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Friday, March 31, 2017

Business Entity Comparison Charts

Accounting and Recordkeeping - Fringe Benefits - Liability

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Organization and Ownership - Taxation of Profits and Losses

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Business accounting and tax preparation is a dreadful task for most Carolina business owners. Thankfully, in your time of need there is a professional you can trust to turn to for assistance. That professional is Franklin P. Sparkman, a certified public accountant in Charlotte NC.

Thursday, January 19, 2017

Education Tax Benefits

If you pay tuition, fees, and other costs for attendance at an eligible educational institution for yourself, your spouse, or your dependent, you may be able to take advantage of one or more of the education tax benefits.


You can claim more than one education benefit in a tax year as long as you do not use the same expenses for more than one benefit.

Exception: Qualified expenses used to claim education benefits can also be used to eliminate the 10% penalty on premature IRA distributions.

You may claim only one of the following education tax benefits for the same student per year: tuition and fees deduction, American Opportunity Credit, or Lifetime Learning Credit.

Education Deductions

Deductions reduce the amount of income subject to income tax. Deductions for education expenses include:
• Tuition and fees deduction up to $4,000 from gross income. Income limitations apply.
• The provision for deducting tuition and fees expires for tax years after 2016.
• Student loan interest deduction up to $2,500 from gross income. Income limitations apply.
• Business deduction on Schedule C or F. You can deduct the cost of education related to the business or farm activity.
• Miscellaneous itemized deduction on Schedule A, subject to the 2% AGI limitation. You can deduct the unreimbursed cost of education required to keep your current job or maintain and improve skills needed for your job. You cannot deduct the cost of education that qualifies you for a new trade or business.

Education Tax Credits

Tax credits reduce the amount of income tax you may have to pay. Income limitations apply. The education credits are claimed on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).
• American Opportunity Credit, $2,500 maximum per student per year.
• Lifetime Learning Credit, $2,000 maximum per tax return per year. Note: The Hope Credit applied to 2008 and earlier years. It was replaced by the more generous American Opportunity Credit for tax years after 2008.

Penalty-Free IRA Distributions

If you withdraw money from your IRA before you are age 59½, you are generally subject to a penalty of 10% of the distribution, in addition to any tax that may be due on the distribution.
• The 10% penalty does not apply to traditional IRA or Roth IRA withdrawals, if you use the money to pay qualified education expenses for yourself, spouse, or for any child or grandchild of yourself or your spouse.
• Qualified education expenses include tuition, fees, books, supplies, equipment, and special needs services required for enrollment or attendance at an eligible educational institution. Room and board for students enrolled at least half-time in a degree or certificate program may also qualify.
• Reduce qualified expenses by scholarships and other tax-free assistance the student receives, but not by gifts or inheritances.




Education Savings Plans

Contributions that you make to education savings plans are not deductible, but the earnings accumulate tax free. In addition, no tax will be owed on distributions if they are less than the beneficiary’s qualified education expenses. Qualified expenses are reduced by scholarships, other tax-free assistance, and amounts used to figure education credits.
• Qualified Tuition Programs (QTPs). States sponsor QTPs to allow prepayment of a student’s qualified higher education expenses. For information on a specific QTP, you need to contact the state agency or eligible educational institution that established and maintains it. Note: QTPs are also called 529 Plans because they are authorized under section 529 of the Internal Revenue Code.
• Coverdell Education Savings Accounts (ESAs). A Cover dell ESA can be used to pay a student’s eligible K-12 expenses, as well as higher education expenses. Coverdell ESA contributions are limited to $2,000 total per year for each beneficiary, no matter how many accounts have been established or how many people are contributing. Unless the beneficiary is a person with special needs, contributions to a Coverdell ESA must stop before the beneficiary reaches age 18 and the account balance must be distributed within 30 days after the beneficiary reaches age 30 (or dies, if earlier).

Exclusions From Gross Income

An exclusion from income means you don’t report the benefit you receive as income and you don’t pay tax on it, but you also can’t use that same tax-free benefit for a deduction or credit.
• You may exclude the part of scholarships, fellowships, and grants that you use for qualifying education expenses while you are a degree candidate.
• You may exclude up to $5,250 paid for you under a qualifying educational assistance plan. Additional amounts are included in your W-2 income, unless they are a working condition fringe benefit. A working condition fringe benefit is an amount that you could have deducted as an employee business expense, had you paid for it instead of your employer.
• If you cash in qualified U.S. Savings Bonds to pay for eligible education expenses for yourself, spouse, or your dependent, you may exclude the bond interest from income. Income limitations apply.


To learn more about our tax preparation services in Lancaster SC and Charlotte NC, please visit FPSparkmanCPA.com

This article contains general information for taxpayers and should not be relied upon as the only source of authority.  Taxpayers should seek professional tax advice for more information.

Tuesday, December 27, 2016

Employee or Independent Contractor

Employee or Independent Contractor? In order for a business owner to know how to treat payments made to workers for services, he or she must first know the business relationship that exists between the business and the person performing the services. A worker’s status determines what is needed for tax preparation; what taxes are paid and who is responsible for reporting and paying those taxes. A worker performing services for a business is generally an employee or an independent contractor. If a worker is classified incorrectly, the IRS may assess penalties on the employer for nonpayment of certain taxes.


Penalties and Interest

When the IRS determines that a worker is actually an employee rather than an independent contractor, the employer is subject to penalties for failure to withhold and remit income, FICA (Social Security and Medicare) and FUTA (federal unemployment tax) taxes, interest on the underpaid amounts, and penalties for failure to file information returns. The state will also seek to collect workers’ compensation and unemployment compensation premiums for unreported wages.


Independent Contractor

An independent contractor is self-employed and is generally responsible for paying his or her own taxes through estimated tax payments. A business issues Form 1099-MISC, Miscellaneous Income, to any one independent contractor, subcontractor, freelancer, etc., to whom the business made $600 or more in payments over the course of the tax year. The business is not generally responsible for withholding income tax or FICA.


Employee

A worker treated as an employee will be issued Form W-2 for wages paid. The business hiring the worker is responsible for withholding income tax and FICA. The employer is also liable for FUTA and various state employment taxes. Also, the employee may be eligible for certain fringe benefits offered by the employer, such as health care.

Factors to Determine Worker Status

The general rules for classifying workers as independent contractors or common-law employees center on who has the right to control the details of how services are to be performed. The factors can be grouped into three categories.

1) Behavioral control. Factors that indicate a business has the right to control a worker’s behavior include the following.
Instructions that the business gives to the worker. Employers generally control when and where work is to be done, what tools or equipment to use, what workers to hire or to assist with the work, where to purchase supplies and services, what work must be performed by a specified individual, and what order or sequence to follow.
Training that the business gives to the worker. Employees may be trained to perform a service in a particular manner. Independent contractors generally use their own methods.

2) Financial control. Factors that indicate a business has the right to control the business aspects of a worker’s job include the following.
Extent of the worker’s unreimbursed business expenses. Independent contractors are more likely to incur expenses that are not reimbursed, such as fixed overhead costs that the worker incurs regardless of whether work is currently being performed.
Extent of the worker’s investment. Independent contractors often have significant investment in facilities used to perform services for someone else, such as maintaining a separate office or other business location.
Extent to which the worker makes his or her services available to the public. Independent contractors are generally free to offer their services to other businesses or consumers. They often advertise and maintain a visible business location.
Method of payment for services performed. Employees generally are guaranteed a regular wage and work for an hourly fee or a salary. Independent contractors are generally paid a flat fee for a specific job. Exceptions apply to some professions, such as accountants and lawyers who charge hourly fees for their services.
Extent to which the worker can make a profit. Independent contractors can make a profit or a loss.

3) Type of relationship between the parties. Factors that indicate the type of relationship include the following.
Written contracts that describe the relationship and intent between the worker and the business hiring the worker.
Employee-type benefits provided to worker. Employers often provide fringe benefits to employees, such as health insurance, pensions, and vacation pay.
Permanency of the relationship. Employer-employee relationships generally continue indefinitely.
Extent services performed by the worker are a key aspect of the business hiring the worker. A worker who is key to the success of a business is more likely to be controlled by the business, which indicates employee status. For example, an accounting firm hires an accountant to provide accounting services for clients. It is more likely that the accounting firm will present the accountant’s work as its own and would have the right to control or direct that work.


Incorrect Treatment of Employees as Independent Contractors

A worker who receives a 1099-MISC instead of a W-2 has two options.
1) Agree with the way the business has classified the worker, file Schedules C and SE, and pay self-employment tax on the earnings, or
2) File Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will then decide if the worker should have been treated as an employee, subject to income and FICA tax withholding. If the IRS agrees that the worker really is an employee, the employer will be liable for employment taxes. However, if the IRS determines that the worker is really an independent contractor, the worker will be liable for paying SE tax.

Example: Harold owns a restaurant and hires Jim, a gardener, to mow the lawn and weed the landscaping once a week. The contract states that Jim will arrive at the restaurant on Monday mornings, mow the lawn, pull weeds, and tend to the landscaping. In exchange, Harold agrees to pay Jim $50 for this service each week. Jim supplies his own lawnmower, weed eater, and hedge clippers. Jim decides what time he arrives and how long the job will take him. Harold does not supervise Jim in his tasks or dictate to him how they are to be done. Jim is an independent contractor.
 

Example: Jeffrey owns Jeffrey’s Gardening Service and employs three gardeners to perform services for his business. Jeffrey pays his gardeners a fixed wage and withholds taxes, FICA, and various benefits and remits those withholdings to the appropriate government agencies. In addition, Jeffrey provides his employees with the tools and equipment they need to perform their work, instructs his employees which jobs to go to, and supervises them while they are doing their work. Jeffrey’s workers are employees.


Contact Us

There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact Franklin P Sparkman CPA in advance if you have questions about the tax effects of a transaction or event, including the following:
• Pension or IRA distributions.
• Significant change in income or deductions.
• Job change.
• Marriage.
• Attainment of age 59½ or 70½.
• Sale or purchase of a business.
• Sale or purchase of a residence or other real estate.
• Retirement.
• Notice from IRS or other revenue department.
• Divorce or separation.
• Self-employment.
• Charitable contributions of property in excess of $5,000.


This article contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information.