Ten Self-Employment Potential Deductions

Ellis Jackson of allproman.com provides ten ideas for the self-employed to consider for potential tax savings. They include: mapping your house to see if you can justify a home office deduction; deduct health and dental insurance in full if you cover your whole family; meals and entertainment (at 50%!) are available but make sure to document; phone costs may be deductible, especially if you have a second line dedicated to your business and interest on business loans and credit cards (best if a business-dedicated credit card) are deductible. The second five covered by Jackson are: businesss mileage on your car (use standard rates and document), dues and subscriptions reasonably specific to your business (don't take Sports Illustrated unless are a business like Sport Clips), take 100% of expenses (except meals and entertainment) on out-of-town trips, education related to your business, and various retirement contributions.

Jackson's list is not particularly new and anyone using it should double-check with their tax preparer before getting too excited. Nevertheless, the list is a good reminder of tax opportunities available for the self-employed and may help some of the self-employed find legitimate deductions.

Power Forwards and Knees

As the NCAA tourney approaches, Purdue's hopes took a sizable hit with Robbie Hummel's injury. Though less widely reported, Missouri (which was my other graduate program) also lost THEIR forward, Justin Safford. Both occurred in the first half of the respective games. At the risk of crying over spilled milk, I could have done without last night's games, though both teams won.

States Seek Stiff Tax Hikes

A combination of a shaky economy, fiscal mismanagement (mostly in the form of excessive entitlements), unfunded federal mandates and balanced budget laws (with no capacity to print money to "solve" their problems) have many states seeking greater revenues. California is the well-known example of an economic mess, but other Western states, such as Arizona and Oklahoma, are also hemorraging tax revenue. Nervous legislators in Arizona, Georgia, Illinois and Washington State and Arizona are considering significant tax increases while North Carolina has found some success with tighter corporate tax enforcement.

I will acknowledge that the Laffer curve is less likely to apply to state taxation compared to federal taxation; nevertheless, the legislators in question had best hope (without much reason to believe this) that TEA party participants are so distracted by Washington, DCs shenanigans that they would ignore a closer-to-home source of tax increases. There is already talk of sizable changes in the federal legislative bodies this fall--and little reason to believe that state legislatures passing sizable increased taxes are any less suspectible to being "voted out."

Subtle Issues to Consider with a Roth IRA Conversion

Mike Solomon of CPA firm Amper, Politziner and Mattia expected a wave of taxpayers to traditional IRAs to Roth IRAs this year--primarily because Congress waived the $100,000 AGI limitation for the conversion during 2010. While acknowledging that the conversion required payment of taxes on the converted amount, Solomon believed that the two-year spread provision and the 2010 specific reconversion provision would still generate a lot of conversions, especially since Roth does not require minimum distributions at 70.5 years and Roth withdrawals are tax-free. Solomon then acknowledged that the upfront tax payments overwhelmed other considerations, especially since prudent financial planning requires that non-IRA assets be used to cover the taxes.

To me, three key issues apply on Roth conversion (two comments before going further: [1] consult with your own tax preparer/advisor about your specific circumstances (my attempt at a Treasury 230 disclaimer), [2] for taxpayers under $100K, there is no immediate plan to close Roth IRA conversions). Issue one: what is your age? Conversion makes comparatively more sense if you are over 50, because the time value of paying taxes now is less painful; [2] on a similar line of thought, what do you expect in the way of inflation? If you believe that significant inflation is a real possibility, conversion to a Roth IRA makes less sense because the present value of taxes paid today may be much greater than 10-30 years from now, [3] what is your AGI? You have more flexibility in deferring the conversion if your AGI is under $100K; additionally, your marginal tax rate on the conversion (thus tax paid now) is lower if AGI is middle-incomeish.

Pennsylvania Puts the Comedy in C PA

NOTE: Check out the President's Day Edition of the Carnival of Taxes at Don't Mess with Taxes, which includes my GAO Takes On IRS post from last week along with many other worthwhile posts.

The Pennsylvania Institute of CPAs just released four videos showing the humorous and creative side of Certified Public Accountants. Among the skits are spoofs on Bigfoot and an 80s anti-drug public service announcement. The site augments these videos with tax advice and financial literacy material aimed at children.

Applause to the Pennsylvania Institute for their creativity and also for providing a laugh or two to CPAs buried in the middle of busy season!

IRS Comes Under GAO Scrutiny for Stimulus Performance

The Government Accountability Office evaluated Internal Revenue Service performance on five new tax provisions from last year's "Stimulus" law: the [first-time] homebuyer credit; the Making Work Pay (MWP)credit; the subsidy for taxpayers paying for health insurance under COBRA; the extension (to five years) of NOL carrybacks and Build America Bonds for state and local infrastructure projects. The Treasury has already done some review of defects in IRS compliance monitoring on the homebuyer credit but GAO pointed out that the IRS should have done better at identifying the qualifying year. The GAO did acknowledge that the IRS was taking steps to pursue taxpayers who abused the provisions of the homebuyer credit. The GAO found that the IRS had defective withholding tables on the MWP credit which led (among other things) to unnecessary interest payments with some refunds and inefficient use of revenue agent time in some cases. For the COBRA and Build America Bonds issues; the biggest known problem is that insufficient data was collected on entities receiving benefits from these programs, making it difficult to determine whether abuse of the programs had occurred.

It appears that the GAO did a thorough job of reviewing IRS performance and that there were and to some degree there still are problems with IRS implementation. Rather than throw the IRS back under the bus; however, it seems to me that the key here is not what the IRS accomplished or failed to accomplish--instead, the key point is that the U. S. Government has become so large that its ability to quickly make changes in operations to accomodate new laws is dubious.

Building Physical Stamina for the CPA Exam

Jody Padar compares her experience with running a mini-triathlon (and Jody, like me, is no lightweight) with preparing for the CPA exam. She points out that each takes guts, discipline and determination. Additionally, developing a schedule and sticking to it gives one a far better chance of succeeding. Finally, a support system, such as a CPA review course, likely will improve your chances. A reward for succeeding (which in her case appeared to be having children) is also a good idea.

Ms. Padar's proposals are worth the attention of students preparing for the CPA (or CMA or other professional accounting exams). Though she did not specifically mention this, building some level of physical stamina (like she did for the mini-triathlon) is also very helpful. While the exam no longer requires five three-to-four hour segments as it did when I took it in the 1970s (yes, and now you'll tell them that you walked three miles uphill both ways to school every day); getting in at least some degree of shape WILL help both in studying and in taking the exam.

Tax Implications of the FY 2011 Federal Budget

Also:

Congressional Testimony on Budget

President Obama introduced his FY 2011, with unprecedented appropriations of $3.8 trillion. The budget includes a mixture of tax cuts and tax increases. Among the cuts are an extension of the "Making Work Pay" credit, an increased child care credit, eliminating certain capital gains taxes on small businesses, continuation of Section 179 depreciation of up to $250,000 and making permanent the R & D credit. Increases include limiting deductibility of charitable contributions by high-income taxpayers and reinstituting the 35% and 38.6% tax rates that existed before the Bush tax cuts. Testimony on the budget included praise from the National Association of Manufacturers for proposing making the R&D credit permanent and criticism from Senator Grassley (R-IA) for increasing the effective tax rate on small businesses.

The budget proposal appears to me to give with one hand and take with the other to small businesses. There are several provisions which can help small business owners, but these owners are likely to be hit with higher individual tax rates in many cases. Additionally, little if any mention is made about regulatory reform, which might be one of the biggest factors why employment is NOT growing even though the economy has posted one or two good quarters recently.