“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!

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.

IRS Delays Tax Refunds: Congress to Hold Hearings

Before the 2012 tax filing season the IRS released the 2012 Refund Cycle Chart showing that taxpayers could receive their refunds in as fast as 5 business days this year.  Unfortunately, the IRS has not lived up to this schedule.   In fact, in almost every instance this year that I’m aware of, the IRS has deposited refunds late.  I’m not aware of a single instance where any taxpayer actually received their refund in 5 business days.

Why such delays this year?  Well, they haven’t really said for sure.  They’ve said things like new “anti-fraud techniques” or “computer glitch”.    They also came out with the standard statement “most taxpayers are receiving their refunds within 10-21 days, which is consistent with historical time frames”.  What?  People don’t care about historical time frames.  If you say you’re going to deposit the money on a certain day, do it!  If you don’t, provide a valid reason to the taxpayer why you didn’t!  And, what is it?  Is it a “computer glitch”, “anti-fraud techniques” or is it just okay because people are getting their refunds within 10-21 days?

But, now Congress has scheduled a hearing to investigate why refunds have been delayed this year.  Hopefully they will get to the bottom of this.  Unfortunately, many taxpayers blame tax preparers when their refunds don’t get deposited on time.  This has led to some tax preparers being threatened.  It is also especially frustrating to taxpayers when the IRS’ “Where’s My Refund” tool also produces errors.  This gives the impression that maybe the tax preparer didn’t even file the return at all, which is not usually the case.

So, if the IRS doesn’t give you your money back on time they just make excuses, but, pay your tax bill late or file a business return late and you get hit with penalties and interest.

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.

Many Tax Credits Are Overrated

Many people will spend money in order to qualify for a tax credit, only to find that the tax credit is so small it isn’t worth mentioning or is not available at all.

Here are two examples that I’ve encountered this year:

1. Taxpayer spent $6,000+ on a certain residential appliance only to find that the residential energy tax credit was only $150.

2. Taxpayer purchased an alternative energy vehicle in 2011 partially because the sales person sold them on the huge tax credit that they would qualify for, only to find that most tax credits for alternative fuel vehicles expired on 12/31/10.

The takeaway? Don’t spend a bunch of money to qualify for a measly tax credit and be wary of tax advice from a car salesman.

The Flawed Earned Income Credit

A single mom, whom we’ll call “Mary”, works hard without support from her ex to provide for her child, and makes about $35,000 per year.  Unfortunately, she makes too much money to qualify for the so called “Earned Income Tax Credit.”  During 2011, she lost her job due to company downsizing.  But, since she lost her job in October, her earnings for 2011 were still close to $30,000 – still too high to qualify for the EITC (with one child).  If she had lost her job in July or maybe August, her earnings would have been low enough to qualify.

Unfortunately, qualifying for the EITC has a lot to do with timing.

Mary is still unemployed and looking for a job.  It could be March or April before she lands a good job.  In other words, she could start working “just in time” to NOT qualify for the EITC again in 2012.  Even though she will have been out of work for 6 months, since those 6 months are split between 2011 and 2012, she doesn’t get the EITC for either year.  This is what you call a “wacky” system that only someone in D.C. could have come up with.

A single parent, claiming 3 dependents, can hit the “sweet spot” of EITC by earning between $12,750 and $16,650 during the year.  They can get EITC of up to $5,751 added on to their Income Tax Refund.  For 2 dependents the EITC is $5,112.

Another single mom that I know has supported 2 children on only about $17,000 per year for the past few years.  Unfortunately, last year she got a second job at a gas station and made an extra $5,000.  This extra income significantly decreased her EITC this year.  Only someone in D.C. could devise such a system that punishes a single mom for getting a second job.

The third situation is about two divorced parents living together with each having children of their own.  They each are providing for their own “household” and paying for each of their children’s expenses.  Thus, they both claim Head of Household and the EITC.  They each get $3,000 – $5,000 per year from EITC.  Then they get married.  Suddenly they no longer qualify for the EITC at all because together they make “too much money” to qualify for EITC.  Again, only a bureaucrat in D.C. could devise a system that encourages co-habitation and punishes married people.

All three of these situations are actual situations and I know all of these people personally.  The EITC is one of the many flaws in our current tax system that needs to be fixed.

Here is how it could be fixed:

1. If you’re going to have EITC at all, allow people to apply for EITC any time during the year using the past 12 months of income.  This could be done on an amended Form 1040X.  They would need to wait 12 months before applying again.

2. In order to not “punish” someone for getting a second job, allow people to take an average income over the past 3 years to determine their EITC.  Putting this in place would help those people who didn’t realize that they were going to be “punished” for working a second job and would allow them to decide going forward, after meeting with their tax professional, if they want to keep working the second job.  When you consider child care, social security and medicare taxes and the decrease in EITC it is hardly worth it for someone to work a second job.

3.  Allow married couples to file as “Single” if they so choose with only one being allowed to file as “Head of Household”.  And, no longer allow people living together to each file as “Head of Household”.  There should only be one “Head of Household” filing per physical address.

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!

Romney Releases 2010 Tax Return

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Mitt Romney released his massive 203 page 2010 tax return yesterday.  The big story is the 14% tax rate that he pays.  But, to me, as a tax professional, my eyes went to Schedule A, Line 22, Tax Preparation Fees.  I’m always curious what high profile individuals pay for tax preparation services.  And, guess what?  The line is blank.  Is this a mistake?  Did Pricewaterhousecoopers LLP do it for free?  He was way over the 2% threshold so the tax preparation fees would have been a dollar for dollar deduction.  Oh, well,  I guess I’ll focus on the 14% issue.

Here are the facts:

1) His income was about $21.6 million

2) The majority of his income was from Capital Gains ($12.5 million)

3) The next largest portion was from Dividends ($4.9 million)

4) The third largest portion was from Interest ($3.3 million)

Capital gains are taxed at 15%.  There is a reason for that.  It encourages investment.  Raise the capital gain rates and you discourage investment.

Dividends are also taxed at 15%.  The reason for this is because they have already been taxed at the Corporate Income Tax rate of 35%.  Corporations don’t get a deduction for dividends.

Interest is taxed as ordinary income which means Mitt Romney paid 35% on his Interest Income.  This is because Corporations DO get a deduction for interest payments and therefore don’t have to pay taxes on it.

5) He gave $3 million to charity.  This helped reduce his taxable income and, of course, his overall tax rate.

6) He earned $593K from speaking fees, director fees, etc.  He reported this on Schedule C and paid the FULL Medicare Tax on it.  He could have run it through an S-Corporation, paid himself a reasonable salary, and then taken the rest of it as a distribution, like Newt Gingrich did, but he didn’t .   Not that there is anything wrong with the way Newt did it.  I’m just pointing out the facts.  Romney should at least get some points for that.

There is a lot to this tax return and I’m not going to spend the time going through all the forms.  I’ll just stick with the basics.  But, I don’t see anything big here.  The only ammunition will be for those who want to play class warfare.

IRS Direct Deposit Refunds Will Be Getting Faster

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The IRS is working toward a real-time filing system.  They announced today that they are hosting a Second Real-Time Tax System Meeting.  This real-time system will allow instant matching on returns which should result in 24 hour refunds.

In my opinion this is long overdue, at least the refund part.  Under the current system you can receive your refund in 5-10 business days.  This is without any type of document matching.  Employers don’t have to file W-3′s  and W-2′s with the IRS and SSA until Feb. 28th so any matching that is done is way after-the-fact.  In fact, the IRS admits that “It is not uncommon for a taxpayer to receive a notice 12 to 18 months after a tax return is filed.  This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS.”  So, my question to the IRS now is, what happens in the 5-10 business days that people currently have to wait?  Why is there even a wait time at all if there is currently no matching done?

When I e-file a client’s return I get an almost immediate response from the IRS that the return has been accepted.  In a matter of minutes their computers have matched up the taxpayer’s name, SS#, spouses name, SS#, all W-2 company names with Tax ID#’s and some other various information.  Of course, they cannot match up any W-2 payroll information because they either haven’t received the information from the employer or they have and it hasn’t been processed (it will be 12-18 months later).  Then, they wait 5-10 business days before they directly deposit the money?  Why?  What happens in that 5-10 days?  It appears, nothing.  There should already be 24 hour refunds.  They don’t need a perfect matching system in order to implement that.

This real-time system should be done in two phases:

1) Start refunding taxpayers money immediately upon them filing.  This would be simple to implement under the current system.  Anything larger than $15,000 should require additional approval (or matching) to prevent extremely large fraudulent refunds.

2) Start improving the matching system.

A real-time system is great, but, the big question for me is, how much “matching” is going to be done up front?  All of it?  And, will it cause even greater delays for many taxpayers in getting their refunds?  Employers aren’t perfect either.  Many times the information that they file with the IRS is inaccurate.  Under the current system taxpayers receive letters 12-18 months later.  Then they have to either agree with the changes to the return or disagree and state the reasons why they disagree.  Sometimes it turns out the the employers filed inaccurate information.

I’m for a real-time system.  But, in what form?  I think it would be great if the IRS would match things up faster so that taxpayers aren’t accruing interest and penalties for 12-18 months before they find out that their return is wrong.  But, the IRS already receives the info by Feb. 28th, 30 days after the taxpayer’s receive their tax documents.  Why does it take so long to match things up?  If they can’t match things up within a few weeks after receiving the info how are they going to operate a “real-time” system?