Business Alert: Bartering has tax consequences

April 20, 2012

Did you know there’s a way to get goods and services you need for your business without using up your company’s cash?

A growing number of businesses are using the barter system to supplement their normal purchasing activity. Bartering is a payment method in which goods and services are exchanged between parties in lieu of cash.

In a simple bartering arrangement, two parties trade items of similar value. For example, let’s say your business owns a building located next to a telephone company. An Internet service provider might be interested in putting its servers in an unused portion of your basement and, instead of paying you rent, offers to provide you with a high-speed Internet connection and a website.

Before you consider jumping on the bartering bandwagon, though, it is important to be aware of the tax consequences of these transactions. While your first thought might be that bartering is a simple exchange of goods or services with no tax implications, the tax authorities have other ideas.

The IRS requires that the fair market value of goods or services received in a bartering transaction be recognized as taxable income. However, the business can deduct the fair market value of the business goods or services that were tendered in exchange. A bartering arrangement doesn’t always result in a deduction immediately equal to the income you recognized. For example, you might provide a service and recognize income immediately in exchange for some equipment you’ll end up depreciating over several years.

Records of bartering transactions should be maintained just like ordinary transactions to maintain compliance with sales tax laws.

The growth of bartering has also led to a number of companies that bring parties together and facilitate bartered transactions. Such companies operate much like a bank, whereby clients register with them and earn “trade” credits in an account that can be used against future transactions. The normal fee structure is a one-time registration fee with a fee per transaction based on its dollar value.

If you have any questions about bartering, please give us a call.

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2011 Refunds are delayed

April 17, 2012

Taxpayers are waiting longer for their tax refunds this year largely due to IRS efforts to catch fraudulent filings. According to a recent IRS report, the Service has identified more than 2.1 million fraudulent tax returns, many of which involve identity theft. IRS computers have had additional screening steps added which is the major factor in the refund delays.

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IRS offers penalty relief in “Fresh Start” initiative

April 13, 2012

Taxpayers who are struggling to pay their taxes may get some relief from the IRS’s expansion of its “Fresh Start” initiative, a program started back in 2008. The new Fresh Start provisions provide penalty relief to the unemployed and make installment agreements on taxes owed available to more people.

 Normally, a failure-to-pay penalty of one-half of one percent per month, up to a 25% maximum, is charged for overdue taxes. The “Fresh Start Penalty Relief” initiative gives eligible taxpayers a six-month extension to fully pay 2011 taxes — that is, until October 15, 2012, before the penalty begins to apply. Interest of 3% will still be assessed starting from April 17, 2012.

 The penalty relief is available to workers who have been unemployed at least 30 consecutive days during 2011 or 2012 and to self-employed individuals who experienced a 25% or larger reduction in business income in 2011 due to the economy. Income limits apply: the relief is not available to singles with adjusted gross income over $100,000 or to couples with income over $200,000. Also, taxes due cannot exceed $50,000.

 The Fresh Start program also changes the eligibility threshold for streamlined installment agreements from $25,000 to $50,000 and increases the maximum term from five to six years.

 For details or assistance, contact our office.

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Need more time to file?

April 10, 2012

If you can’t file your 2011 tax return by the April 17 deadline, you can file for an extension by that date and get until October 15, 2012, to file. You can request the extension on paper, by phone, or online. The extension is automatic, with no explanation necessary. Be aware, however, that an extension to file does not give you more time to pay taxes due for 2011. For assistance, contact our office.

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Is your business due for a change?

April 6, 2012

The business entity your company operates under can have a significant effect on the taxes you pay and your costs of doing business. As your company grows or changes, it may be a good idea to switch to a different entity. Among the main entity choices: sole proprietor, partnership, C or S corporation, and LLC. For guidance in analyzing the entity issue for your company, contact us.

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April 17 – A big day for taxes

April 3, 2012

Tuesday, April 17, is the deadline for filing certain returns and taking certain tax-related actions. Here are the major deadlines.

 * Filing 2011 income tax returns for individuals. If you cannot file your return by this deadline, be sure to file an extension request by April 17. The automatic extension (you don’t need to explain to the IRS why you need more time) gives you until October 15, 2012, to file your return. An extension does not, generally, give you more time to pay taxes you still owe.

* Filing 2011 partnership returns for calendar-year partnerships.

 * Filing 2011 income tax returns for calendar-year trusts and estates.

 * Filing 2011 annual gift tax returns.

 * Making 2011 IRA contributions.

 * Paying the first quarterly estimate of 2012 individual estimated tax.

 * Amending 2008 individual tax returns (unless the 2008 return had a filing extension).

 * Original filing of 2008 individual income tax return to claim a refund of taxes. Some taxpayers have tax refunds due them for prior years, and unless a return is filed to claim the refund by the three-year statute of limitations, the refund is lost forever.

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There’s still time to cut your 2011 tax bill

March 30, 2012

Are you still dealing with your 2011 tax return? Do you owe a bigger tax bill than you expected? Are you missing a tax break because your adjusted gross income is too high? Would you like a bigger refund? Don’t despair. You might still have time to make some changes. For example:

* You have until April 17 to make a tax-deductible IRA contribution for 2011. If you qualify, you could contribute up to $5,000 and have it count as a deduction against last year’s taxes. If you were 50 years old or older last year, your maximum contribution is $6,000.

* Even if you’ve already made your 2011 contribution to a Roth IRA, it may not be too late to make a change. You may be able to recharacterize your contribution as a traditional IRA contribution and take the deduction. You’ll need to set up a traditional IRA, make a trustee-to-trustee transfer, and report it on your 2011 tax return. Get details before you try this to make sure you avoid any tax traps.

*If you’re self-employed, there’s still time to set up a SEP-IRA for your business. You have until the due date of your return, including extensions, to set up the plan and make a contribution from 2011 earnings. SEP-IRAs are relatively easy to establish and flexible to manage.

Contact our office if you’re interested in any of these ideas. We can help determine whether you qualify and guide you through the process.

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Use it or lose it – deadline approaching

March 27, 2012

If your flex plan at work allows a 2½ month grace period for using the pre-tax dollars you set aside for 2011, be aware that a final deadline is approaching. You have until March 15, 2012, to use the funds you set aside for 2011 or you forfeit any leftover dollars.

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Does this April 2 deadline apply to you?

March 23, 2012

If you reached age 70½ last year, April 2, 2012, could be an important deadline. That’s the last day you can take your required minimum distribution (RMD) for 2011 from your traditional IRAs. If you miss that deadline, the penalty could be a 50% excise tax on the amount you should have withdrawn.

Here’s how the rules work. Once you reach age 70½, you must start taking annual distributions from your traditional IRAs. Normally these distributions must occur by December 31 of each year. But a special rule lets you defer the first distribution until April of the year after you reach age 70½. So if you turned 70½ last year, April 2 is the deadline for your 2011 distribution. Be aware that you’ll still need to take your 2012 RMD before the end of this year.

Generally, the amount of the RMD for any year is based on your age. You take the balance in all your traditional IRAs as of the last day of the previous year, and divide by a factor representing your life expectancy. The IRS has published a standard life expectancy table to use in the calculation. Special rules might apply if your spouse is more than ten years younger than you are.

Because all or part of your distribution may be taxable income, it is important to include RMDs in your tax planning. Ideally you should start planning for RMDs several years before you reach age 70½. But whether you’re planning in advance or looking at a distribution on April 2, contact our office for more detailed advice.

The RMD rules don’t apply to Roth IRAs. Unless you’re still working, this deadline also applies to your other retirement accounts.

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Payroll tax cut is extended through 2012

March 20, 2012

Congress passed an extension of the 2% payroll tax cut that had been scheduled to expire at the end of February. The extension means 160 million working Americans will continue to pay social security tax on their wages at a 4.2% rate for the rest of 2012, rather than at a 6.2% rate.

Because Republicans and Democrats were unable to agree on how to pay for the extended tax cut, the law included no spending cuts to offset the estimated $93 billion cost of this provision.

The law also provides for long-term federal unemployment benefits, setting the maximum at 73 weeks in states with the worst unemployment and 63 weeks for other states.

Another provision in the law includes the so-called “doc fix” that prevents a scheduled 27% reduction in Medicare payments to doctors.

The unemployment benefits and doctor payments will be paid for by government sales of broadband spectrum, requiring federal workers hired after this year to contribute more to their pensions, and cuts in certain health programs.

President Obama signed the bill into law on February 22.

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