Grant Thornton offers tax filing season planning tips for businesses and individuals to manage and prepare for 2014 / How to manage a fast and strict filing deadline and prepare for a new year

Grant Thornton for heraldonline.com writes: Taxes are one of two certainties in life, but how much you owe can depend greatly on your preparedness and your planning, according to Grant Thornton LLP. For business owners, you not only have your returns and your family’s returns to worry about, you also have complex business tax provisions to consider.

2013 marked the first time in years that individual income tax rates rose. Coupled with the new 3.8 percent tax on net investment income, many taxpayers will see a marked increase in their personal tax liability.

“Many of the taxpayers subject to these higher taxes are actually able to mitigate their exposure, even in the new year,” said David Walser, managing director in Grant Thornton’s Washington National Tax Office. “But by properly planning for the next year and beyond, a taxpayer can avoid the headaches of filing season and fatten their wallet in the process. The earlier you start, the better you’ll feel about your return this time next year.”

Grant Thornton has developed tax tips on what to consider when filing your 2013 tax returns, what you can still do to lower your tax liability and how to make the most of planning for 2014.

What’s new for your 2013 return?

What’s changed since last year? You need to know before you start your 2013 return.

• There are new benefits for same-sex married couples. For the first time ever, the tax law has been harmonized to treat same-sex married couples the same as other married couples. Following the Supreme Court’s landmark decision in U.S. v. Windsor, the IRS issued new rules allowing same-sex married couples to file joint returns and enjoy equivalent treatment in all areas of federal income, gift and estate tax law. In fact, all couples with valid marriages, whether same sex or not, must file as a married couple in 2013, either married filing jointly or married filing separately.
• Higher earning individuals face higher taxes. For the first time in more than a decade, Congress raised individual tax rates. Individuals earning more than $400,000 and couples earning more than $450,000 are now subject to a 39.6 percent top rate. The top capital gains and dividend rates also went up from 15 percent to 20 percent, not including the new Medicare tax. Finally, the personal exemption phaseout (PEP) and “Pease” phaseout of itemized deductions are back in 2013. Both phaseouts complicate tax planning and return preparation while raising taxes.
• A new tax comes due. Another first for your 2013 returns is the calculation and payment of the 3.8 percent Medicare tax on net investment income. The tax became effective at the beginning of 2013 and imposes a 3.8 percent tax on investment income, like dividends, rents, royalties, interest, capital gains and annuities. Passive income from a trade or business in which you do not materially participate is also subject to the tax.
• Alternative Minimum Tax (AMT) indexed for inflation. Congress didn’t eliminate the AMT, as many had hoped. As part of New Year’s Eve legislation in 2012, lawmakers did decide to index the tax for inflation for the first time. Previously, Congress had simply “patched” the AMT for one or two years at a time.

Is it too late to make any changes to my 2013 return?

No, it’s not too late. While the books closed on your income, gain and loss at the end of 2013, there are still ways to reduce your tax liability, such as contributing to a traditional individual retirement account (IRA) or converting to a Roth IRA.

• Contribute to an IRA. You can still get an above-the-line deduction on your 2013 return by contributing to an IRA now, before you file your income tax return. Don’t have an IRA? You can set one up today, fund it, and still take advantage of the deduction. Contribution limits for 2013 are $5,500 plus a $1,000 catch-up for those 50 years old and older. If you were an active participant in your employer’s retirement plan, contributions to an IRA offer deductions only at income levels below $112,000 for joint filers and $68,000 for singles.
• Reconsider a Roth IRA rollover. In 2010, Congress eliminated the $100,000 income limit on rollovers from an IRA or 401(k) to a Roth IRA. Rolling over allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). These rollovers have been very popular. They should become even more popular in the future because, unlike distributions from a regular IRA, distributions from a Roth IRA do not increase your AGI — which is used in determining the new Medicare tax and the amount of the PEP and “Pease” phaseouts.
• Make a grouping election. The new 3.8 percent Medicare tax on net investment income will generally apply to any income you receive from a business in which you do not materially participate. While it’s too late to go back and change how much you participated in your businesses in 2013, you may be able to make a grouping election when you file your return to combine your activities for various business interests and satisfy the material participation tests.
• Make the 65-day election. Like individuals, most trusts are also subject to the new 3.8 percent tax on net investment income. “Complex trusts” are subject to the new tax in 2013 to the extent their undistributed investment income exceeds $11,950. By making a distribution of the income within 65 days of the end of 2013 (March 6, 2014), the trustee can elect to have the distribution treated as if it were made in 2013, shifting the income for tax purposes to the beneficiary. If the beneficiary is in a lower tax bracket than the trust, the election can reduce the overall tax burden.

How do I avoid filing season hassles?

Tax preparation is complicated, and a transposed number or a forgotten form can make matters worse. Keep these tips in mind when preparing this year’s return so you can avoid common filing season mistakes.

• Organize your receipts. Whether it’s a charitable contribution or a business deduction, the IRS wants to see proof of your expense. These expenses must be documented in order to be deducted. What’s proper documentation? Receipts, bank records, letters from a charity confirming your gift, and even electronic records like emails can be sufficient. Failing to substantiate expenses is a surefire way to lose an audit with the IRS. Proper organization can save you time, money and heartburn.
• Get with the times and file electronically. Filing electronically will not only expedite your refund, but it can also save you from making mistakes. As an additional incentive, the IRS will check your electronic return for commonly made errors. If you did make a mistake, the IRS gives you the chance to correct the problems before it accepts and processes your electronic return.
• Check your numbers twice. Make sure you have the right social security numbers, and, if necessary, employer identification numbers. The IRS may be working with a smaller budget than before, but its computers are still sophisticated enough to automatically match all Social Security numbers and check for simple math mistakes. Lately, the IRS has broadly used its “math error” authority to automatically fix these mistakes, but accidents do happen on their part.
• Don’t miss the deadline for filing an extension. The filing deadline is Tuesday, April 15, 2014. If you can’t make it by then, don’t worry! Filing for an automatic extension with Form 4868 is a painless process that will spare you penalties for missing the deadline. While extending the filing deadline does not extend the time for making a contribution to an IRA or extend the time for payment of any tax due, it will give you some breathing room to properly file your complete tax return. By the filing deadline, you must have paid at least 90 percent of your 2013 tax liability through withholding, estimated payments and any payment made with your extension.

How do I plan for 2014?

The last thing most people want to do immediately after filing their tax returns is to begin tax planning again. But doing so will give you a head start and prepare you for potential tax changes.

• Is tax reform on the horizon? Lawmakers have debated tax reform for years, and 2014 may present the best opportunity for Congress to dramatically change our tax laws. But, will reform be a benefit to individual taxpayers? It’s hard to tell. The top individual rates have risen to 39.6 percent, and Congress has discussed lowering corporate rates from their current peak of 35 percent. That could influence whether a business is organized as a pass-through entity, like a partnership or limited liability company, or as a corporation. After all, the greater the disparity in corporate and individual rates, the more opportunity to change the entity classification of your business.
• Materially participate in your business. The 3.8 percent Medicare tax on net investment income is imposed on passive income. For example, an individual taxpayer who doesn’t “materially participate” in a business will see that income taxed at a higher rate, due to this tax. By materially participating in the business, that investor can eliminate the 3.8 percent tax. Doing so can be tricky, but especially for family businesses that have relatives as owners, it makes sense to look into how to materially participate in the business.
• Understand foreign bank account reporting. The IRS and Department of Justice have, for the last several years, taken a hard look at U.S. taxpayers with unreported offshore financial accounts. Penalties for not reporting offshore income or the existence of those accounts are steep, and can include prison time. The IRS has a voluntary disclosure program for those individuals, which allows for reduced penalties and no prosecution. Keep in mind that the foreign bank account reporting form is not filed with your tax return — rather it must be filed by June 30 of each year with the Financial Crimes Enforcement Network (FinCEN), an agency within the Treasury Department

You can visit Grant Thornton here.

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Get the New Intuit Small Business Blog App for Free on iTunes

Stephanie Taylor for Intuit writes: Time is money, period. You need a reliable source of practical, accurate, and actionable small-business advice — one full of fresh ideas that nourish your entrepreneurial spirit and spark your creativity. And you need it on the go.

We’re proud to be that source for many small-business owners nationwide, and we have some exciting news to share: We’ve released an updated version the Intuit Small Business Blog app for iOS! The new mobile app is available now for free download on iTunes.

The updated app still packs useful, relevant, and timely content on topics like money management, marketing, employees, customers, and trends. It also features improved functionality to fit your busy life: Stories load faster, and sharing them with your social networks is seamless. We’ve also refreshed the graphics and cleaned up the interface design for your reading pleasure. (As before, you can save articles that catch your eye on the use Instapaper and read them when you find some downtime.)

We launched the Intuit Small Business Blog app in 2011 to provide you with insight and inspiration, including tips from other entrepreneurs and industry experts, on your mobile device. Since then, readers have called the app “addicting,” “priceless,” and full of “bite-size articles for the business person on the go.” Thanks for saying so!

We invite you to download the latest version today and become part of our thriving entrepreneurial community. We’d love your feedback, too. Share your thoughts in the Comments section of any post on the blog, or leave a review of the app in the iTunes App Store. Thanks again, and happy reading!

2013 Tax Planning Is Not Finished For S Corporations - How To Purge Problematic Earnings and Profits

Tony Nitti for Forbes writes: In this week’s Tax Geek Tuesday, we take a look at one of the rarest of species in the tax world: the opportunity to implement an impactful tax planning strategy after year-end. Specifically, we’re going to discuss the opportunity for a calendar-year S corporation to elect to purge its accumulated earnings and profits as of December 31, 2013 even though New Years Eve has long since passed. As discussed in detail below, ridding an S corporation of any accumulated earnings and profits may be desirous for a number of reasons.

The strategy traverses subchapters C and S and touches on several complex and misunderstood topics, but hey…that’s what Tax Geek Tuesday is for. This ain’t for the faint of heart.

Let’s get to it.

Earnings and Profits, In General

The concept of a corporation’s “earnings and profits” was first introduced into federal tax law with the Revenue Act of 1916, yet in the near century that’s followed the term has never been formally defined by statute. Instead, earnings and profits (E&P) has been indirectly defined through its application and modification by various sections of the Code to represent the measure of a corporation’s ability to make distributions to its shareholders out of earnings, rather than by returning shareholders’ contributions to capital. As opposed to a corporation’s taxable income or “book” income — which are driven by tax policy and financial accounting considerations, respectively — the computation of E&P is concerned primarily with quantifying the corporation’s economic income, without regard to such considerations.

A corporation’s E&P determines the taxability of distributions made to its shareholders.  Section 316 defines a “dividend” as any distribution of property made by a corporation out of current or accumulated E&P.  In turn, Section 301(c) provides that any distribution constituting a dividend must be included in the gross income of the shareholder, while amounts distributed in excess of those considered a dividend are first treated as a nontaxable return of capital to the extent of the shareholder’s stock basis, with any remaining distribution treated as a gain from the sale of the stock, resulting in capital gain.

Example: Corporation X is wholly owned by A, an individual. In 2010, X’s first year of existence, X had $500 of E&P. As of December 31, 2010, before any adjustments for distributions made by X throughout the year, A had a basis of $300 in his X stock. X distributed $1,000 to A on December 31, 2010.

The taxability of X’s $1,000 distribution to A is determined under Sections 316 and 301(c). To the extent of X’s current E&P of $500, the distribution is treated as a dividend. Thus, A includes $500 in taxable income under Section 301(c)(1). Of the remaining $500 distribution, $300 is treated as a return of A’s capital, and reduces A’s stock basis from $300 to $0. The remaining $200 distribution is treated as the sale of the stock, generating capital gain.

The Relationship Between E&P, Taxable Income, and Retained  Earnings

A corporation’s E&P is neither its accumulated taxable income nor its retained earnings for financial accounting purposes. Rather, E&P is an independent measure of a corporation’s economic income for the purpose of separating those distributions which represent income derived from the conduct of business from those which represent returns of capital contributed by shareholders. Because E&P is concerned with economic effect of a particular item, E&P generally includes all items of income and expense resulting from the economic activities of a corporation, regardless of the treatment of such items in computing taxable income or retained earnings.

A corporation’s taxable income differs from its E&P primarily due to the tax policy considerations that override the determination of  taxable income — such as the exemption of certain state and local bond interest income and the disallowance of expenses for federal income taxes or penalties — that fail to reflect the economic effect of the underlying item of income or expense. As the computation of E&P is generally not concerned with such tax policy considerations,  adjustment are required to convert taxable income into E&P.

Example: In 2013, X, an accrual basis corporation, generated $20,000 of taxable income, giving rise to a $3,000 federal income tax liability. X also earned $10,000 of interest income on state and local bonds that was tax-exempt under Section 103. Assume X had no accumulated E&P as of December 31, 2002, and that there were no other items affecting X’s computation of E&P or taxable income in 2013. On December 31, 2013, X distributed $25,000 to its sole shareholder, A.

If E&P were synonymous with taxable income, X’s $25,000 distribution would be treated as a dividend to the extent of its taxable income of $20,000, with the remaining $5,000 distribution treated first as a reduction in A’s stock basis, then as capital gain to A.

Because a corporation’s E&P differs from its taxable income, however, certain adjustments must be made to convert X’s taxable income into E&P.

While X’s $10,000 of state and local interest income is excluded from taxable income by statute, it nevertheless increases the funds available for X to distribute to A. As a result, a $10,000 increase to X’s taxable income is required in computing E&P.  Similarly, while X’s $3,000 of federal income tax liability is not deductible in computing X’s taxable income pursuant to Section 275, the liability reduces the funds available for X to distribute to A. Thus, X must reduce its taxable income by $3,000 in computing its E&P for 2013.

After modifying taxable income for the aforementioned adjustments, X had $27,000 of E&P in 2013 ($20,000 + $10,000 -$3,000) Thus, X’s entire $25,000 distribution to A is one made from E&P that is taxed as a dividend, and is included in A’s taxable income pursuant to Section 301(c)(1).

A corporation’s E&P is also not identical to its retained earnings for financial accounting purposes, as fundamental differences exist between retained earnings and a corporation’s cumulative economic income available for distribution to shareholders. For example, retained earnings can be reduced by stock distributions or the establishing of a contingency reserve, neither of which impair a corporation’s ability to finance distributions to its shareholders. For these reasons, the 2nd Circuit  has stated that a corporation’s retained earnings is “not even prima facie evidence of E&P for income tax purposes.”

Example: On December 31, 2010, Corporation X had $100,000 of retained earnings for financial accounting purposes. On that day, X made a stock dividend to its shareholders that reduced its retained earnings by $40,000. Because the stock dividend did not impair X’s ability to fund a distribution to its shareholders, there is no reduction in X’s E&P.

Reasons For Computing Earnings and Profits

The primary purpose for computing ...[snip...the article continues, to read the rest of Toni Nitti visit Forbes here]

FreshBooks Wins 6 Stevie Awards for Excellence in Customer Service / World’s best customer service team rooted in best-in-class training, supportive management and innovative technology platform.

FreshBooks, the #1 cloud-based accounting solution designed exclusively for small business owners, today announced it has been awarded six Stevie Awards, recognizing the company’s excellence in delivering a superior customer experience for its small business customers. 

FreshBooks placed first across three categories receiving Gold for Front-Line Customer Service Team of the Year, Customer Service Management Team of the Year, and Customer Service Manager of the Year. FreshBooks also took home three Silver awards for Customer Service Training Team of the Year, Young Customer Service Professional of the Year, and Best Use of Technology in Customer Service.

“Delivering an exceptional experience is part of our commitment to our customers – it’s something they can expect as part of our service and it’s an area of our business that we view as a key differentiator in our market,” said Levi Cooperman, co-Founder and VP of Operations, FreshBooks. “At FreshBooks, we believe that connecting our caring, passionate team directly with small business owners is the best way to help them find the right solutions for their business, to give them an opportunity to share feedback with us, and to ultimately stay focused on what they do best – running their business.”

The commitment to customer experience is pervasive throughout the organization with employees spending their first month at FreshBooks working as part of the customer support team. The program is designed to help FreshBooks employees connect with its small business customers and empathize with the challenges they face. As a result of the deep connection FreshBooks has with its customers, the company is able to stay at the forefront of cloud accounting for small business by anticipating their needs, forming value-added partnerships, and developing features and solutions specific to their customers.

“Supporting our customers is what makes FreshBooks the best cloud accounting solution available today,” said Sandy Lai, Training Specialist at FreshBooks. “When our customers reach out to us, they speak with a FreshBooks employee which enables us to build long-lasting relationships with our customers and focus on their business needs.”

Empowered and encouraged to deliver an extraordinary experience for its customers, FreshBooks employees go above-and-beyond to personalize the relationship the company has with small businesses. The FreshBooks team regularly meets with its customers and has even gone as far as Singapore to connect with unique business owners. On March 6, the FreshBooks team will be in Austin, TX. Local customers are encouraged to sign up to meet the FreshBooks team and share their experience: https://guestlistapp.com/events/231681.

Intuit Receives Consensus Rating of “Hold” from Analysts (NASDAQ:INTU)

Nolan Pearson for WKRB writes: Shares of Intuit (NASDAQ:INTU) have earned an average recommendation of “Hold” from the twenty ratings firms that are covering the company, American Banking News.com reports. Three research analysts have rated the stock with a sell rating, eight have assigned a hold rating, five have given a buy rating and one has issued a strong buy rating on the company. The average 12-month target priceamong brokers that have updated their coverage on the stock in the last year is $72.79.

INTU has been the subject of a number of recent research reports. Analysts at Jefferies Group raised their price target on shares of Intuit from $73.00 to $75.00 in a research note on Friday. They now have a “hold” rating on the stock. Separately, analysts at Zacks downgraded shares of Intuit from a “neutral” rating to an “underperform” rating in a research note on Thursday, February 20th. They now have a $71.40 price target on the stock. Finally, analysts at Deutsche Bank cut their price target on shares of Intuit from $68.00 to $65.00 in a research note on Thursday, February 13th.

Intuit (NASDAQ:INTU) traded down 0.58% during mid-day trading on Tuesday, hitting $76.96. The stock had a trading volume of 331,676 shares. Intuit has a one year low of $55.54 and a one year high of $78.74. The stock’s 50-day moving average is $73. and its 200-day moving average is $70.58. The company has a market cap of $21.857 billion and a P/E ratio of 30.14.

Intuit (NASDAQ:INTU) last issued its quarterly earnings data on Thursday, February 20th. The company reported $0.02 EPS for the quarter, missing the Thomson Reuters consensus estimate of $0.14 by $0.12. The company had revenue of $782.00 million for the quarter, compared to the consensus estimate of $778.88 million. Analysts expect that Intuit will post $3.57 EPS for the current fiscal year.

The company also recently declared a quarterly dividend, which is scheduled for Friday, April 18th. Investors of record on Thursday, April 10th will be given a dividend of $0.19 per share. This represents a $0.76 dividend on an annualized basis and a yield of 0.98%. The ex-dividend date of this dividend is Tuesday, April 8th.

Intuit Inc (NASDAQ:INTU) is a provider of business and financial management solutions for small businesses, consumers, accounting professionals and financial institutions.

Intuit Q2 Results Show Just How Hard Xero's US Task Is

Ben Kepes for Forbes writes: The SMB cloud accounting space is, contrary to what people might think, a very interesting space. New entrant Xero has got a lot of attention, some serious investment and gained a real global foothold. At its latest reporting period Xero had 250000 individual businesses as customers globally.

At the same time there is the dominant existing player Intuit, whoseQuickbooks product fuels the bulk of US SMBs. Intuit has had a cloud product for years, Quickbooks Online, but it has been a fairly sub standard product until recently.

What changed recently was Xero gaining lots of attention – while dabbling in the US mrket until now, Xero picked up around $200M of funding and flagged that it was serious about entering the US market in a substantive way. It’s also flagged a US listing (to add to its existing New Zealand and Australian public listings)

Seeing the very real risk that Xero introduces, Intuit has finally decided to get serious about its cloud product. Taking a leaf from Clayton Christensen‘s book the Innovators Dilemma, Intuit has decided to actively begin disrupting its existing legacy products in order to reduce the imapct of external threats. In essence they’re disrupting themselves before Xero does it for them.

And Intuit’s Q2 results announced this week show that its executing on this change. The company announced that Quickbooks Online has now got 561000 business paying for it, of those 561000, 45000 were added in the last quarter alone.

Previously Xero’s CEO Rod Drury has gone on record criticizing Intuit for not breaking out Quickbooks Online revenue. He’shad to review that critique and is now toning it down to reflect more upon the money Intuit is spending on marketing and the limited impact that he believes this is having on growth:

@benkepes @crepetto that’s new. Thanks. So all that marketing spend for 30% FY13 growth? SMBs super hard to reach aren’t they

— Rod Drury (@roddrury) February 13, 2014

It’s a fascinating look at market dynamics. An incumbent was arguably resting on its laurels for a number of years. An upstart managed to grow to scale while the incumbent was napping and finally the incumbent wakes up and begins to respond. Intuit has an existing customer base across all its business products of close to 1.2 million businesses. This is a significant number and the question is whether the company will be able to continue converting users of legacy products onto QBO at the same time as adding new businesses into the platform. In terms of the second point, it all comes down to mindshare – while not a hard metric, only a couple of years ago almost no one I spoke to in the US had heard of Xero. Today that has changed and the first thing that people generally ask me when they find out I come from new Zealand (the home of Xero) is whether I’ve heard of the company.

However, at least in the US market, Xero hasn’t yet got significant coverage. Of its 250000 global customers, it is saying close to 100000 are in Australia. My assessment would be that the company is still under 50000 paying customers in the US, a tiny footprint that they’re going to be anxious to grow rapidly. The company will no doubt be hoping that a US listing off the back of global revenue will help them gain the credibility in the US to start building those numbers.

Xero is building this awareness through a number of means – strong ties with accountants, high profile investors and executives and an immensely strong ecosystem of add-on partners. This is the key area for Intuit – it has existing mindshare but it’s executed poorly on building the ecosystem of third party add-on products. If I were inside Intuit I’d be investing a lot of development in building out the Quickbooks Online API and engaging with developers to both provide more valuable functionality for customers but, perhaps more importantly, to build a defensive wall to protect itself from the very real threat which is Xero.

You can read Forbes here. 

TurboTax, TaxACT and H&R Block Review: Quick Guide to the Best Online Tax Software Read more: Taxes 101: Guide to TurboTax, TaxACT and H&R Block

Kate Furlong for Go Banking Rates writes: As the tax deadline draws near, you’re probably getting all of your tax paperwork in order so that you can file in time for the April 15 deadline. If you have a very complicated tax situation, it’s not a bad idea to hire an accountant to make sure that everything is done properly.

However, if your taxes are relatively straightforward or you feel confident doing them yourself and want to save some money, there are some great pieces of free tax software out there that can help you file your own taxes.

You’ve probably heard of TurboTax, TaxACT and H&R Block. They are all reputable products with similar functionalities, but if you’re unfamiliar with some of their capabilities, here are a few basic points about each.

 

1. TurboTax Review

TurboTax is great for novice and intermediate users alike, as it offers you the option to go through your taxes by answering questions or, if you prefer, you can navigate your own way through.

As you go along in your questionnaire, TurboTax points out unusual situations and flags issues that it sees. It also saves your information from past tax years which can be helpful to reference or to spot mistakes. Additionally, TurboTax has a forum of user-generated FAQs that can be very helpful in finding quick answers to questions.

At the end of the process, you can use the software to file both your state and federal returns and save a PDF of the returns to your computer for your own files.

The regular edition allows you to file your federal return for free while more complicated tax situations will require a paid upgrade to the Deluxe, Premier, or Home & Business editions. It costs money to file your state return ($27.99), but what’s nice is that the information that you input into your federal return easily transfers over.

2. TaxACT Review

TaxACT’s price is one of the main competitive advantages over the other tax services. TaxACT allows you to file your federal return for free but charges per state ($14.99); however, it has cheaper upgrade options than the others and the price of the state return is less than $14.99 when you use an upgraded federal version.

As with the other services, you can import data from your tax forms (W-2s or last year’s returns) easily and you are guided through different areas of your taxes via easy-to-answer questions or self-navigation.

3. H&R Block Review

H&R Block is a household name in the tax business; its main benefit is its “Best of Both” option that allows you to visit a physical office if you end up needing offline help with your taxes.

As with TurboTax and TaxACT, H&R Block offers a free version for the simplest of tax situations and then provides paid upgrades for more complicated situations. The service allows for free federal filing and charges a base rate of $27.99 per state filing.

Each of these three software choices are sound options for filing your own taxes; consider testing them all out at the start to see which interface you feel most comfortable with. Then you can decide which you’ll use to file your own taxes.

Seven Questions to Ask Before Purchasing An App for Your Cloud-Based Accounting System

Geraldine Cruz for Bill.com writes: Apps can extend the value of your accounting software by delivering functionality unavailable with your backend system. Examples of apps currently available for the leading accounting systems include:

•A full-service, automated payment solution that leverages vendor and invoice data to help businesses pay bills electronically or with paper checks 

•Document management capabilities that connect contracts, invoices,and proposals with customer and vendor data 

•Customer relationship management functionality that transforms lead and proposal data into customer data and invoices upon successful contract execution

•Business intelligence features that analyze order processing, workflows, and other transactional data to measure business efficiencies 

Leading accounting software vendors feature “App Storefronts” on their websites that makes it easy for customers to find new apps that fit their business needs. But the consumer, retail-like experience may belie the need to assess the business, technical, and security capabilities of the app developer with the same rigor as it did when it evaluated the purchase of the accounting system. Assuming you have already done your due diligence in evaluating the fit of an app to your business and technology needs, you should consider the following seven questions and be comfortable with the answers — before you purchase the app:  

1.Does the vendor of the accounting system endorse the app? One indication that the accounting software vendor endorses the app is that it lists it on its “App Storefront.” But not all “App Storefronts” are created equally. The ease or difficulty in getting a vendor endorsement will vary. You should determine how the accounting software vendor evaluates apps. And read what reviewers say about the app, but do not limit your evaluation to just the reviewers on the “App Storefront”. Nothing beats talking to a variety of customers about their experiences with the app. 

2.What challenges, if any, should I expect to integrate the app with my accounting system? Even if the app promises complete integration with your accounting system, you should ask the app developer and its customers about the difficulty of the first integration between the two applications. You should expect some challenges if you have customized the accounting system or are using the system or the data fields differently than the way customers traditionally use them. 

3.Where is the app and the data it generates hosted? The app may be hosted on the same server as your accounting system and data, or it may be hosted separately on the app developer’s servers — or a company that hosts the app and the data. In the former scenario, initial integration may be easier, even for accounting systems that have been customized. If the app is hosted on a different server, you may need to use and pay for integration services from the app developer. You should also assess whether the app developer — or the company hosting the app — can support the volumes you anticipate, particularly during your peak periods. 

4.How does the app developer address updates to the accounting system? Cloud-based accounting systems will inevitably be updated, and the apps that integrate with them may need to be updated. Customizations to the accounting system may result in more challenging upgrades. Validate how the app developer intends to align its roadmap with the roadmap of your accounting software vendor.

5.At what point in your workflow will you need to sync the accounting system and the app? You should consider how and when the syncs between the two applications will need to be performed. When users need to sync data, will it occur naturally, as part of their workflow? Or are there required steps that delay, interrupt, or change the workflow? You may need to redesign your process and/or train users. Or you may decide that using the app requires too many detrimental changes to your workflow.

6.What data is being synced between the accounting system and the app, and is the sync bi-directional or uni-directional? You should know what data (or fields) are taken from the accounting system and what are passed back. This will help you determine if all data fields are updated bi-directionally, or if one system contains more updated data. 

Moreover, if the app is updating only one module in the accounting system (e.g., vendor and payments) but syncs many more fields than that (e.g., vendor, payments, customer, and customer invoices), you may want to ask the app provider to sync only the necessary data to get the app to work. And if the app developer cannot do that, you should assess if users have inadvertent access to data they should not, requiring a change in data access and controls.

7.How will the app scale with your business needs? Business needs change. Will the app accommodate your changing business needs? For example, as your business grows, will the app support those transaction volumes or support new features that you will need? If you anticipate upgrading to an accounting system that supports larger organizations, will the app support the new accounting system you are likely to adopt? Does the app have the same sync capabilities and features with the new accounting system? 

A trial of an app can provide some of the answers to these questions. You can see how the sync works; confirm which syncs are uni-directional and which are bi-directional; and validate that the app workflows and syncs align with your users’ current workflows. But it may be difficult, impossible, or not advisable to replicate the scenarios to test the app vendors’ capacity to support growing or changing business needs. Digging into these seven questions with the application developer and representative customers will help to flesh out what to expect in these scenarios.

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How To Avoid Audit Triggers On Form 1040 Schedules A, C, And E

How To Avoid Audit Triggers On Form 1040 Schedules A, C, And E

The IRS makes no secret of the fact that it commonly examines items reported (or not reported) on Form 1040 Schedules A, C, and E. Practitioners may have received one or more of the IRS warning letters sent to practitioners who prepare a large volume of these important schedules. These letters generally direct practitioners to ask more questions of their clients and be more circumspect with the information they receive. But the wary practitioner can go further to circumvent potential audit issues by taking note of specific potential pitfalls, such as documentation requirements, changes in tax law, or tax form revisions. This article summarizes some of the major audit issues covered by Claudia Hill, E.A. M.B.A., TaxMam, Inc., during her February 7, 2014 CCH webinar “Schedule A, C & E: Audit Hot Buttons.”

Schedule A, Itemized Deductions

Medical and Dental expenses, Line 3. The tax law has changed so that taxpayers who were under age 65 at the end of 2013 may only itemize a deduction for unreimbursed medical expenses that exceed 10 percent of their adjusted gross income (AGI). However, if a taxpayer or his or her spouse was 65 or older at the end of 2013, the lower 7.5 percent threshold still applies. In 2017, however, the AGI threshold increases to 10 percent for all taxpayers without exception.

Auditor Note

“The IRS knows how old you are, so make sure the taxpayer’s birth date is entered into your tax preparation software,” Hill said. She advised practitioners to double check whether the birth date field was required, and if not to change their office practice to require its entry.

Home mortgage interest, Lines 10 and 11. Both lines are for reporting home mortgage interest paid during 2013 and reported on Form 1098. However, line 10 is for interest and points reported to the taxpayer; whereas line 11 is for home mortgage interest paid by the taxpayer, but reported to someone else.

This situation might arise in a situation where a mortgage was partially financed by the taxpayer’s family member, but the taxpayer paid the interest, Hill explained. “Failure to put the number on the correct line can generate a CP 2000 letter,” she said. Practitioners should train the clients to bring the actual mortgage interest documents to the office so the practitioner can cross-check the name of the person listed on a Form 1098.

Mortgage insurance premiums, Line 13. Although taxpayers may deduct amounts paid during 2013 for mortgage insurance premiums, this deduction is no longer effective for 2014 and beyond. Practitioners should prepare their clients for the fact that, absent Congressional action, this deduction is now unavailable for 2014 and future tax years.

Gifts to charity made by cash or check, Line 16. Cash contributions under $250 must still be substantiated by a bank record, receipt or other written communication from the qualified donee organization that verifies the transaction took place, Hill said. That means that cash donations of change thrown into a bell ringer’s collection bowl or money placed in a church collection plate without a contemporaneous record would not be deductible.

For any cash or property contribution of $250 or more, a taxpayer must obtain and keep a contemporaneous written acknowledgment from the qualified organization indicating the amount of the donation, a description of any property contributed, and a statement reporting any goods or services received as a result of the contribution. If no goods or services were received, the statement must say as much.

Auditor Note

Practitioners should take particular care to ensure that the acknowledgment is contemporaneous, meaning the receipt was obtained prior to filing the tax return, Hill said. Furthermore, in the event of an audit, if a taxpayer cannot find an acknowledgment, the taxpayer must have the charity reproduce a copy of the original contemporaneous written acknowledgment. It would be insufficient to have the charity produce a new one, even if it reported all the same information, since the law requires taxpayers be holding the receipt at the time their return is filed.

Gifts to charity other than by cash or check, Line 17. Noncash gifts of $500 or more must be accompanied by Form 8283, Noncash Charitable Contributions. With the exception of donations of publicly traded securities, for which a taxpayer may rely on the valuation given by regulated securities markets like the NASDAQ, taxpayers must obtain a qualified appraisal.

Auditor Note

The rules for qualified appraisals are stringently applied. For example, in the case Mohamed v. Commissioner, TCM 2012-152, Dec. 59,074(M), the taxpayer was a certified real estate appraiser. However, when he appraised his own donation of property to the Charitable Remainder Unitrust that he and his wife had established, the Tax Court disallowed the deduction. When in preparation for the trial, the taxpayer obtained a new qualified appraisal, the Tax Court still denied the deduction. The appraisal had been made only as the audit began, and was not contemporaneous with the gift.

Casualty and theft losses, Line 20. Theft losses reported on Schedule A are calculated using Form 4684, Casualties and Thefts. The IRS has added a new Section C to the new 2013 Form 4684 for taxpayers to claim a theft loss deduction from a Ponzi-type investment scheme. Section C replaces Appendix A in Rev. Proc. 2009-20.

Other miscellaneous deductions, Line 28. The IRS instructions for Schedule A list several types of itemized deductions that are not subject to the 2 percent AGI threshold and that must be reported on line 28. Hill stated that this list, however, was not exhaustive. Once in a while a practitioner might find another deduction that could be included on Line 28. If the practitioner’s tax software does not allow the deduction to be added, the return must be filed on paper, she explained.

Schedule C, Profit or Loss From Business

Payments requiring Form 1099s, Line I. Tax preparation software often has default settings regarding the checkbox line asking whether a taxpayer made any payments in 2013 that would require a Form 1099 to be filed. Sometimes the software checks “Yes,” other times “No,” and other times left the box blank. “You do not want to leave this blank,” Hill cautioned. Know how your software works, she emphasized.

Auditor Note

Taxpayers should not assume that they do not need to issue a Form 1099 to a service provider, Hill said. For example, a piano teacher who has paid a piano tuner more than $600 is required to file a Form 1099.

Gross Receipts or sales, Line 1—Form 1099-K, Payment Card and Third Party Network Transactions. The IRS has announced that it will audit the underreporting of Form 1099-K income. In the case of a Schedule C filer, such income must be reported on Line 1, even though the individual line reserved for Form 1099-K income has disappeared from the 2013 Schedule C.

Auditor Note

Practitioners should be prepared for instances where payments reported as income to taxpayers on the Form 1099-K do not actually match the amount the taxpayer counted as gross receipts in its books. For example, a Form 1099-K might report a total amount of a credit card transaction that includes state sales tax or transaction fees that the proprietor did not actually receive as income.

Home office deduction—Simplified method, Line 30. New for 2013 is the simplified method by which taxpayers calculate a deduction for business use of their home. The simplified method introduces relaxed reporting requirements by allowing a deduction of $5 per square foot of home used for business (up to 300 square feet). However, the actual expenses could be greater than the standard deduction. Also, the simplified method does not allow a deduction for depreciation or a loss carryover.

Schedule E, Supplemental Income and Loss

Passive activity loss limitations, Line 22. In general, losses from rental real estate activities are considered passive, andCode Sec. 469 provides that they can be deducted only to the extent of a taxpayer’s passive income. Two exceptions exist: (1) the taxpayer is a real estate professional, or (2) they actively participate in the rental real estate activity and their income is under $100,000.

Auditor Note

The second exception can result in a maximum $25,000 deduction for qualifying taxpayers. The deduction is reduced by $.50 on the dollar for taxpayers with AGI between $100,000 and $150,000.

Rental real estate professional. “Who is a rental real estate professional? The government will not commit on this point,” Hill said. However, in general, a taxpayer is a real estate professional if (1) he or she spends more than 750 hours in a year performing services in one or more real property trades or businesses in which he or she materially participates; and (2) the taxpayer spent more time providing personal services in the real property business in which he or she materially participates than in a non-real property trade or business.

Auditor Note

What constitutes “material participation” is further defined under another set of requirements. The result of the complicated PAL rules is that many inexperienced taxpayers improperly claim they are real estate professionals and deduct passive losses that may later be disallowed on audit.

Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts. The 3.8 percent net investment income surtax applies to certain investment income of individuals, estates and trusts that have income above the statutory threshold amounts. This can include rental real estate income, unless the rental real estate income was derived from the operation of a trade or business in which the taxpayer materially participates.

Auditor Note

Hill predicted that this area could generate much significant controversy over what constitutes a real estate trade or business. She did clarify, however, that even if a taxpayer does qualify as a real estate professional, his or her participation in rental real estate activity does not necessarily constitute a trade or business for purposes of the net investment income tax.

Reference: PTE §39,020.15