Archive for the ‘tax returns’ Tag

It’s Friday April 15 and Taxes Aren’t Due?

Originally published in the Cedar Street Times

April 15, 2016

If you were (or still are!) a last minute tax return filer, you may have some pleasant news this year – you have three more days to procrastinate!  If you are reading this article on April 15, you might be wondering, “Why is it a normal workday, and my taxes are not due?”

The answer is “Emancipation Day.”  No, we are not talking about emancipation from taxation, but emancipation from slavery.  On April 16, 1862, President Lincoln signed the District of Columbia Compensated Emancipation Act.  This act freed slaves in Washington, D.C., and compensated the prior slave owners for having to give up what was perceived as a financial loss.  This was the only instance were prior slave owners were compensated by the federal government.

The importance of the District of Columbia Compensated Emancipation Act is that it was seen as the first major victory that led to the abolition of slavery.  There had been attempts in the past to accomplish similar feats, but they had all failed.  In fact, when Abraham Lincoln was still a Senator, he tried in 1849 to accomplish this task, but it did not get enough votes to pass the legislature.  Even the decade prior to that saw several failed attempts spearheaded by others.

The District of Columbia Compensated Emancipation Act served as a precursor to the much broader Emancipation Proclamation, nine months later, that freed all slaves in Confederate territories.  Whereas the District of Columbia Compensated Emancipation Act freed about 3,000 enslaved people, the Emancipation Proclamation freed about three million enslaved people!

The Emancipation Proclamation, although often thought of as abolishing slavery, did not actually do so.  It was a wartime power instituted by Lincoln (not voted on by Congress), and it only freed slaves in the Confederate territories that were rebelling.  There were still four non-Confederate states in the South where slavery was legal, even after the Emancipation Proclamation.  It was not until the 13th Amendment to the Constitution was passed, and then ratified on December 6, 1865, that slavery was officially abolished in the United States.

The District of Columbia Compensated Emancipation Act, although celebrated in various capacities since 1862, did not become an official legal holiday in Washington D.C. until 2005.  The first year the tax return filing deadline was changed was for the 2006 tax returns due April 17, 2007.  Since the Emancipation Day Celebration fell on a Monday, and the IRS deadline is always the next business day if the 15th falls on a nonbusiness day, the due date was bumped to Tuesday the 17th.  That year, only Washington D.C. residents received an extra day, and everybody else still had to file on April 16.

Tax year 2011 was the next conflict, and the first time the whole country received an extra day, and is just like this year where April 15 falls on a Friday.  Whereas, the IRS moves their due date to the next business day when April 15 falls on a nonbusiness day, the Emancipation Day celebration moves to the prior business day.  Since April 16 was a Saturday in 2011, as it is now, Emancipation Day moves its celebration to Friday April 15, and then the IRS turns around and says, “Okay, today is a holiday, so we move our due date to the next business day,” which results in Monday the 18th!  Phew!  And fortunately California says, “We will just do whatever the IRS does,” – a rare but appreciated concession in a state that enjoys nonconformity.

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

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Do I Need to Set up an LLC or Incorporate?

Originally published in the Cedar Street Times

October 3, 2014

Two weeks ago I discussed some of the pitfalls of using an online service to help you set up an entity such as an LLC, C-Corporation, or S-Corporation for your business.  In a nutshell, you really need tailored advice from an accountant and an attorney to address your circumstances and you should use an attorney to properly set everything up.  I have found that people that utilize these services generally do not have a good understanding of what they did and why, and they don’t know much about their ongoing responsibilities, the importance of carrying them out, or the consequences of failing to do so.

Now I am going to turn the tables and ask you why you think you need a formal entity at all?  When I say this I am thinking about small businesses getting started.  If your accounting and legal advice is from family or friends, hopefully they actually are accountants and business attorneys and reviewing your WHOLE situation.  Or maybe you read something online – maybe even an article like this!  Be careful what you read!

My personal feeling is that there are a lot of small businesses out there that have set up entities prematurely, and have entangled themselves in a lot of extra cost, record keeping, and administrative hassle for very little benefit.

The vast majority of people setting up entities for small businesses do it because of perceived liability protection for their personal assets.  Some do it for certain circumstances that can lead to tax benefits, and others do it in rare circumstances where a major customer requires it.

It is important to understand there is no bullet proof solution when it comes to shielding yourself from liability.  There is almost always a way to spoil a good plan.  Legions of lawyers make their living at this.  Layers of protection are often implemented to mitigate the risk of chinks in your armor.  For instance have an entity and also having insurance would be a good example.

It is also important to understand that entities do not protect you from all forms of claims.  For instance, professionals cannot be shielded by an entity for acts of malpractice.  Malpractice insurance, however, could cover you.

If you do not respect the entity by following all the rules of corporations, s-corporations, or LLCs promulgated by various government authorities, then if there is a lawsuit, the courts could say, “You didn’t respect the entity, so why should we?”  They could look right through your entity and allow a creditor to go after your personal assets.

Small businesses are at a much higher risk for this since they generally don’t have a legal department trying to keep up with all the details!  I have seen small businesses that have gone through the hassle and expense of setting up corporations, filing tax returns and paying the California Franchise Tax each year and yet they have never held a corporate meeting or elected officers, never recorded any corporate minutes (and even if it is just you wearing all hats, you can’t ignore these things!), and treated the bank accounts of the company like an extension of their personal checking account.  And all the while they were thinking they had solid liability protection because they were a corporation…uhh no.  The devil is in the details as it is said!

Besides the initial cost of setting up an entity properly which could run two or three thousand dollars or more, you then have to file separate business tax returns, file an informational filing with the Secretary of State, possibly have an attorney draft a document or two each year, have better accounting for the tax returns (true double-entry accounting which includes an accurate balance sheet in addition to the profit and loss statement), and then you get the privilege of paying California at least $800 a year whether you make a dime or not.  So you have at least another couple thousand dollars each year of ongoing costs (more if you need to hire a bookkeeper when you find out that QuickBooks actually requires a fairly good amount of accounting knowledge to operate it properly.)

If the inherent risk of the business is relatively small or moderate, and especially if you are starting very small and do not even know if the business is going to be successful, then I think you need to carefully way the benefits and costs.  Could you just carry really good insurance and mitigate your risk to an acceptable level?  Do you need the additional layer of protection?  You can always incorporate or set up an LLC later.  Do you have employees, and what amount of risk do they expose you to?  Are they driving vehicles a lot for your business?  Or do you have rental property with lots of tenants?  Maybe you are a free-lance graphic artist designing business cards remotely from your home – not much risk there!  What are you trying to protect anyway – maybe the bulk of your personal assets you have would be considered exempt assets from creditors already? Although attorneys are generally risk-averse because they see all the things that can go wrong, and therefore would prefer to set up an entity, I think these types of discussions can be had with them and really question if it is right to set up an entity for your business for liability reasons.

Taxwise, there can be benefits to setting up an entity, depending on your circumstances, but it is rarely a driving force in and of itself for most small businesses.  The most common one people ask about deals with reducing self-employment taxes for the owner of an S-corporation.  There are ways this can be successful, but it is an issue that is in jeopardy of being eliminated.  It also has the drawback of possibly reducing your future Social Security benefits – although our government will probably beat you to the punch on that one anyway.

If you read this article and think, gee, I am not sure I really need the entity I have – do not just ignore the entity and pretend it doesn’t exist anymore!  Besides getting the proper tailored advice for you, you generally must properly dissolve it, or you will be plagued with continuing mandates for tax returns as well as Franchise Tax fees to California.  (There are limited circumstances where you can just walk away.)

In summary, get competent advice from an accountant and an attorney in light of YOUR facts and circumstances before jumping into an entity.  And question its necessity if you are small or if your business has low or moderate inherent risk and you have access to insurance that could protect you sufficiently.

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Tax Return $3 Presidential Election Campaign Fund

Originally published in the Cedar Street Times

April 18, 2014

Have you ever wondered exactly what that little section is at the top right of your personal tax returns with checkoff boxes for the taxpayer and spouse to send $3 to the Presidential Election Campaign Fund?  And why is it on your tax returns?

The majority of people do not check the boxes.  There are of course a variety of reasons for this.  Perhaps they are just apathetic towards politics, and the boxes appear like additional meaningless gibberish to wade through at tax time.  Or perhaps they loathe politics and politicians in general and would dry-heave at the idea of giving three of their hard-earned dollars to a few baby-kissers!  Or just maybe they understand campaign finance laws, agree with Congress’ original intent, and have made an educated decision about whether or not to check the box.

Despite the explicit language in that section on the return: “Checking a box below will not change your tax or refund,” many people still think they are contributing extra money out of their pocket to give to the election process if they check the box.  In reality, what Congress has done is given you the ONLY direct choice you have about how the tax dollars they just collected from you are going to be spent.  This is your one opportunity to pull the purse strings!

The concept of public dollars being used for presidential election campaign financing had its genesis in the early and mid-1960s amidst a series of campaign financing scandals and a growing disparity between the parties’ abilities to raise funds.  The idea was to level the playing field for candidates running for president to make it more difficult to buy America’s vote.

The Presidential Election Campaign Act, sponsored by Senator Russell Long was passed in 1966, but was repealed the next year in a challenge led by Senator Al Gore, Sr.  Gore and Senator Robert Kennedy felt that the current law did not do enough since it was not the sole mechanism of financing and still allowed the “corrupting influence” of large private contributions.  Ironically, the Kennedy family had used vast amounts of its family’s personal wealth to finance and ultimately win the election of 1960 for Robert’s brother, John F. Kennedy, as well as financing Robert Kennedy’s bid for election in 1968 against Johnson.

The issue was then revived and was passed again in 1971 as a tax return checkoff to allocate $1 beginning on the 1972 tax returns.  Congress decided that Americans would get to decide how much money would be utilized to fund the elections.  President Nixon and most Republicans were opposed to the idea in general, so the IRS was not being pressured to make it easy.  It was a separate form that had to be requested and it was not advertised very well – only bringing $4 million into the fund the first year.  In 1973, Senator Long did some negotiating with the IRS and the checkoff box was moved to the front of the Form 1040 the next year.  By the 1976 election $90 million had been collected.

The intent of the Presidential Election Campaign fund is to provide full funding for the major party presidential nominees in the general elections, provide funds for the party nominating conventions, and provide partial funds for the primary elections.

In order to receive the funds, the candidates must show broad national public support in the primaries; they must not spend more than $50,000 of their own money; in the general elections they cannot accept any private individual or Political Action Committee (PAC) funds; and there is a cap on the maximum that can be spent on the election campaign.

The various caps and funding amounts were indexed for inflation, however the checkoff amount was not.  The only change since 1972 came in 1994 when the checkoff amount was raised from one dollar to three dollars by Congress.  Making matters worse, its peak participation in 1980 of 28.7 percent of taxpayers utilizing the checkoff has consistently fallen to the 2012 level of only 6.4 percent.  If there is a shortfall, then candidates will just get less money prorata.

President Barack Obama and Mitt Romney became the first general election candidates since the program’s inception to turn down public financing and to raise the funds privately instead.  And two weeks ago, President Obama signed into law legislation that ends the portion of the law that finances the presidential nomination conventions.

All of these factors combined indicate the pendulum is rapidly swinging the other direction and unraveling the system that has operated over the past 40 years.  I suppose after a few more scandals or when one party starts out-fundraising the other substantially there will be outcry again, and the campaign finance laws will be reinvigorated once again.

At least for now, you still have the option to tell Congress how to spend a few of your tax dollars.  If you have already filed your returns for 2013 and have an incredibly intense desire to contribute to this degenerating fund, you can file an amendment to do so.  Interestingly, if you now have an incredibly intense desire to uncontribute to this fund, you cannot amend your return to do that!  This will lead us to our next topic in two weeks – amending your tax returns!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Aren’t All Tax Returns Created Equal?

Originally published in the Cedar Street Times

February 7, 2014

There is a belief by many people that a tax return is a bit of a commodity – basically you are going to get the same results no matter if you or anybody else prepares the return.  If that were true, your only goal would be to find the absolute cheapest tax preparer in town (or do it yourself).

A number of years ago Money magazine used to annually send out the same hypothetical family’s tax return to be prepared by 45-50 tax preparers across the country.  The surprising result was that it was rare in any year to have even two tax returns prepared the same way.  The most recent one that I could find resulted in only 25 percent of the preparers coming within $1,000 of the theoretical correct answer.  That means 75 percent missed the mark by more than $1,000.  This certainly speaks to the complexity of the tax code, and why you really need to have someone with as much relevant experience, education, and training as possible to navigate the tax terrain.  You may think you are being savvy by saving $200-$300 by getting a deal on your tax preparation, but what did you get?  Maybe you overpaid your tax by a $1,000 in the process of saving $300.  And how would YOU ever know.

When it comes to hiring someone to prepare your returns, credentials are not everything, but they certainly are a measuring stick of the education, training, testing, and commitment required.  Here are your options:

Do-It-Yourself Software (i.e. TurboTax) – Tax software, whether for professionals or amateurs is certainly a requisite tool to bring any measure of accuracy or efficiency to preparing a tax return.  Computers are quick at math and very accurate at crunching numbers (that is the part that is “guaranteed” to be accurate by do-it-yourself software providers), but if you provide the wrong input, or your software is not even programmed to ask you or accept all the variables you might need, then you will get a wrong answer every time (that part they don’t guarantee).

In addition, without an understanding of the forms and tax law, you will have no idea if there is a glaring error staring you in the face when you are ready to submit the forms.  I have seen countless returns butchered through the use of tax preparation software over the years.  I am currently amending three years of tax returns for a family that overpaid their taxes by $1,000 a year for the past twelve years due to a simple mistake that the software was not able to point out to them.  Unfortunately the statute of limitations has run out on the first nine years and they cannot get a refund at this point.

RTRP -“Registered Tax Return Preparer” – This is the current basic credential required by the IRS to prepare tax returns for pay.  There is no formal high school or college education required, no professional class and exam process to become licensed, and no continuing education requirement.  You just pay $65 to the IRS and you can prepare tax returns professionally!  This designation was created in the last few years with the intent of having a basic exam and some continuing education, but the testing and education requirements have been put on hold pending legal challenges to the requirements. RTRPs have limited practice rights before the IRS.

CRTP – “CTEC Registered Tax Preparer”– (CTEC stands for CA Tax Education Council) – This is the current basic credential required by California to prepare tax returns for pay.  Again, there is no formal high school or college education required.  There is a 60 hour professional class (equivalent to three or four semester units in college – one class) that is offered by many providers in person, on the internet or by self-study with an exam on the material covered.  There is 20 hours of continuing education each year, and a $5,000 bond.  This is the license that the vast majority of preparers hold in California at chains such as H&R Block, Liberty Tax Service, and Jackson Hewitt.  CRTPs also have limited practice rights before the IRS.

EA – “Enrolled Agent” – This is the highest of the two designations offered by the IRS, and EAs can practice in any state.  Again there is no formal high school or college education required, and there is no required professional class (although an intensive prep course is generally taken).  There is a 10.5 hour proctored three-part exam with 100 question each – one on individual, one on business returns, and one on practice procedures and ethics with essentially 24 hours of continuing education each year.  EAs have unlimited practice rights before the IRS.

CPA – “Certified Public Accountant” – Licensed by each state (although there is reciprocity to practice with nearly every state now).  California requires a college degree with 150 semester units (five years) including 24 semester units of accounting and 24 semester units of business related courses in taxation, economics, finance, management, etc., 10 semester units of ethics, and another 20 semester units of accounting studies which a masters of taxation or masters of accountancy would satisfy.  You must then work for a year under the direct supervision of a CPA.  If you want to be able to sign audit reports, you have to have 500 supervised audit hours.  You must also pass a 14 hour proctored four-part national exam and then a CA ethics exam.  California also requires a LiveScan background check and fingerprinting of all applicants.  There is essentially 40 hours of continuing education required each year for California CPAs.  CPAs have unlimited practice rights before the IRS.  Although CPAs are trained in, and can do a lot more than just your tax returns, most small CPA firms focus on tax preparation.

Attorney – Licensed by each state. We won’t discuss the requirements to become an attorney, as attorneys rarely prepare tax returns.  Some attorneys that specialize in tax will prepare tax returns, although most of those are focused on estate tax returns.  Attorneys that do prepare tax returns will often have obtained a CPA license also.  Attorneys have unlimited practice rights before the IRS.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.