Tuesday, October 6, 2009

Taxes on Cash for Clunkers Rebate

There are a number of e-mails that have been floating around for the last month or so claiming that you have made a terrible financial mistake if you took part in the CARS or Cash for Clunkers program. The main claim being that the rebate itself is taxable and can cause you pay more for the car by inflated prices and in taxes than you get the benefit of in the rebate.

I don't know much about the pricing or whether dealers inflated prices. And I can't tell you whether or not you can afford a new car instead of a running vehicle that is paid off. What I can tell you is that the rebate specifically is NOT considered taxable income on your Federal or state tax return. It simply is not true that you will owe taxes on the rebate. It is true that certain states charged sales tax on the rebate portion of the purchase price. Below is a resource for the states that did charge sales tax, but you paid the tax at time of purchase and can deduct the sales tax if you itemize your Federal return.

As always, if you have any questions or I can help you with your particular situation, please feel free to e-mail me at James(at)RainwaterCPA.com.

Thursday, October 1, 2009

How to pay taxes – two mistakes that can cost you!

This is the second in a series of articles themed around the recession-preneur. Tight budgets leave little room for error for the recession-preneur so this series is designed to help you avoid some of the more common pitfalls when starting a new business.

Starting a business is difficult enough. Suddenly there are all kinds of new responsibilities depending on your business. Today I want to talk briefly about the smaller and micro businesses. There is a ton to discuss about the type of entity you choose, but this is primarily aimed at individuals (stay tuned, we need to talk more about that choice in another post) and single member LLCs. These are the entity types that are mostly reported on a Schedule C of an individuals tax return.

The confusion I see most often comes from the following logic that many new (and too many experienced) business owners have: All I have to do is pay taxes based on the percentage from my tax bracket and I have until April 15th to pay it.

The first surprise comes when you discover yes, you will pay regular income taxes on the net profit (revenue minus all expenses) of the business based on your tax bracket. But, you also will pay an additional 15.3% in self-employment tax which is effectively the FICA you pay as an employee, but now you are both employee and employer (this is IRS logic, not mine!) so you get to pay the entire 15.3% tax. Now luckily, you get to take half of that tax to reduce your income. If you have not been working with someone to estimate your taxes or you have not done it yourself (I’ve never met the business owner who has time to do it themselves) you are in for your first big surprise depending on how much you made in your business.

The second big surprise is you have your taxes prepared on time, mail them and pay any taxes due by April 15th…but, you get a bill from the IRS and your state a few weeks later with penalties and interest on it! What, I thought I paid on time! Well, most likely what happened is you violated what is called the Safe Harbor Rule which basically says (I’m over-generalizing for a moment) that if you did not pay in at least as much tax during the tax year as you did in the previous tax year and you owe taxes on your return, you are subject to interest and penalties. Yep, the treasury wants to count on getting at least as much as last year from as many people as possible and this is where estimated tax payments come in. I found a great, not too technical synopsis of the actual
Safe Harbor Rules if you are interested in reading them.

My advice for any business owner is to work year round with an experienced CPA tax preparer to avoid these and many other issues. As always, if I can answer any questions or help you, feel free to e-mail me at James(at)RainwaterCPA.com

Saturday, September 26, 2009

The one simple mistake that can sink your new business from the start

This is the first in a series of articles themed around the recession-preneur. Tight budgets leave little room for error for the recession-preneur so this series is designed to help you avoid some of the more common pitfalls when starting a new business.

So for one reason or another, you’ve decided to start your own business. Congratulations! You’ve taken a big step. Whether you’ve been laid off, starting something while still working full time or planning a big new venture this one mistake can sink your business faster than most any other mistake. I have helped hundreds of businesses get started and this mistake consistently gets new business owners in more trouble than any other. And when I tell you what it is you’re likely to say, “well, duh”. But I said it was simple, but you would be amazed at how difficult it can become.

When you start your business you’ve made a big decision and a very exciting decision. And most people get very wrapped up in that emotion and excitement, so what is the first thing they start going…spending money. And they end up spending too much money too soon, often before they have even made their first dollar. Combine this with an aggressive sales projection in your cash flow plan (you do have a cash flow projection in your business plan, right?!?) and you can see how easy it is to get sunk real quick.

But I see it time and time again and no amount of advice will dissuade some people’s misdirected enthusiasm. I have a friend (not a client) who had a tremendous idea for a web 2.0 business. And it is a good idea and could still be a profitable one. But, my friend sunk $80,000 into development before testing the waters in more affordable ways. Now he has an $80,000 dysfunctional website and never a dollar of revenue. The best way to avoid the trap is to have a solid business plan and let someone review who isn’t afraid to criticize it, then listen to their feedback. Now the worst part of being an entrepreneur is the discouragement from others, but don’t be so blind that you turn away good advice, preferably from someone who has been down this road before you.

Also, remember that you are excited! Your sales forecast is probably optimistic and your expense forecast not conservative enough. Keep thinking it over until you can figure out how to do more with less. Keep thinking of creative ways to test the waters before sinking cash into the idea. It doesn’t matter if you are starting your business with $200 or $2,000,000. This principle is consistent. Only spend what you need to generate revenue. As long as you are in startup phase, it is not negotiable. Once you are stable as a business, the other perks can come, but till then, only spend what you need to generate revenue and apply that test to every dollar you spend.

Finally, there’s a real tax consideration behind all this too. Technically, the IRS requires that any costs you incur prior to the first dollar of revenue you earn are considered start up costs. Start up costs must be amortized over five years! So now 4/5ths of everything you spend before earning any revenue has flipped and become taxable income in a sense. Some forethought and planning can avoid this predicament in a lot of cases. Sometimes it’s just unavoidable because of your business model, but wouldn’t you like to have the option at the start? Me too.

As always, if you have questions or would like help with your business or taxes, feel free to e-mail me at James(at)RainwaterCPA.com.

Friday, September 25, 2009

First Time Homebuyers Tax Credit

There are just over two months left to take advantage of the first time home buyers tax credit signed into law earlier this year. The credit is worth $8,000 to home buyers buying a house before the November 30, 2009 deadline. It is important to note that the IRS requires a closing prior to November 30 to be eligible for the credit. So, while the deadline is two months away, if you are not already in the process of buying a house, you may already be running out of time.

The definition of a home can include a house, townhouse, condo, RV, etc. It just has to be a primary residence. Second homes, investment property or vacation homes do not qualify. "First time buyer" is a bit of a misnomer as the only requirement for qualifying as a first time buyer is that you have not owned a primary residence in the last three years. So, if you have owned a house in the past, but have been renting an apartment for the last three years, you would still qualify as a first time buyer.

There are several ways to claim the credit. The law allows you to claim the credit in 2008 if you want, which means you can ammend your 2008 return claiming the credit and receiving a refund immediately (well, as immediately as the IRS processes your return and refund), you can claim the credit on your 2009 return, or, if you have FHA financing you can take the credit directly against closing costs at closing.

Hope that helps make the credit a little more understandable. If you have questions or I can help you claim the credit, feel free to e-mail me at James(at)RainwaterCPA.com