consulting and who are not incorporated.  Vendors in this category will include most businesses who are LLCs and LLPs as most of these entities are taxed as partnerships.
2.       All payments to attorneys both incorporated and those not incorporated.

The due date for providing the payee Form 1099 is January 31, 2011.
The due date for providing the IRS Form 1099 is February 28, 2011.

Here is the link to the IRS From W-9 , Request for Taxpayer Identification Number and Certification, to aid you in gathering the required information from your vendors.
http://www.irs.gov/pub/irs-pdf/fw9.pdf

This was my favorite tax change so far this year – especially since I recently joined the ranks of the self-employed – and it basically allows a self-employed individual to get the same type of pre-tax treatment for health insurance that is available to employees under 125 plans.  Under the SBJA, the self-employed health insurance deduction now reduces self-employment tax in addition to ordinary tax.  This is a great extra tax reduction for sole proprietors and active partnership and LLC/LLP owners.

What would this look like?  Let’s take an active member in a profitable LLC that pays family health insurance premiums of $1,200/month.  Under old rules, the total health insurance premiums for the year of $14,400 would be a deduction on the front of the 1040 on line 29; however, this would only be a deduction against ordinary tax.  Under the new rule, the LLC member would save approximately $2,000 in self-employment tax.  This is a great benefit as long as there is net income and some self-employment tax to offset, and it is definitely needed as small business owners usually pay fairly large monthly premiums for health insurance.

Even better – the new tax rule applies to the self-employed taxpayer’s first tax year beginning after December 31, 2009.  This means that when you are doing your year-end tax planning for 2010, you may find that you have an extra tax deduction this time around.

Read more about this deduction and the SBJA

One of the specific credits from the Health Care Reform Act that requires some current planning in 2010 is the Small Business Health Care Tax Credit, which is a 35% tax credit based on premiums paid to cover employees.  As the name suggests, you have to be a small business – one with fewer than 25 full-time employee equivalents (FTEs).  In addition, you have to pay average annual wages below $50,000 per FTE.  Lastly, as the employer, you have to pay health insurance premiums under a “qualifying arrangement”, which in simple terms means you pay a uniform percentage of not less than 50% of the premium cost of coverage for each enrolled employee.

I probably lost many business owners right there; however, after reading the fine print in the law you may find that you qualify after all.  The most important fine print: wages paid to business owners or their family members are not included in calculating the average wages or the number of employees.  This is very good news for corporations as the shareholder wages would have likely made most ineligible for the credit right off the bat.  This could work out well for small, family-owned businesses that provides health insurance and employs a number of non-family employees.

Then we hit the final hurdle – as an employer, do you pay at least 50% of the premium cost of coverage for all your employees?  Even if you do not pay a full 50% or even provide this employee benefit at all, you should at least run the calculation to see what your potential benefit would be.  It may be worth looking into.  Not only do you get a tax credit, but in this economy, such an employee benefit could be given in lieu of pay increases.

To calculate you potential tax credit, check out the calculator at smallbusinessmajority.org.

More detailed information on the tax credit:
IRS Q&A Page on the Small Business Health Care Tax Credit
White House Summary & Fact Sheet

1. The employer gets a holiday from paying the business’s share of the OASDI (Social Security 6.2%) tax on the new employee for the rest of 2010, and
2. The employer gets up to a $1,000 tax credit for keeping the new hire on the payroll for at least one year (52 weeks).

Some additional details about the incentives in the new hiring act include:

• The 6.2% payroll tax holiday is immediate and increases your business cash flow.  While the business is not required to pay its ½ of the OASDI on the new hire’s wages, it must still pay the Medicare tax on the wages paid to the new employees and all FICA taxes for old employees.

• To qualify, the employee must have NOT worked for anyone for more than 40 hours in the prior 60 days ending with the day the employee starts work for you, and he must have been hired by you after February 3, 2010.  The employee must sign an affidavit form (New Form W-11) confirming his unemployment status.

• The business can’t simply replace another employee and qualify for the credit unless the replaced employee separated from employment voluntarily or for cause.  An exception may apply if the business had a lay off due to lack of work, and then later rehired due to an increase in work.  You do not need to rehire the laid off individuals, but be careful, there must have been a valid work load reduction.

• To encourage businesses to retain the new hires for at least 52 consecutive weeks, the HIRE Act also provides a credit up to the lesser of $1,000 or 6.2% of the first $16,129.03 of wages paid for each qualified employee.  This credit will be claimed on the 2011 return.

• There is no minimum weekly number of hours of work required of the new employee.

• The maximum payroll tax credit that may be forgiven per employee is $6,622.  The business saves 6.2% on both a $40,000 worker and a $90,000 worker.  There is no maximum dollar amount of forgiveness per business; if you hire 5 qualified employees, your credit could be over $33,000!

• If a worker is eligible for both the HIRE credit and the “Work Opportunity Tax Credit,” the business can choose one benefit or the other for 2010—no double dipping.

• There are no HIRE tax breaks if the business hires family members (except spouses).

• The business can’t simply replace another employee and qualify for the credit unless the replaced employee separated from employment voluntarily or for cause.

For 2009, there are plenty of year-end tax planning opportunities available to the small business owner.  Some new provisions help businesses that have been dramatically affected by the recession while others help businesses that have had very a profitable year.  Below is a general overview of several of the more important planning opportunities.

Bonus Depreciation:

Many companies used the bonus depreciation provision in 2008; however, due to the current economic conditions, business owners are much more restrained with regard to capital expenditures than in prior years.  Nick Parsons, one of the partners at our firm, recommends concentrating on capital purchases that are needed and will help generate more profit for the business rather than just purchasing for the sake of tax savings.  He also recommends looking at purchases that will need to be made in the next five to six months and accelerating those purchases if possible before year-end.  Even if the business had a poor year, bonus depreciation could produce a tax loss and actual tax refunds with the new net operating loss carryback rules (see below).

Bonus Depreciation details:

• Only available for NEW property, 20 year class life or less
• Provision is scheduled to expire after 2009
• Must be placed in service before year-end

Code Section 179 Depreciation:

Businesses with net taxable income are taking advantage of the new limits on 179 depreciation ($250k), which allow you to write-off the entire cost of the fixed asset within the year of purchase.  However, many businesses are looking at losses this year, so the bonus depreciation can be a better option.  Regardless, using the right mix of bonus and 179 depreciation can create a net operating loss that can be carried back five years under the new rules (see below).

One minor detail to keep in mind – unlike bonus depreciation, the property does not have to be new to qualify for 179 depreciation.

Vehicle Depreciation:

If a business is looking to buy a new vehicle in the next six months, accelerating the purchase before year-end could be very beneficial.  The luxury auto depreciation limits have been increased from $2,960 to $10,960 through 2009 thanks to bonus depreciation rules.  There are different rules for trucks, vans, and SUVs, but for a typical passenger car used more than 50% in business – this provides great tax savings.

Five Year Carryback of Net Operating Losses:

Many businesses affected by the recession have been able to make use of the expanded net operating loss carryback rules for the 2008 tax year, and many received substantial cash refunds that helped them with current cash flow problems.  Now the carryback rules have been extended for 2009 tax losses, which should bring some more immediate help.  However, the rules are a little more complicated this time around:

• For 2008, the expanded carryback was only applicable to businesses with gross receipts under $15 million.  The net operating loss could be carried back up to five years and there were no further complications.
• For 2009, the rule is expanded for all businesses, however, there are complications:
  • For businesses under the $15 million gross receipts limit, the 2009 NOL can be carried back up to 5 years even if the 2008 NOL was carried back under the prior rule.  The only difference is that for 2009, you can only use ½ of the taxable income in the fifth year.
  • For businesses over $15 million in gross receipts, they can use the extended NOL carryback for 2008 OR 2009, but not both years.  Also, like with small businesses, they can only use ½ of the taxable income in the fifth year.

Solo 401k Contributions / Profit – Sharing:

For small business owners that had a good year and are looking for tax deductions while putting away for retirement, the solo 401k is an excellent vehicle that many ignore because of the extra reporting requirements.  Small, family-owned businesses often use the SIMPLE IRA plan to put away up to $11,500 ($14,000 age 50 & older) under the 2009 limits.  However, given sufficient self-employment income, the same small business owner can put away up to $49,000 ($54,500 age 50 & older) using a solo 401k plan and also make the same contribution for the business owner’s spouse if they are involved in the business.  The are special requirements for the solo 401k, so it is definitely something you need to speak with a professional about before opening an account.  However, even if the solo 401k is not an option for you, there are other 401k plans that would still save you much more than with a SIMPLE IRA plan.

If you have not read the It’s Only Money column that was in the Sunday Oregonian entitled “Act Now to Save on 2009 Tax Bill”, make sure you check it out.  We had the opportunity to contribute to the small business section of the article, and it has some good information throughout.

There is a lot of ground to cover, but in Part 1 of this post I will concentrate on individual tax planning and opportunities related to your primary residence:

First-Time Home Buyer Credit Extension:

Most people are familiar with the existing first-time home buyer credit that was extended, but the new reduced credit for “long-time homeowners” is a great opportunity as well that some have not looked into.

• $6,500 credit ($3,250 married filing separately)
• Have to have owned and used the same principal residence for any 5 consecutive year period during the previous eight-year period ending with the date on which the new residence is purchased.
• Income phase-outs have been increased and start at $125k for single and $225k for joint returns.  For taxpayers near the phase-out limits, eligibility can be met with some good year-end tax planning.
• The extended date is 4/30/10; however, it is important that people realize that they just have to enter into a binding contract before 5/1/10 and close by 7/1/10.

I think that this will become popular for those looking to upgrade or downsize – especially after we get passed the holiday season.  However, one note of caution – if you are newly self-employed (within the last year or more), it is extremely to get a mortgage right now.  The new requirement is that you have to have two years of tax returns as a self-employed individual to prove the income.  If you have less than two years of self-employed returns, you may be looking at a serious road block keeping you from taking advantage of the new credit.

Residential Energy Property Credit:

This credit is 30 percent of the sum of expenditures for qualified energy efficiency improvements, including windows, furnaces, water heaters, heat pumps, and more, which are placed in service in 2009 and 2010, which is limited to $1,500 for 2009 and 2010.  The improvements must meet strict energy efficient standards, so taxpayers should do their homework on this one as a mistake could be costly.

Avoid an Unwelcome Surprise:

Lastly, if you are struggling financially due to a loss of a job or reduced income and are behind on mortgage payments and property tax on your primary residence, understand that this could change your 2009 taxes and you could be looking at an unwelcome surprise if you are significantly behind.  For many, interest and property taxes are very significant itemized deductions, so a few month’s worth of unpaid mortgage payments could really increase your tax liability.  It is not something you want to hear if you are in that situation, but it is something to be aware of, and if you can make a payment by the end of the year, it will help your tax situation.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

Source: IRS – IR-2009-111, Dec. 3, 2009

Remember, you need to keep a contemporaneous record or log of your mileage.  If you tech saavy, there are several apps for that (like Milebug), which will (hopefully) make it easier for you.

Also, even if you are depreciating your business vehicle, you need to keep a log to prove the percentage of business usage you are using.  This is not as much an issue with large specialty vans & trucks, but with passenger vehicles it is very important.

Finally, make sure you understand the rules on a qualifying home office and commuting miles so that you can maximize your business miles.