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