Business Tax Issues and Challenges with Employment Taxes

“Failure to pay employment taxes is stealing from the employees of the business…”

— IRS

Yes, we’re very familiar with this story, having gone through it ourselves. We knew when we did it and were still aware as we watched the stack of IRS notices pile up. News Flash, Mr. IRS agent, we felt like shit, but it was all we could do at the time. It can only be described as drowning, and we were grabbing at anything to stay above water.

The Internal Revenue Service today announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction).

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option. 

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. Further details on the new option can be found in Revenue Procedure 2013-13, posted today on IRS.gov.

The standard mileage rate for transportation or travel expenses is 56.5 cents per mile for all miles of business use (business standard mileage rate).

The standard mileage rate is 14 cents per mile for use of an automobile in rendering gratuitous services to a charitable organization.

The standard mileage rate is 24 cents per mile for use of an automobile for medical care or as part of a move for which the expenses are deductible.

BASIS REDUCTION AMOUNT

For automobiles a taxpayer uses for business purposes, the portion of the business standard mileage rate treated as depreciation is 21 cents per mile for 2009,

23 cents per mile for 2010, 22 cents per mile for 2011, 23 cents per mile for 2012, and 23 cents per mile for 2013.

MAXIMUM STANDARD AUTOMOBILE COST

For purposes of computing the allowance under a FAVR plan, the standard automobile cost may not exceed $28,100 for automobiles (excluding trucks and vans) or $29,900 for trucks and vans. See section 6.02 of Rev.

This notice is effective for deductible transportation expenses paid or incurred on or after January 1, 2013, and mileage allowances or reimbursements paid to an employee or to a charitable volunteer on or after January 1, 2013, and for transportation expenses the employee or charitable volunteer pays or incurs on or after January 1, 2013.

As a citizen of the United States, you are required to pay U.S. income tax any money you earn, even if that money was earned in a foreign country. In fact, we are the only major country that taxes the individual income no matter where they live or earn their income. In most, if not all, other countries, if you move out of the country, you no longer have to pay the taxes imposed by your country. And, in doing so, you don’t have to give up your citizenship.

For example, if you were a citizen of Canada or Australia, you could locate to a low tax country like Bermuda and pay no tax. As a U.S. citizen, you can’t do that. Instead, you must give up your citizenship.

However, If your income is from a business that can be operated any where in the world, like an online business or trade, you might want to read on.

If you move to another country and become a legal resident and operate your company in that country, you could earn up to about $95,000 tax free under the Foreign Earned Income Tax Exclusion found in Section 911 of the tax code. This is for an individual; the amount goes up for a couple. Additionally, you can deduct certain housing expenses while living abroad, as long as you’ve lived in that country for the entire tax year, uninterrupted.

And if this question pops in your head, the term “foreign country” does not include those places that the U.S. possesses, such as Guam, Puerto Rico, Mariana Islands, the U.S. Virgin Islands, American Samoa, and of you dare, Antarctica. The term also does not include ships and aircraft traveling in or above international waters. Nor does it include offshore installations that are located outside the territorial waters of any individual nation, just in case you were going to try to be creative.

Tax shelter. It sounds like a wonderful thing. Be honest, if you’re going to need shelter from things in this life, storms and taxes are probably near the top of your list. But what is a tax shelter and how does it work?

A tax shelter is a type of investment that allows you to reduce your tax liability. Examples include investments in retirement plans and real estate. You can also reduce your taxable income if you have losses on investments.

You may have heard of offshore tax shelters. How do they work?

A company can incorporate in countries with less stringent regulations than those imposed by the IRS. Many countries allow businesses to keep income secret from the government of the country in which the business is actually headquartered. For example, you could open a small office in Belize although your multi-billion dollar business doesn’t actually perform any work in Belize. The income earned by your business can be protected from taxing agencies.

It’s done fairly easily in Belize. You need only one director and one shareholder. There are no requirements for public filings, you are not required to file an annual return and your accounts will not be audited. These loose standards allow you to be as secretive as you wish.

You will find similar advantages in Cyprus, Malta, Singapore and Mauritius in addition to several countries in the Caribbean. There are several governments interested in helping the rich get richer. The latest estimates indicate that there are approximately sixty-five tax havens spanning the globe.

The promoters of these tax shelters cite several advantages. Probably the most significant is that the countries in which the funds are kept have few, if any reporting regulations, which blankets the investor’s banking services in secrecy. This secrecy protects your wealth from lawsuits, creditors and the almighty IRS. Estate taxes can also be avoided this way.

Individuals and companies alike can use the banking systems of these countries for their savings and they’ll be afforded the same privacy and tax advantages as the entities incorporating in them. Unfortunately, these shelters have been abused by those engaged in illegal activities like drug smuggling and sex slavery.

The amount of money that can be saved through these tax shelters is beyond staggering. It’s been estimated that as much as ten billion dollars in lost tax revenues has been taken from the United States alone.

Be aware that this kind of lost tax revenue has not gone unnoticed by governments and watchdog organizations. Many non-profit organizations have focused the world’s attention on the premise that the loss of revenue has contributed not only to the underdevelopment of poorer countries but also to the economic problems within the countries from which this money is hidden. Specifically they claim that education and health care are not properly funded while money that should have been collected as tax to address these issues is being hidden in illegal tax shelters.

Some promoters of offshore tax shelters say that these tax havens are not only for the rich and powerful. They claim that they also exist for the little guy and the amount of money involved is truly overwhelming. While some continue to debate their legality and their morality, others are protecting their wealth from the tax man.

No doubt you’re here because you need some help. Most likely you’ve:

1. Got questions about paying taxes in general,
2. Are being audited and don’t know what to do first,
3. Have had your bank accounts seized and want to know what’s next,
4. Want to pay the least amount of taxes as possible,
5. Started a small business and find the tax system overly confusing,
6. Just can’t make sense of all the instructions, or
7. Have a shitload of questions and simply want some straight answers without waiting forever on terminal hold with the IRS.

Maybe we can help. We’ve been in your shoes a time or two and know how frustrating it is to get an answer that makes sense. We’ve faced the Internal Revenue Service head on, had bank accounts seized because of misinformation, missed payments, been audited, accumulated notices, worked diligently to get issues resolved, and sometimes, have just been a bit lackadaisical about following through with IRS requirements. Keep in mind, we’re not experts. We’ve simply compiled, in one place, an assortment of information that should help you make sense of all the chaos.  If we’ve not addressed your situation, call the IRS and ask them your question. They’re not scary people. Some of them are jerks, but if you’re nice and honest, you’ll get a nice and honest response.

Seriously though, it’s time to take the bull by the horns and get cranking — take care of business so you can relax and minimize the number of ulcers you’re accumulating because of the stress.

Supporters such as Gary Crittenden suggests that being proactive in these situations will not only help you understand, but will also help eliminate stress. Using a site like this can help you get to the bottom of finnancial stresses.

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