“Conservative” Group Pushes for Sales Tax on Services
The Thomas Jefferson Institute for Public Policy, a supposedly center-right public policy foundation, is pushing for sales taxes to be collected on most services in Virginia. The law would include services provided to the public but not business-to-business services. This would include tax preparation, legal services, transportation, shipping services, insurance, private education, auto repair, hair services, dry cleaning, landscaping services, apartments, bowling, and the list goes on and on. The new law would be “revenue-neutral” (what they always say) and would eliminate the Business and Professional Occupational Tax (Business License), Business Personal Property Tax and Business Inventory Tax.
Although I like the idea of getting rid of Business License fees and Property and Inventory Taxes, I don’t like the idea of charging sales taxes on services. Charging a sales tax on services is the same as charging sales taxes on labor. As we all well know, labor is already taxed extensively through the Federal Income Tax, State Income Tax, Social Security Tax, Medicare Tax, State Unemployment Tax and Federal Unemployment Tax. Now, they want us to collect and remit sales tax to the state for services?
This also creates burdensome accounting. For example, if you pay someone to mow your lawn as an independent contractor then under this new law they would also be required to collect sales tax from you and remit it to the State. That seems to me like a paperwork nightmare, especially for small operators. And, it increases the potential for fraud. How much of this new tax will never get remitted to the State?
Although this tax is paid by the public, it will eat into the pockets of service providers. There are certain price points that people will pay, tax included. Thus, service providers will have to lower their prices to accommodate the new tax. Also, it will give an unfair advantage to those small operators who skirt the law and don’t collect or report the tax at all. I say, “Two Thumbs Down” on this idea!
Like this:
April 15th (April 17th): Just Another Day
Please, don’t stress about April 17th, the due date for this year’s Individual and Partnership Federal Income Tax Returns. April 17th is NOT a hard deadline. Just file an extension and if you think you might owe money make an estimated payment to avoid interest and penalties on the amount due. Keep in mind, the point of filing an extension, if you owe money, is to avoid a late FILING penalty.
So, why all the hoopla surrounding the tax “deadline”? We are programmed from an early age to fear the IRS. Many people believe that if they don’t file their tax return by April 15th (April 17th) they might face serious fines or even go to jail. Of course, that isn’t really true unless you owe a lot of money and don’t file at all.
Here are the facts:
1. If you are due a refund, there are no penalties if you file late. Yep, that’s correct (for Federal returns). The IRS will even pay you interest on the amount they owe you! (at .000000001% or something like that)
2. If you owe money, you can avoid late filing penalties by filing an extension. For Individuals the extension is 6-months and for Partnerships it is 5-months.
So, relax, stop stressing and file an extension.
Business License Fees Punish Success
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Like most other responsible business owners in Chesapeake, VA I renewed my business license before March 1st of this year. One of the things that has always seemed odd to me is how the license fee is calculated. If you make less than $100,000, your business license is $50. But, if you make $100,000 or more, you pay a percentage of gross revenue. For accountants it is 58 cents per $100, or 0.58%. In other words, if you have $99,999.99 in revenue your business license is $50, but if your revenue is $100,000.00 your business license is $580.
Of course, a third grader could see why this isn’t fair. That one extra penny costs you $530 in extra license fees.
Whoever set this up was either too incompetent to implement a gradual system or simply didn’t care.
From a political standpoint, I can see why this would be hard to change. It would be practically impossible to keep business license fees revenue neutral without raising taxes on someone. For example, if you lowered the $50 cutoff to $75,000 and then said that business license fees are $50 for the first $75,000 and a percentage of revenue for everything above that then you would be raising fees on businesses that bring in between $75,000 – $100,000 but lowering fees on those that bring in above $100,000. On the flip side if you had a partially graduated scale where the first $99,999.99 was still $50 but $100,000 – $125,000 was $50 plus a percentage of the amount over $100,000 and then increased taxes on the amounts above $125,000 to make up for the loss of license fees on the amounts lower than $100,000 then you would be increasing fees on those businesses with more than $125,000 in revenue. Business license fees are already high enough and shouldn’t be raised on anyone.
The only fair solution is to charge $50 for the first $100,000 and then a percentage on everything above that. Of course, doing this will lower tax revenue to the city (which is not necessarily a bad thing). And, “fair” is a relative term. It would be “fair” to make everyone pay a percentage of sales, regardless of how much those sales are. If you bring in
$90,000, for example, instead of $50, you would pay a percentage. But, of course, making it “fair” would cause an increase in license fees for those businesses with revenues of less than $100,000, and I would never be for increasing taxes or fees on small businesses.
Another solution is to implement a graduated scale from $100,000 – $125,000 (for example) and not raise rates on those above $125,000. This would fix the “one penny costing $530 problem”. This would also cause a loss of revenue to the city.
Thus, the only way to fix this improper business license calculation without raising taxes on anyone is for the city to take a cut in tax revenue. But, worse things have happened. If doing the right thing means less revenue to the city then so be it.
Use the Same Tax Professional for Personal and Business
Many taxpayers will hire a professional to prepare their business return, and then will prepare their personal return themselves. I do not recommend this if you own an S-Corporation or a closely held Partnership.
The primary reason you should not do this is because of the way Bonus Depreciation and the Section 179 deduction is handled. If you take more Bonus Depreciation or Section 179 than you need, it is lost forever. When I prepare an S-Corporation return that is closely held and the owner’s personal return(s) I toggle back and forth between the personal and business returns. This ensures that the taxpayer(s) pay the least amount of tax possible without forfeiting Section 179 or Bonus Depreciation. Without doing both returns at the same time you really don’t know for sure if you are maximizing your tax savings.
I’ve had business owners tell me to “just take the max” of Section 179. They say this without really understanding it. Then they prepare their personal return. It is possible that they could be forfeiting thousands of dollars of future deductions by taking more Section 179 than they really need for that year. The future deductions would more than pay for the extra preparation fee.
Of course, one could always file amended returns going back three years. But, how would you know if you needed to file amended returns unless you hired a professional to take a look. Also, if you did realize that you took too much Section 179 or depreciation in prior years and went back and filed amended returns, you would have to amend both business and personal, which would result in more preparation fees. The best option is to simply have your tax professional prepare both your business and personal returns from the beginning.
1 Down, 5 To Go
January 31st is finally gone! The following items were due on January 31st:
W-2′s
1099′s
941′s, plus payments for those less than $2,500 in payroll taxes for the quarter. You have until Feb. 10th to actually file the 941 if you made your deposits on time. The payment, however, is due by Jan. 31st.
940′s, plus payments. You have until Feb. 10th for this as well, if you made the payments on time. If you owe more than $500, chances are you should have made a deposit during the year. The payment is due by Jan. 31st.
State Unemployment Taxes
There are six primary days a year that cause stress for tax and accounting professionals.
They are:
January 31st
February 28th
March 15th
April 15th
September 15th
October 15th
There are others as well. But, those are my six.
Now we can move on to bigger and better things. Like preparing tax returns!
There Is Still Time!
Image by Aranami via Flickr
- Mortgage/Loan Payments
- Rent
- Charitable Donations
- Business Gifts
- Pay Contractors
There is a longer list here: Santa’s Year End Business Tax Tip’s and also Should You Borrow Money To Increase Year-End Expenses
Happy New Year!
Should You Borrow Money To Increase Year-End Expenses?
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If you’ve read Santa’s Year-End Tax Tips you know that spending money in your business at year-end is a great time to reduce your tax liability. But, what if you don’t have the money? Should you use a credit card or a line of credit?
Let’s look at the numbers. Let’s say that you spend $5,000 using a credit card or a line of credit in order to increase your year-end expenses. And, let’s say that you are in the 25% tax bracket. The $5,000 in expenses will reduce your tax liability by $1,250.
Now, how much will it cost to borrow the $5,000? Well, let’s say that your business line of credit charges 10% annually. If you borrowed the $5,000 for one month it would cost you $41.67 in interest. If you had to borrow it for 1 year it would cost you $500. Since you would get the tax deduction the following year anyway I don’t think it would be worth it to finance the purchases for an entire year. Of course, you’ll need to crunch the numbers to see exactly how you would come out.
As you can see, it could be worth it to borrow the money to increase your year-end expenses for your business on a short term basis. If it ends up being a long term debt it could end up costing you more money in interest in the long run than the short term tax savings. And, you should only do it if the items you purchase are necessary items for your business and you plan on purchasing them anyway.
Santa’s Year End Business Tax Tips
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It’s that time of year again. Time for Santa Claus to start thinking about his tax return for the new year. Here are some items to help Santa minimize his tax bill for 2012. Read more 
To Lease or Buy
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It is almost always better to buy an automobile for your business (or for yourself) than to lease. But, here are some basic Pros & Cons of each: Read more
What is Wrong With This Picture?
What is wrong with this picture? Read more
