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The election is over. It’s time for a lighter topic—like taxes.
I recently attended a workshop to update tax preparers on changes to the tax code. As motivation to continue reading, let me quote the IRS agent who told us, "The IRS is back in business." Here are the areas they are taking a hard look at.
Unreported Income. The bulk of the 350 billion dollars in uncollected tax revenue comes from sole proprietors or single-member LLCs who use Schedule C to report business income and expenses. According to the agent, 80% of all Schedule C filers use tax preparers. He told the audience of tax preparers, "I know all of you are in the choir, but one of you is singing off key."
Hobby Losses. A business loss reported on Schedule C will be disallowed if the IRS deems your activities a hobby rather than a legitimate business.
Meals and Entertainment. This is a perennial issue, especially for Schedule C filers, if this expense appears too high in relation to your income.
Repairs and Maintenance. This is always on the IRS hot list, as well. Owners of rental property are often confused about what is a capital improvement, to be depreciated over a period of years, and what is a repair and 100% deductible. If your repairs are too high (the definition of "too high" is a tightly held secret) your return will merit a harder look.
Mixing Personal and Business Expenses. This is always a big "no-no," but it happens, especially with Schedule C filers.
Legal Fees. Non-business legal fees are deductible only if they are for the production of income, such as advice on investments, property, and tax issues.
My conclusion from this information—outside of the obvious fact that you should report all your income and not fudge on expenses—is that it probably isn’t a good thing to be a Schedule C filer.
Now, here are the latest tax changes:
· The annual deduction limitation on equipment purchased for a business was increased to $108,000.
· The 15% rate on capital gains and dividends was extended through 2010.
· The alternative minimum tax exemption was increased to $62,550 for a married couple, but reverts to $45,000 in 2007.
· Regardless of your income, you can convert a traditional IRA to a Roth IRA in 2010 and pay the tax in two installments, half in 2011 and half in 2012.
· Retroactive to January 1, 2006, the age limit was raised from 14 to 18 for a child’s passive income over $1700 to be taxed at the parents’ rate.
· For the first time ever, you will receive a 1099-INT for tax exempt interest paid on municipal bonds.
· There is a new tax credit available for certain hybrid vehicles. That’s the good news. The bad news is that the full credit is only available on the first 60,000 cars, and Toyota and Lexus have hit that limit.
· If you improve your personal residence with insulation, windows, doors, a metal roof, or an HVAC makeover, you may qualify for a credit.
· LLCs can avoid having all income subject to FICA tax and be taxed as an S-Corp by taking the election to be taxed as a corporation and filing the S-election.
· 401(k)s can now have a ROTH option, if your employer elects to amend the plan to allow it, and it is available to employees without regard to income limitations.
That’s my scintillating tax update news. If you struggled to stay awake to get this far, it could be worse. I sat through eight hours of presentations on this stuff.