The Tax Foundation released a special report on Monday that indicates that the “Amazon Tax” laws signal business unfriendliness and will worsen short-term budget problems. Currently, four states (North Carolina, Colorado, Rhode Island and New York) have some form of a  law that require Companies that have “affiliates” in their states to collect sales tax from their customers in that state.

For those that may be unclear as to exactly what an affiliate is, let me explain it as simply as I can and use Amazon.com as an example.  Amazon allows other website owners to post links or advertisements to their products on their website. In exchange, Amazon pays those website owners a small commission on the products sales that this generates. Simply put, these website owners are basically providing a targeted advertising medium to Amazon. What the “Amazon Tax” law does is it requires Amazon (or other Internet retailers) to collect sales tax in a particular state, even if Amazon has no physical presence in that state.

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North Carolina was the first state to announce that it will delay state income tax refunds and issue them based on its available cash flow.  We have originally heard that refunds may be delayed into July but the NC Department of Revenue website shows that they are currently processing refunds and managing cash flow.  The state has provided a link to check the status of your NC tax refund through their website.

Due to the strain on the states budgets throughout the country, we suggest that you adjust your tax withholdings to eliminate the possibility of having substantial over payments in either federal or state payments.  We have already seen several states over the past year that have issued IOU’s instead of actual refunds.    The problem with an IOU is that you can’t use that to pay your mortgage or put food on the table.

I think it is time for a little lesson on 1099’s for everyone.  Forgive my rant, but every year people start begging for their 1099’s in early January.  They say they “need their 1099 to file their taxes.”  This is simply untrue and tells me that many of them are probably cheating on their taxes.

A 1099-MISC form is issued to a person or unincorporated entity that is paid more than $600 in the calendar year.  If they pay you less than $600, the payor does not have to issue a 1099-MISC but that does not mean it is not income to the receiving party.  The purpose of the 1099 is to notify the IRS that this person should be claiming the income and paying taxes on it.  The IRS then matches this amount reported to the proper return and if it is not reported, the IRS sends out a lovely balance due notice.  Are these individuals that “have” to have a 1099 in order to do their taxes excluding the income from the ten vendors that paid them $500 each that were not required to send a 1099?

Independent contractors are self-employed are businesses whether they know it or not.  Just like any other business, they should keep a proper set of books and records to substantiate their income and expenses.  They are also eligible to deduct qualifying expenses against the income before paying taxes on it.

With electronic filing being done for most returns today, no statements like W2s have to be submitted to the IRS with the returns.  Even with paper filing, you only attach statements showing how much was withheld and remitted to the IRS.  1099s do not normally have withholding so they are not required and never have been required to be submitted to the IRS.

So when I hear someone asking for their 1099, I hear a business owner saying “I do not keep books and records.  I do not keep up with my business as a business.” and “I plan to only claim the income that is sent to the IRS.”  This is a recipe for pure trouble and is the reason the IRS scrutinizes self-employed filers so much.  The truth is that this one the highest concentration of tax cheating that exists in our tax system today.

Do yourself a favor.  If you are a business owner, require all potential 1099 vendors to complete the form W-9 from the IRS before they receive any payments from you.  If they are planning to cheat on their taxes, remember that they may not always be the best vendor for you.  Have a backup!

Over the past week, starting with the State of the Union Address last Wednesday, President Obama has been speaking a lot about doing more to help the nation’s small business owners.  The question is whether or not the President is proposing real relief or more of the same lip service that small business owners have been getting over the past year.

Small Business Tax Credit. One of the big highlights of the Presidents speech was where he proposed a new small business tax credit that would go to small businesses who hire new workers or raise wages.  Generally speaking, small business owners would get a portion of the new worker’s salary or existing worker’s raise back as a tax credit – effectively allowing the government to subsidize a portion of this person’s salary.    As general policy goes, I hate the idea of the government subsidizing anything.  However, if they are going to help someone with subsidies to help create jobs, small businesses are where it should be.    After all, its better than spending $533,000 to create each temporary job, as we did with the Stimulus Bill.

Elimination of All Capital Gains Taxes on Small Business Investment. Wow!  This sounds great!  Except for one thing.  When someone invests in a small business, they typically invest for the long-term.  While this policy would mean well, will it really create a flood of investment into the small business market?  After all, these investments could indeed be subject to capital gains taxes again when they are sold 5, 10, or 20 years down the road.  Don’t get me wrong – I like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.

Therein is the underlying problem that I have seen with using Capital Gains rates to encourage investment all along.  Altering the tax rate in the short-term does little to spur on long-term investment.  The problem is that the tax rate is determine based on when an investment is sold – not when the investment is made.  If I invest $100,000 into a new business venture today, what will the tax policy be 15 years from now when I sale the small business?    If the President and Congress want to spur investment, they need to allow taxpayers to “lock-in” a zero-percent capital gains rate at the time they make the investment – not years later when it is sold.  Investors like certainty.  Little certainty equals little investment.  Greater certainty equals greater investment.

I do like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.  I applaud the President for this proposal.  I just happen to like it for slightly different reasons than he does.

Small Business Lending Fund. President Obama is now promoting a $30 billion fund that will be specifically designed for the nearly 8,000 small community banks (those with assets of $10 billion or less) to loan money to small businesses in hopes that it will spur job growth.   Interestingly, many in the banking industry say that the extra funds will not help lending.  They say that banks with plenty of money to lend are having trouble finding credit worthy borrowers and that small business owners are holding off on expansion and improvements due to the sluggish economy.

If a business participates in the loan program, does it subject that business to more regulation and government control?  If so, the loan may not be worth it.

Much of the success of the program will revolve around how much control the federal government wants to exercise over the program participants (the banks) and what kind of regulations the government places on the banks.    An easy example of this are the underwriting guidelines for these loans.

The federal government will have to change drastically from the ARC Loan program for small businesses if they want it to succeed.  (See prior posts, ARC Loans are Ready to Go – If You Can Find A Lender and What Ever Happened to ARC Loans?)  The ARC Loan program was a complete failure by any measure.  It was amazing to me how many SBA Lenders had never even heard of it.   A big reason for its failure was the stringent underwriting guidelines placed on the banks for a very low-profit loan for them.  They had no interest in underwriting a loan that was simply not profitable for them – even with little or no risk.

While the above three proposals are a step in the right direction, they ultimately do not solve the underlying issue.  Small business owners rarely make decisions based solely on tax results.  Regardless of whether there is a credit available, most small business owners are gong to be reluctant to hire or borrow money until they see their business moving in the right direction.

In excerpts of a speech from today that were released by the White House early, President Obama states that “Jobs will be our No. 1 focus in 2010. “  Well, that sounds spectacular, Mr. President.  I am not sure why it was such a back burner item in 2009, but at least we can look forward to 2010.  Or, are you just paying us lip service again?  Only time will tell.  In the meantime, kudos to the President for at least proposing some small business relief.