Accountability Services-Blog

Washington State Audits

8/1/2014

An educational experience

If your company is under audit by the state, be assured that you will have a very different experience compared to an audit conducted by the IRS. Most of the WA auditors will take the extra time to teach taxpayers what to do. Nearly all of our clients who have gone through state audits tell us about positive encounters. In reflecting on their experiences, clients also say that they wished they had not spent the energy getting so worried ahead of time.

Survival Tips

For Washington businesses, know the www.dor.wa.gov requirements for your business.
Review your out-of-state purchases and be sure to always pay the sales ("use") tax on your Excise tax returns.
Review ahead of time paid invoices and lease agreements for large expenditures (e.g., fixed assets) to ensure you were charged and paid sales tax.
Always reconcile your accounting system's gross receipts to what you report to Washington and your city.
Ensure that your total gross business income reported to WA equals the gross business income reported on your IRS corporate tax return.
Clear a room in your office for the auditor(s) to work.

For your audit, gather all of the items required in the audit notice. Ask if the auditors will accept a copy of your accounting (QuickBooks, etc.) file. Most auditors will accept a copy, and that step will help to eliminate much of your paperwork requirements.

And, as our clients have confirmed, try to think of your WA audit as a business learning opportunity. You will benefit from the experience.

Setting a "Reasonable Salary" for Officers

8/1/2014

HOT IRS Audit Issue - Guidelines for S-Corporations

Officer compensation for shareholders of subchapter S corporations is on the IRS hot list. S-Corporation officers notoriously take low salaries so they can receive the bulk of their corporation's profits as dividends, which are not subject to payroll taxes. The IRS is now taking a closer look at the practice, and the agency continually wins most of the cases it prosecutes.

In a recent case, an owner took a $24,000 salary in a year when his share of the firm's profits was approximately $200,000. The IRS challenged, and a district court agreed that his pay was unreasonably low and ruled that the dividends needed to be re-characterized as salary.

The consequences of misinterpretation or abuse of the law can be quite costly. The liability can add up to as much as two to three times what would have been due originally had reasonable compensation been paid in the first place. No two cases are the same, but the courts consider the following 10 factors:

Duties and Responsibilities
Time and effort devoted to the business
Training and experience
Dividend history
Payments provided to non-shareholder employees
Compensation agreements
What comparable businesses pay for similar services
Compensation agreements
Timing and manner of paying bonuses to key people
Any formula used to determine compensation

In addition the IRS looks at fringe benefits, such as health insurance premiums paid. Accurate and detailed record-keeping is a must.

It is important to review your policies, procedures and record-keeping. What was reasonable several years ago may not be considered reasonable today. Then you will be able to identify what is reasonable in your industry based on the services that you provide.

Job Search Expense Can be Tax Deductible

8/1/2014

An Often Overlooked Miscellaneous Deduction

Job search expenses are miscellaneous itemized deductions. The miscellaneous expenses rules can be baffling. The basic one is that you can claim the amount of expenses that is more than 2% of your adjusted gross income, so be sure to save all your receipts from the reams of printer paper used to spit out your resume to train tickets and parking lot chits. Also, remember to keep track of your car mileage as you drive to and from appointments.Job-search expenses can be tax deductible only when searching for a new job in your current profession. That means if you're switching careers, they are off-limits; and first-time job seekers are excluded from any of the deductions. In addition, the IRS does not permit deductions after a substantial break between your last job and your current job.Here are some examples of deductible expenses:

Agency Fees You can deduct employment and outplacement agency fees you pay while looking for a job. If your employer pays you back in a later year for employment agency fees, you must include the amount you received in your gross income, up to the amount of your tax benefit in the earlier year.
Resume Preparation You can deduct amounts you spend for preparing and mailing copies of your resume to prospective employers. This includes paper, ink, printing costs, and postage.
Travel If you travel to look for a new job, you may be able to deduct travel expenses to and from the area to which you traveled. This can include mileage, parking fees, taxi fares, airfare, and hotel room charges. You can deduct the travel expenses only if the trip is primarily to look for a new job.
Dues & Membership Fees Dues, subscriptions, and professional association fees can be deducted.
Professional Growth If you pay to take skill-building seminars and/or job-training courses, or to attend networking events, the charge is usually deductible, but you must be able to prove that it's connected to your job search.
Childcare If you need to hire a babysitter to watch your kids while you're out on an interview, you can probably deduct his or her wages, but you need to be diligent about your record-keeping.
Online Fees Work-related Wi-Fi charges, online job-site fees, and networking service fees such as LinkedIn's fee for an upgraded professional access are deductible.

What's not on the allowable deduction list? Haircuts, Botox treatments and face lifts, new interview clothes, a briefcase, and tuition to learn new skills for a job change.

If you get that job in a new city that is at least 50 miles away, you can look at moving expenses as another deduction!

To Have and To Hold

8/1/2014

Are there Tax Implications when getting Married?

The wedding bells have rung, and now it is official! The bliss may be a little short-lived, however, when couples go to file their annual tax returns. They may discover they actually pay more in taxes than they would if they were single. You may have heard the term "marriage penalty." This so-called penalty has been embedded in the U.S. tax code for a long time. The simple math is that the married filing joint income thresholds for the higher tax brackets are NOT double the amount for single.

On top of that, the new tax increases and additional taxes implemented in 2013 have the potential to hit married couples harder; especially if they both earn high salaries and/or have investment income. Also, married couples in higher tax brackets will find the phaseout of personal exemptions and itemized deductions are lower, resulting in higher taxes. Rarely does married filing separate offer any relief; and in community property states it is nearly impossible to legally file separately. Reviewing all the options with us will be pivotal to your tax strategy.

It is also helpful to review your income and withholding throughout the year while there is time to make adjustments to avoid surprises at tax time.

Oh, and by the way, if you get married on December 31, you are considered married for the tax year.

Washington State Audits

Setting a "Reasonable Salary" for Officers

Job Search Expense Can be Tax Deductible

To Have and To Hold

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