Factoring Blog - For Small Businesses

You know gas prices are high when even the IRS reacts and does something special.

In a nod to the high gas rates we are paying at the pumps, the IRS announced a mid-year adjustment to the standard mileage rate.

Effective July 1, 2008 the rate increased from 50.5 cents (in effect for the first six months of 2008) to 58.5 cents per mile for business miles driven from July 1, 2008 through Dec. 31, 2008.

According to the IRS announcement:

“In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

“Rising gas prices are having a major impact on individual Americans. Given the increase in prices, the IRS is adjusting the standard mileage rates to better reflect the real cost of operating an automobile,” said IRS Commissioner Doug Shulman. “We want the reimbursement rate to be fair to taxpayers.”

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.”

Remember, also, to keep track of your mileage in a log or some other recordkeeping means. Many people use a small notebook as a mileage log, keeping it in the car and jotting down mileage with each business-related trip.

In my case I make notes on my computer. In addition to a mileage record, I enter the mileage information into my QuickBooks accounting records. I try to do it right away. If I don’t do it within a day, I usually forget about it and lose track of the mileage.

If you still haven’t received your U.S. Federal Income Tax Stimulus check, and are wondering how much it will be, I noticed a handy dandy little online calculator just for that purpose.

Go over to the IRS website to the Economic Stimulus Payment Calculator. You’ll need about 5 to 10 minutes to complete the calculator, along with your 2007 Federal tax return in front of you.

It’s pretty fast to complete. And it will tell you exactly how much you can expect to receive.

There’s also an entire Stimulus Payments Information Center — a section of the IRS website with information about how the payments are calculated, FAQs and so on.

Some of the lucky few have already received a Federal Income Tax stimulus check.  The rest of us are still waiting … and waiting.

If you’re still waiting to receive your stimulus check and thinking about how to use it, why not see what other people are doing?

Over at the Bankaholic site, they’re running a poll to see how people are using their stimulus checks.  Choices range from putting it into a savings account, to donating to charity, to donating to your local lottery outlet, to paying for college tuition, and more.

Amazingly, 3% said they are going to spend it on lottery tickets.

Go take the survey!

As if you didn’t already have enough tax record-keeping to contend with, some proposals are afoot that could add extra work and expense for compliance.

According to the New York Times, the budget proposed by President Bush, if approved, would “require detailed reporting of credit card transactions to the Internal Revenue Service. Another would require most owners of small businesses to report any payments above $600 to corporations, like Federal Express, for services.”

The measure related to the credit card transactions is designed to provide a records trail that would enable more audits of small businesses.  From the small business perspective it also would add a huge paperwork burden.  You’d not only have to match the credit card receipts with other records, but deduct returns item by item.

The Federal income tax rebate checks have started going out. According to President Bush:

“These rebates will deliver up to $600 per person, $1,200 per couple, and $300 per child,” Bush said in his weekly radio address.

About 7.7 million Americans received their rebate checks last week. More are on the way.

Here’s the schedule:

May 2-15: Taxpayers who receive their tax refunds – or make payments – through direct deposit will receive stimulus payments in their bank accounts.

May 16-July 11: The rest of the 130 million stimulus payments will be sent through the mail as checks. Check your card: Stimulus checks will be sent out in the order of the last two digits of the Social Security number used on a tax return. For joint filers, the first Social Security number listed will determine the timing of the couple’s rebate check.

So the question becomes: will the rebate checks help?

The economic news in the United States lately can best be described as confused. Some financial pundits and economists swear we are in a recession. Others say no way, Jose.

Unemployment actually fell in April a little bit. But inflation is up, with food and gas prices high.

My best estimate: the rebate checks won’t do much for individual situations. Of course, I won’t be turning mine down, however.

With National Small Business Week here, let’s take a look at the Small Business Tax Index from the Small Business & Entrepreneurship Council. The SBE Council ranks the States according to how tax friendly they are to small businesses and entrepreneurs. It looks at 16 different tax measures, including: income, property, death/inheritance, unemployment, and consumption-based taxes such as state taxes on gas at the pumps.

SBE Council President & CEO Karen Kerrigan said: “Entrepreneurs and small businesses have to struggle every day with the costs of taxation, which affect a wide array of decisions, including hiring, investment, expansion and location. While the federal tax burden and the complexity of that system is quite heavy, state and local taxes can add significantly to that load. The ‘Business Tax Index‘ captures these tax costs, and provides businesses, investors and political leaders with a measurement of how the states stack up against each other in this regard.”

The 15 best state tax systems are:

1. South Dakota
2. Nevada
3. Wyoming
4. Washington
5. Florida
6. Alaska
7. Texas
8. Colorado
9. Alabama
10. Mississippi
11. South Carolina
12. Tennessee
13. Missouri
14. Ohio
15. Virginia

The 15 worst state tax systems are:

• North Carolina
• Nebraska
• West Virginia
• Hawaii
• Idaho
• Vermont
• Massachusetts
• New York
• Rhode Island
• Maine
• Iowa
• California
• Minnesota
• New Jersey
• District of Columbia

Go to the interactive map to check out the status in your home state.

On a related note, according to the Tax Foundation, “Tax Freedom Day” occurs today, April 23 in 2008. Here is an excerpt from the report:

Tax Freedom Day had arrived later for the four previous years, but due to an expected slowdown in the nation’s economy and a massive one-time fiscal stimulus tax cut passed earlier this year, Tax Freedom Day is projected to arrive three days earlier this year compared to last year.

Do you see a relation between the business tax index and the tax freedom day?

The Internal Revenue Service came out with its list of the dirty dozen tax scams to avoid. The IRS has put out such a list each year for the past several years.

On this year’s list are some ways to avoid being taken in by scams, whether for your personal tax situation or business taxes.

But mostly, I think the IRS just wants to remind people to avoid getting into a mess by engaging in dodgy tax schemes and outright frauds. And if your tax advisor suggests one of these activities, think about getting a new tax advisor. It’s not worth having your life turned upside down by IRS troubles. It’s not only bad for your business, it’s bad for your marriage, your health and your freedom.

OK, the editorial is over. Now here are a few items on that dirty dozen list:

• Phishing scams - you know better than to respond to those emails asking you to send information to the “IRS”, right? Because it’s not really the IRS sending them. The IRS says it NEVER communicates via email about taxes.

• Hiding income offshore — And of course you already know that you shouldn’t be setting up that account in the Caymans to avoid paying taxes. Says the IRS, “Individuals continue to try to avoid paying U.S.taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans.” As long as people have to pay taxes, there will be a tiny minority who try to hide their money offshore. But with today’s electronic records, I would think it gets increasingly easy for the IRS to track this kind of activity and harder to hide your trail.

• Disguising corporate ownership – Better not use shell corporations to disguise your business activity to avoid paying taxes. This is another technique that’s as old as the hills, but apparently it is still alive and well. The IRS website notes, “Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing.”

Read the entire Dirty Dozen list over at the IRS website if you want all the details. There’s even a podcast you can listen to.

We will make additions to the blogroll in the near future. Please come with your suggestions. Here are a few blogs that we will be adding to the blogroll:

Don’t Mess With Taxes

Don’t Mess With Taxes aims to keep Uncle Sam cranky by providing tax and personal finance tips and advice that will put more money in your bank account, not the government treasury.

Footnoted.org

Takes a closer look at the things that companies try to bury in their routine SEC filings. Some posts are little factoids while others are more serious, like aggressive accounting or the type of questionable self dealing that can often be indicative of serious problems at a company.

Resource: Business blog directory at Blogged.com.

The recent tax stimulus package passed in the United States includes two significant tax benefits for small and midsize businesses in a position to take advantage of them. 

If you are considering big capital expenditures, 2008 would be a good the year to make those purchases so you can take advantage of the added tax breaks.

And no, I’m not talking about those piddly rebate checks.  They’ll put a little extra spending money in your pocket.  But the REAL benefits for business come from two significant depreciation and deduction provisions designed to encourage and reward you for spending in your business:

• The first-year depreciation for equipment, software and other assets you can take depreciation on (except real estate) has been almost doubled for 2008.  If you ”place in service” in 2008 assets that qualify, you can depreciate the entire cost up to $250,000 in the first year, instead of spreading it out over multiple years.  It’s called the Section 179 depreciation deduction and it’s a valuable break that can help you afford to invest in new equipment.

• The second tax break that was passed is a 50% first-year bonus depreciation for new assets, including vehicles. According to an article at AllBusiness.com, your business can immediately ‘immediately deduct half of the cost of a new asset if it’s purchased and placed in service during 2008. Then you can write off the remaining cost via the Section 179 deduction (if available) and/or regular depreciation deductions over the asset’s designated “recovery period.” ‘

For more details, including examples that illustrate how these tax benefits work, see the Allbusiness.com’s New Tax Breaks for Small Businesses.

If you operate like an increasing number of U.S. small businesses today, chances are your business does some activities over state lines — thanks to the Internet and cheap communications and shipping.   

A long line of cases and law has protected interstate commerce and prohibits states from taking action to place an undue burden on companies trying to do business across state lines.  However, in recent years, some states have gotten more aggressive in trying to find ways to impose taxes on small businesses. 

The U.S. House Committee on Small Business under Chairwoman Nydia Velazquez (NY) has been considering the effect of  business activity taxes across state lines and their effect on small businesses.  For instance, this testimony given by small business representatives is eye-opening. 

The Committee’s press release notes:

U.S. small businesses regularly sell their products and services around the globe, but can they reach out as freely to consumers within our own nation? According to witnesses at a hearing of the House Committee on Small Business, the answer is “no.” Many entrepreneurs are finding that Business Activity Taxes (BAT), which vary considerably from one state to the next, significantly inhibit their ability to engage in commerce. The congressional panel, chaired by Congresswoman Nydia M. Velazquez, today explored the issue with an eye towards balancing the needs of entrepreneurs with the fiscal interests of states.

“We are seeing cases where entrepreneurs are charged a $400 BAT for less than $100 of total sales in a state. Not only does that have a chilling effect on small firms, it hurts the national economy,” said Chairwoman Velazquez.

This state taxation issue is definitely one to be aware of.  And you might want to double check with your own tax people.