Typically, these benefits apply to you, your spouse, or a dependent you claim as an exemption on your tax return:

1. American Opportunity Credit – This credit has been extended for an additional two years: 2011 and 2012. The credit is valued at up to $2,500 per eligible student and is available for the first four years of post-secondary education. Forty percent of this credit is refundable in most cases. This means that you may be able to receive a tax refund from the government of up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies, and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).

2. Lifetime Learning Credit – In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled at an eligible educational institution. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, so graduate-level and professional degree courses qualify, but to claim the credit, your modified adjusted gross income must be below $61,000 ($122,000 if married filing jointly). The $2,000 cap applies per return, not per student.

3. Tuition and Fees Deduction – This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim a tuition and fees deduction of up to $2,000 for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly). The deduction can be as much as $4,000 if your modified AGI is under $65,000 ($80,000 if married filing jointly).

4. Student loan interest deduction – Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if married filing jointly), you may be able to deduct interest paid during the year on a qualified student loan used for higher education regardless of when you obtained the loan. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to claim credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Remember that the education credits are claimed by the individual who claims the exemption for the student, not necessarily the person who pays the tuition. Also, the tuition expenses qualifying for the education credits can be pre-paid for the first three months of the subsequent year if you have not paid enough to take advantage of the full credit in 2011.

You cannot claim the tuition and fees deduction in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit for the same student. You must choose to take either the credit or the deduction and should consider which is more beneficial for you.

Our Charlotte CPA firm has recently announced the addition of the Coach4College planning service. We utilize your information to provide you with a personalized plan on how to take advantage of all funding sources, make the right tax decisions, and reduce the overall cost of education. If you have questions or would like to schedule an appointment to discuss how best to finance and pay for education expenses and maximize tax benefits, please give us a call.

First, get information on both scenarios to determine what the prices will be for both scenarios. Don’t forget to get the residual value on the lease. Then, you can determine the internal interest rate on the lease and determine which scenario is a better value for your dollar. You should also consider how many miles you will put on the vehicle. If you may go over the mileage allowance, you are probably better off purchasing the vehicle.

If you own a business and the business is the buyer or lessor of the vehicle, you will probably end up paying higher insurance rates for commercial vehicles and higher registration and property taxes. It usually works out better for the individual to purchase the vehicle and have the business reimburse the individual by the mile at the standard mileage rate. The only real exceptions to this is if you plan to purchase a Hummer or gas guzzling vehicle where actual expenses are preferable to the standard mileage rate. The rate for 2011 is 51 cents per mile.

If you still are not sure, we can perform a detailed analysis of lease vs. purchase based on the details of each deal that you provide to us. Let us know if we can help with this.

Our internal best practice has been filing this receipts in an accordion file by month. I don’t think It is necessary to spend too much time filing these receipts but just being able to locate them if asked by the IRS should be the goal. Another problem with our current technology has arisen though. Most receipts are now printed on thermal paper. If you have ever looked at one of these receipts a year or two later, they fade away and become a blank slip of paper. Therefore, I recommend that these receipts be periodically scanned to preserve the information. Otherwise, by the time the IRS gets around to asking for them, they may have turned into magical disappearing ink and the IRS may disallow the deduction.

I recommend all business owners invest in a sheet feed scanner and even consider going paperless to save time and have a reliable source of data for audit and record keeping. Fujitsu makes a great line of ScanSnap scanners and Neat Receipts has some great portable scanners also. Go ahead and bypass the flat bed scanners and move up to sheet feed scanners. You will thank me later!

We also have a new product for simplifying home and offices with paperless technology. Let us know if you would like more information on how we can protect your data in a paperless environment and help streamline your life!

For more information, you can visit the NC Department of Revenue website.

Mileage Tracking Apps

Small business owners are the backbone of America. According to the US Small Business Administration, small businesses represent 99.7% of all employer firms and employ over half of all private sector employees. Small businesses have generated 64% of net new jobs over the past 15 years. In addition, small businesses produce 13 times more patents per employee than large firms, and their patents are twice as likely to be among the one percent most cited patents.

The enormous risk that small business owners take and the countless hours that small business owners pour into their business often result in little to no reward, yet they push on any way.

One way to celebrate the Mom & Pop Business Owner is to commit yourself to shop in their stores and eat in their restaurants on this special day.

How else do you plan to celebrate Mom & Pop Business Owner day? Let us know!

While the repeal of the heath care bill as a whole failed to pass yesterday (all the Democrats voted against the repeal/all Republicans voted for repeal), a separate amendment to the bill (S.AMDT.9) passed easily with an 81-17 margin.

The primary purpose to this amendment was to repeal the portion of the bill that expanded the 1099 reporting requirements to a level that would have easily crippled many businesses – especially hitting smaller businesses hard. Generally speaking, without the repeal, the current 1099 rules would have expanded to include payments made to corporations and payments made for tangible goods. Think of all of the Corporations that you deal with on a daily basis – like Wal-mart, Staple’s, Harris Teeter (or other grocer). All of these would have required a 1099 if you paid them more than $600 in the year. There are also a lot of details that I won’t go into because now that it is repealed, it is a mute point. Just be happy as a small business owner that you don’t have to do this! It would have been really expensive and/or time consuming to administer.

I can’t imagine why any Senator would vote against the repeal of this provision in its current state. It is over reaching and cumbersome. It would have been nearly impossible for the average business to fully conform to the law. It would have been a nightmare to enforce. And at the end of the day, it accomplished nothing in its current state. There would have been tons of double reporting and the numbers reported to the IRS would mean less than the ones they get now. Nonetheless, these 17 Senators voted against the repeal:

Akaka (D-HI)

Carper (D-DE)

Durbin (D-IL)

Franken (D-MN)

Gillibrand (D-NY)

Harkin (D-IA)

Inouye (D-HI)

Lautenberg (D-NJ)

Leahy (D-VT)

Levin (D-MI)

Mikulski (D-MD)

Murray (D-WA)

Reed (D-RI)

Reid (D-NV)

Sanders (I-VT)

Schumer (D-NY)

Whitehouse (D-RI)

As far as the Health Care Act as a whole, many Senators, including South Carolina’s own Lindsey Graham, have vowed to continue their fight to repeal the bill – in whole or in part. Along with Senator John Barrasso of Wyoming, Senator Graham introduced The State Health Care Choice Act that would allow states to ‘opt-out’ of Obamacare. This is far from passage and as you might imagine it will be a long and hard fight before there is closure on the Obamacare issue.

The primary inquiries fall into three categories. Who has financial control of the job? Who can exercise control over how the worker performs the specific task? And how do the parties themselves view the relationship? When reviewing the checklist, keep in mind that the IRS will make its decision based on the whole picture, not just a single factor.

Workers are more likely to be classified as independent contractors if they:

• Make a significant investment in business property (a home computer is not significant);
• Pay their own business expenses;
• Receive a flat fee that is not based on an hourly or similar rate;
• Are not prohibited from doing work for other companies;
• Can pay subcontractors to get the job done;
• Are not performing services as an integral part of your regular business;
• Have a contract with an enforceable liquidated damages provision;
• Can make a profit;
• Can suffer a loss.

Workers are more likely to be classified as employees if they:

• Are given specific instructions and on-going training in how to get the work done;
• Cannot work for others;
• Have expenses paid by your company;
• Are paid with a salary or hourly wage;
• Do not have a significant investment in their trade or business;
• Are an integral part of your regular business;
• Receive direct reimbursement for all, or almost all, expenses;

Less important is:

• Whether or not the work is performed on the business’s premises;
• Whether the worker has flexibility in setting hours;
• Whether the relationship is temporary or short-term;
• Whether the work is full- or part-time;
• Whether the worker performs services for one or more businesses.

If you suspect from this list that there might be a problem, we would be happy to come in and do an audit of your hiring practices and suggest effective solutions if necessary.

Group Term Life Insurance
The value of company-provided group term life insurance in excess of $50,000 must be included in the employee’s income and is subject only to FICA and Medicare withholding. The value of includable compensation is calculated according to the following table:

UNIFORM PREMIUMS FOR $1,000 OF
GROUP-TERM LIFE INSURANCE PROTECTION
———————————————————–
5-year Cost per $1,000
Age Bracket for one month
———————————————————–
Under 25 $0.05
25 to 29 .06
30 to 34 .08
35 to 39 .09
40 to 44 .10
45 to 49 .15
50 to 54 .23
55 to 59 .43
60 to 64 .66
65 to 69 1.27
70 and above 2.06

For 2% shareholders, the entire amount of premiums paid must be included as income on the shareholder’s W-2, subject to federal income tax withholding, but exempt from FICA, Medicare and FUTA.

Personal Use of Auto
When providing an employee (including shareholder/employees in corporations) the use of a company-provided vehicle, a value representing the personal portion of usage of the vehicle must be included in the employee’s W-2 income. The value computed must be included in the employee’s W-2 as wages and is taxable for federal income tax, FICA, Medicare and FUTA. Although FICA and Medicare withholding is required, federal withholding is not required if notice was provided to the employee of the Company’s decision not to withhold by January 31st.

There is no rigid set of rules for measuring the reasonableness of compensation. No definition of “reasonable” is contained in the Code; the regulations provide only that reasonable compensation is an amount paid for like service by like enterprise under like circumstances. Court cases have shown, however, that each situation must be resolved based on its unique facts and circumstances. Some Tax Court decisions have focused on the following five factors:

1. the character and financial condition of the corporation;
2. the role the shareholder plays in the corporation, including the employee’s position, hours worked, and duties performed;
3. the corporation’s compensation policy for all employees and the shareholder’s individual salary history including the corporation’s internal consistency in establishing the shareholder’s salary;
4. how the compensation compares with similarly situated employees of similar companies; and
5. whether a hypothetical independent investor would conclude that there is an adequate return on investment after considering the shareholder’s compensation.

In these and other cases, the courts have also considered additional factors in deciding whether the amount of compensation is reasonable, including:
1. the employee’s qualifications;
2. the size and complexity of the business;
3. a comparison of salaries paid to sales and net income;
4. general economic conditions;
5. comparison of salaries to shareholder distributions and retained earnings;
6. compensation paid in prior years;
7. the corporation’s dividend history;
8. whether the employee and employer dealt at arms’ length; and
9. whether the employee guaranteed the employer’s debt.

The court decisions confirm that no single factor controls, but rather a combination of the factors must be considered. Furthermore, these factors are not all-inclusive (and may not be given equal weight). Fewer or additional factors may be appropriate, depending on the surrounding facts and circumstances.