Monday June 17, 2013
Backup withholding can catch taxpayers and businesses unaware. My colleague William Perez, Guide to Tax Planning, has a comprehensive article on backup withholding, from the taxpayer's viewpoint. But if your business pays a contractor or other business, you need to know about backup withholding.
What's Backup Withholding?
Before you begin paying a contractor or freelancer or other business, you must get a W-9 form. The W-9 is a request for taxpayer ID and certification (if the person is exempt from backup withholding). If you don't have an ID or if the ID is not valid, the IRS requires that you withhold federal income tax from that payee at the rate of 28%. You don't have to withhold FICA taxes (Social Security/Medicare), because the contractor is supposed to pay those, through self-employment taxes.
How Do I Know if I'm Supposed to Implement Backup Withholding?
You will receive a notice from the IRS telling you to start withholding, because the taxpayer's ID is missing or invalid. Here's more about IRS notices and backup withholding.
Backup withholding is deposited through the EFPTS system, the same as other payroll taxes and on the same schedule. Employers must also file a Form 945 each year to report backup withholding.
Monday June 10, 2013
If the IRS gives you a notice of audit, you will need business records to prove your deductions. If the records as missing or destroyed by forces outside your control (fire or flood, for example, you may be able to get the IRS to accept other means of estimating these expenses. But if you don't have these business recordsá because you destroyed them intentionally, you may be liable for interest and penalties, in addition to having the deductions disallowed.
Remember, in tax matters, the burden of proof is on you - the taxpayer - to provide documents backing up your business tax deductions. The Tax Court said, "Deductions are a matter of legislative grace, and a taxpayer must prove...entitlement to a deduction."
In a recent Tax Court case, a taxpayer destroyed the records for his independent contractor business for 2008 because he was diagnosed with a terminal illness and decided he didn't need the records. Then he got the audit notice and tried to make up the records to validate his deductions. The IRS, and the Tax Court, weren't buying it. The Court upheld the IRS ruling to disallow the expenses and to charge him a penalty for non-compliance.
William Perez, Guide to Tax Planning, discusses how long to keep tax records.
Read more about Keeping Business Records for Tax Verification
Source: Striefel v. Comm. T.C. Memo 2012-102
Friday June 7, 2013
If your business depends on technology, you may be aware of the changes in patent law with the America Invents Act. The main provision of the law is the change to a system of "first inventor to file" (FITF), which took effect March 16, 2013. Under this system, an inventor can now file a patent and then take some time to "perfect" it. The process then allows public comment both before and after the patent is awarded.
This new system is supposed to be an advantage in international situations, but, a recent Forbes article says there has been fear thatá the new system will reward larger companies, who have more access to large legal staffs to help them file. But the article also notes that "the solo entrepreneur with a great idea remains ahead of the patent game."
In another recent article, Inc.com says small businesses are filing fewer patent applications: the percentage of small business-secured patents has dropped from 30 percent in 2000 to 20 percent in 2013. Part of the issue is the cost of filing a patent and getting it fast-tracked through the system (up to $4,000), costs that larger businesses can better afford than small companies.
The good news is your company doesn't have to wait until a patent is fully developed to get a patent. Upstart Business Journal suggests filing early and providing as much detail as possible. But make sure you have a fully formed idea before you file.
In any case, if you have a patentable idea, talk to an attorney who specializes in intellectual property to help you work through the patent process.
Monday June 3, 2013
Confused about how the Affordable Care Act (ACA) (AKA "Obamacare") affects your business? Join the club. To help you sort through the confusion, I've done some research on information available from various federal agencies.
To start, you might want to look at this brochure from Health and Human Services: For Small Businesses: The Facts on the New Health Care Law. The brochure is very general, so you'll need to look further for details.
Your business is affected by the ACA depending on how many employees you have.
If you have fewer than 25 employees, you don't have to provide health insurance, but you might be eligible for a business tax credit if you do. It's called the "Small Business Health Care Tax Credit" and you find detailed information on the IRS's "Small Business Health Care Tax Credit for Small Employers" page. The page includes information on eligibility and how to sign up, with examples. This tax credit has been available since 2010, so if you think your business might qualify, it's worth exploring. Talk to your tax advisor.
Beginning in 2014, if you have more than 50 employees you must pay an assessment if you don't provide an acceptable health plan for those employees. The IRS calls this an "Employer Shared Responsibility Payment." Find answers to common questions about this assessment on this IRS page: Questions and Answers about the Employer Shared Responsibility Provisions of the Affordable Care Act."
If your business employs more than 25 but fewer than 50 employees, you don't have to provide health insurance, but you don't get a tax credit if you do provide health insurance.