Accounting
IRS UPDATE
Check these recent IRS announcements to see if any apply to you or your business.
- If you are responsible for the reporting requirements of a nonprofit organization, this IRS deadline may be important to you. If your organization had its tax-exempt status revoked because you failed to file annual returns for 2007 through 2009, the IRS is giving you a chance to get reinstated with minimum fuss.
- Small organizations with gross annual receipts of less than $50,000 can regain tax-exempt status retroactive to the date of revocation if they act soon. The organization must submit an application for reinstatement postmarked no later than Dec. 31, 2012. Filings by that date will qualify for a reduced application fee of $100.
- The 2010 health care reform law included a requirement that employers report the cost of health insurance on each employee’s W-2 for 2012. The IRS has postponed that requirement for employers issuing fewer than 250 W-2s for 2012 and later. For these employers, the reporting is optional.
- The IRS is giving brokers extra time to start reporting the basis in debt instruments and options. This requirement had been scheduled to go into effect on Jan. 1, 2013, but brokers and other involved parties complained to the IRS that this deadline did not give them enough time to build and test the systems required to meet this obligation. The IRS has extended the deadline to Jan. 1, 2014. This reporting requirement was the third phase of investment basis reporting included in a 2008 tax law.
- Next year’s tax return filing season is not likely to go smoothly, reports National Taxpayer Advocate Nina Olson. The problem is that Congress once again is waiting until the end of 2012 to extend tax provisions that have expired or to pass new tax rules. The IRS Oversight Board, a nine-person panel, agrees with Olson, saying 2012 refunds will be delayed if Congress enacts late-in-the-year legislation. The IRS needs six to eight weeks to change forms and deal with revisions to the tax code.
IS INCORPORATING RIGHT FOR YOUR BUSINESS?
There are many reasons why people feel they should incorporate their businesses. Very often these reasons are based on misinformation about the advantages of being a corporation.
There are a number of things that being a corporation will not do for you. It will not automatically make you more profitable. It will not necessarily limit your liability on all transactions. It will not necessarily reduce your overall tax bill; it may, in fact, increase it.
If you incorporate an existing business, you may find that your long established suppliers now require new financial statement information. They may also request that you sign a personal guarantee that you’ll pay amounts owed if the corporation cannot. Most closely held corporations are required to give the personal guarantee of the major shareholders in securing a line of bank credit for corporation purposes. This guarantee has the effect of not limiting your liability in reference to those bank loans.
With a regular “C” corporation, business profits may be taxed twice – once at the corporate level and again at the shareholder level when paid out as dividends or a liquidation distribution. The double taxation that regular corporations face is generally avoided by making a special tax election known as a Subchapter “S” election. But not every corporation qualifies for S corporation status. You may find that the incorporation of your business has not only increased your income tax bill, but also increased payroll taxes because the previous proprietor is now an employee of the corporation.
Incorporating your business can make a difference in the taxes you pay, the costs of doing business, and the amount of paperwork and red tape you’ll have. Because of the many legal and tax considerations, anyone considering incorporating should discuss the matter with both their accountant and attorney.
UNDERSTAND THE TIME VALUE OF MONEY IN MAKING DECISIONS
If you were offered the choice of being paid $100 today or $100 a year from now, you would probably choose $100 today. After all, even at today’s low interest rates, your $100 could be invested to earn something over the next year. This simple example illustrates an important concept: that the value of money changes with time. A dollar received today is worth more than a dollar received a year from now – and is worth even more than a dollar received five years from now.
There are at least three reasons why today’s dollar is more valuable. First, it can be invested to earn interest or dividends. Second, future dollars may have their value eroded by inflation. Third, the further into the future a payment is due, the greater the risk or uncertainty associated with receiving it.
The concept of the time value of money is important in many personal and business financial decisions. For example, you may have to choose between receiving a lump sum from a pension plan or a stream of payments in the future. In your business, you may be deciding whether to buy a new piece of equipment which will bring increased revenues in future years. Both of these decisions involve comparing the value of present and future dollars.
Finance professionals have developed a technique called “present value” for making such comparisons. The technique involves “discounting” the value of future dollars to reduce them to their equivalent value in current dollars. If you’re about to enter into any financial arrangement that requires you to pay money over time, or entitles you to receive periodic payments, time value could be an important issue.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail [email protected] or [email protected]