TurboTax Support Blog

Small Business and the Law Changes

If you have a small business, do you know there are new wage and tax law changes that may affect your business?  On May 25, 2007, the Small Business and Work Opportunity Tax Act of 2007 was signed into law as part of a much larger bill that provides funds for the troops and increases the federal minimum wage.

First, let’s talk about the increase in minimum wage. It’s the first increase since 1997. The new minimum wage will be raised, in increments, to $7.25 an hour. The first increase, from $5.15 to $5.85 an hour, will take effect July 24. The next increase, to $6.55 an hour, will take effect July 24, 2008. The final increase will take effect July 24, 2009. So if you have employees at minimum wage, be sure that their pay on July 24^th matches this new increase.  Over 30 states have minimum wages higher that the federal already. Here’s a website to check out how your state interacts with federal wage amounts. New Federal Minimum Wage - Interaction with States

 

With this year’s increase, a minimum wage worker will receive almost $1,500 more a year. And when the new rates are fully implemented, the total difference between the old and new annual salary for a person on minimum wage will be more than $4,300.  And these pay increases will impact small businesses like yours.

The Small Business and Work Opportunity Tax Act of 2007 is designed to offset the impact of these wage changes on your budget.  Here are the top two items to help your business:

 

§ Increases and extends Section 179 expenses. 

With Section 179, you can expense purchases in the current year instead of “depreciating” the cost over several years.  With this new tax act, you can deduct $125,000 of property for 2007, including off-the shelf computer software.   Also, this higher amount of Section 179 expenses has been extended through 2010.  So you now have more certainty when planning future business purchases.

§ Broadens and extends Work Opportunity Tax Credit (WOTC)

The WOTC encourages employers to hire individuals from various economically challenged populations. The credit is a percentage of wages paid during each of the first two years of employment of persons who fall into one of eight categories (generally, economically disadvantaged or disabled persons) known as "targeted groups." This new tax act extends the credit through August 31, 2011 and expands the categories dealing with veterans and high-risk youth. For more information, check out Department of Labor - WOTC and IRS Form 8850 Instructions.

 

This tax act has eased a filing rule on married business owners. Joint filers who are the sole owners of unincorporated businesses no longer have to file a complicated partnership return and K-1 forms. Instead, starting with 2007 returns, each spouse reports his or her share of income and expenses on separate Schedule Cs. To qualify, both spouses must materially participate in the business. And for purposes of Social Security benefits, each spouse’s earnings on Schedule C are credited to his or her individual earnings record.

Also included in the act are tax incentives for taxpayers recovering form Hurricane Katrina and changes for S-Corporation.  The total of the tax incentives is about $5 billion dollars.  To balance out $5 billion of tax incentives, the revenue-raising part of the bill deals with the expansion of kiddie tax to millions of families.  For more details on this expansion, check out this blog:  Kiddie Tax Extends to Children Between Ages 18 and 23

Related Articles:

Small Business and Work Opportunity Tax Act of 2007

New Federal Minimum Wage - Interaction with States

Department of Labor - WOTC

IRS Form 8850 Instructions

Kiddie Tax Extends to Children Between Ages 18 and 23

Are Your Important Documents Safe?

On June 1st, the IRS released a notice encouraging anyone in Hurricane prone areas to make sure their tax documents are safe.  But really, this applies to anyone.  We’re all at risk of something: Hurricanes, Tornados, Fires, Earthquakes, Floods or Mudslides.  Sometimes they even come in groups, unfortunately.

So are your important documents safe?  I’m not just talking your tax documents.  You’ll want to include things such as birth certificates, titles, deeds and passports as things you want to be keeping safe.  One of the things to consider is a fireproof safe.  These are good for anything you think it would be a particular pain to replace.

The IRS recommends a number of things you can do to protect yourself:

Paperless Record Keeping

Scan paper documents and store them on a USB Drive or CD.  They recommend then sending the item to a relative or friend in another location to keep it safe.  You also have online document storage options.

Documenting Valuables

Photograph or videotape the contents of your home, especially valuables such as your jewelry and high tech items.  This will provide proof for insurance and casualty loss claims.  Check out the IRS Pub 584 for help compiling a room-by-room list of your belongings.  (Note: Because some items in your home appreciate in value, you may want to consider periodically getting updated appraisals for replacement value on things such as jewelry and antiques.)

Update Emergency Plans

Your situation changes over time, so the IRS recommends reviewing your emergency plan annually.  Make sure you have all your important documents backed up and that you have your home set up with everything you’ll need to handle whatever disaster you may be at risk for.

For more information on this, see the IRS news release and Pub 552 on recordkeeping.

The IRS Random Audits Are Back

The IRS has recently announced that, starting in October, 2007, they will be randomly picking tax returns for full-fledged audits. The plan is to select 13,000 income tax returns, from the 136 million returns filed for 2006. They expect to continue this plan for the next several years.

 

The IRS is under strong pressure from Congress to close the $290 billion tax gap (the difference between what is collected and what should be collected.) To do this, the IRS needs “fresh” data to update their computer program that statistically figures out which tax returns to audit in the future to get the most money.

 

If you used TurboTax’s Audit Alert review, does that take you out of the IRS random audit pool? No. The Audit Alert examines your return and identifies inconsistencies that could trigger a review. With random audits, all returns are in the audit pool.

 

The chance of receiving this random audit is slim but if you do get picked, don’t panic. The IRS says that some audits will be handled through the mail, particularly if most of the return data (like wages with a W-2, etc) can be verified in the IRS databases. However the majority of the audits will be handled face to face with an auditor in your local IRS office.

 

So what do you do if you get one of these random audits? If you’ve already purchased TurboTax Audit Defense  prior to receiving the notice, you’re in good shape. Contact them and they’ll handle the audit for you. It’s what they do for a living.

 

If you have a simple return, you might do alright handling the office audit yourself. Just be sure you have all the documentation backing all the amounts on your tax return.

 

If you have a return with numerous types of forms (K-s, Rentals) and/or complexity (alternative minimum tax), it’s usually recommended that you get professional help from a lawyer, CPA, or an Enrolled Agent. All three are approved to practice before the IRS. By choosing one to represent you, you won’t need to deal directly with the auditor. That’s why you pay them. Beware that the more complex the tax return and /or the less organized are your documents, the more dollars it may cost.

 

When collecting your information for the audit, be sure you have  a copy of the tax return  supporting documents (sales receipts, diaries, charity donation card) for every amount on the return, no matter how small the amount, and any letters that you have received from the IRS for the tax year being audited.

 

If the audit uncovers a calculation error and you prepared your return using TurboTax, don’t forget TurboTax’s Accuracy Guarantee.

 

Remember your chance of receiving that random audit notice is .0096%. You might have a better chance of winning the lottery.

 

For additional information:

 

IRS Updates National Research Program for Individuals

 

Congress Will Push IRS to Get Tougher with Scofflaws

 

What Is AMT and Why is It on My Return?

 

Did You Receive a Notice from the IRS?

Do You Need to Fix Your Filed Tax Return?

It’s after April 15^th and you’ve successfully filed your federal and state tax returns. That’s one more yearly project off your shoulders for 2006.  Then you receive a corrected 1099-INT form from your local bank stating that your interest income for 2006 was really $102, not $62. Do you need to file your return again?

Did you read an IRS article online that declared that a 1/3 of the taxpayers didn’t take their telephone refund tax credit for 2006?  You check your return and you don’t see that $60. What do you do? Or you used TurboTax for the first time and got something called an education credit.  Can you go back and get that credit for past years? Or your state decided in March 2007 to agree with the IRS changes for 2006.  How do you now get that teacher’s deduction on your state return?  The answer to all of these scenarios is “you file an amended return.”

In the 1^st scenario, $40 of interest income may seem too small an amount to file an amended return. It’s not. You are required to file a return with all of your taxable income.  Also, the IRS will be double checking that same 1099-INT against your tax return. If the two don’t match, you will get an IRS letter. 

When it comes to that one time only telephone refund, go for it.  For details if you qualify (and most folks do), read Don't Overlook Your Phone Refund!  Before you start amending your return for this refund, check out Kiplinger's Dial M for Mistake  article.  Since the IRS expected lots of taxpayers to miss this refund, they added a special line (line 15) to the 1040X form to keep the fix simple. In the Ready, Set, Do-Over section of the Kiplinger article, you’ll see easy steps to quickly fill out a Form 1040X for this refund manually.

If the fixes to your return are more than just the telephone refund (or you plan to have that telephone refund applied to your 2007 return), the best way to prepare your amended return is using TurboTax. Every year there are lots of questions about doing an amended tax return.  This past year, TurboTax created a “webisode” on amending a return. It shows the step by step process for amending your federal and state tax returns using TurboTax.

There is an Amend Your Tax Return FAQ in the Community Support Site that answers all of your questions about amending a return, such as when can I file an amended return, how do I amend for the current/ prior years, and where do I mail it. You’ll see that there are different steps to follow depending if you have or have not made the corrections yet in TurboTax. There are separate FAQs that talk about those steps: 

Amend Your Return Using Your Original Date File  and Amend Your Return Using Your Revised Data File

If it looks like you need to amend a return, add it to your summer must-do list.  Take the time to see the read the FAQs and Webisode mentioned above. And get it done!

Related articles:

Don't Overlook Your Phone Refund!

Kiplinger's Dial M for Mistake

Amend Your Tax Return

Amend Your Return Using Your Original Date File

Amend Your Return Using Your Revised Data File

“Kiddie Tax” Extends to Children Between Ages 18 and 23

It’s June and there is already a new tax act and it may affect your older kids’ tax returns.   On May 25^th, President Bush signed legislation that provides funding for the Iraq war and raises the federal minimum wage. In that legislation were tax changes to increase revenue to balance the funding. One of those tax changes extended the age range of the "kiddie tax " to under 24.  For the 2^nd time in just over a year, this age range has been extended.

 

In prior years, if a child was under 14 and had more than $1,700 in investment income (interest, dividends, capital gains), the child’s income was taxed at the higher parents’ tax rate. For 2006, that top age was changed to “under 18.” And now, with the Small Business and Work Opportunity Tax Act 2007, the age range has been extended to “under age 19 or if a full-time student, under age 24.”  This age extension takes effect with the 2008 tax returns. So your full-time students’ 2007 tax returns are safe.

 

If you are wondering why Congress bothered to extend this age range, here’s why. In 2008, 2009, and 2010, the capital gains tax rate for tax returns in the lower tax brackets (10% & 15%) will be zero. Yes, I said zero tax rate! There have been reports that wealthy families were planning to transfer ownership of assets, like stocks, that have gone up in value to their older dependent children who were no longer caught in the ‘kiddie tax.” These children (with a lower tax bracket) would then sell the stock in 2008 for zero tax on the gain.  Congressional staffers estimate this change would raise $1.4 billion over a decade of tax returns.

 

Now, let’s go back to the details on the extended age range. If your child turns 19 (or 24, if a full-time student) before the end of the tax year (starting with 2008), then that child does not fall under the “kiddie tax.” Also if the child’s earned income (wages, tips, professional fees, etc) exceeds ½ of their support, he/she is not hit with the “kiddie tax.”

 

It is assumed that the definition of a “full-time student” refers to a person who is a full-time student at an educational organization during each of 5 months of the calendar year. 

 

For more details, TaxAlmanac - New Legislation

 

To decide if your child needs to file a tax return, check out Does My Child Need to File a Tax Return?

 

For further information on calculating the tax on your child’s tax return, see Can Your Child's Tax Return Be Complicated?