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Monday
Oct072013

Shoe Boxs and Envelopes...

As the final 2012 tax filing deadline approaches on Tuesday, October 15 there are two boxes sitting on top of the filing cabinet waiting to be opened. Inside are the receipts and deposits from a client who shipped out overseas on a contract, before completing his tax information. And it has fallen to me to organize and summarize the data into tax information. Shoebox accounting. His return will cost far more to prepare, my irritation with him and a return filed after April 15th.

If you cannot use QuickBooks or prepare the journal described in a prior posting then use the envelope method. Sort your receipts into envelopes by the expense it paid. In one envelope fuel pump receipts, meals in a second, tools receipts in a third, and so on until you have sort your expenses.

Take one envelope and add up the receipts. Write a description on the outside of the envelope; ‘FUEL’ and the total of the receipts ‘375.58’. Place the receipts in the envelope and seal it.  Write the expense and amount down and start the next envelope.  Once you have finished the envelopes record each expense and the related amount on single sheet of paper.

For income total your bank deposits and write the total on the above list. Give this list to your tax preparer.

If this is too much work then give the receipts to your tax preparer along with a hefty payment for his services.

Friday
Mar082013

See original article at AccountingToday

Saturday
Feb232013

Shoe Box Bookkeeping...Can it work?

It is tax time and part of the annual cycle of tax preparation is the resolution to start keeping better records. Usually uttered in embarrassement as one delivers the plastic sack or shoe box of receipts, scribbled napkin notes, tax documents and IRS notices in thick rubber banded bundles of unopened envelopes to a tax preparer.

And if YOU are a business owner you should be embarrased. To quote the father of accounting Luca Pacioli

Ubi non est ordo. ibi est confusion (Where there is no order, there is confusion). 
Poor organization is the cause of most business problems; missed opportunities, uncollectable receivables, lost assets, increased taxes, partner arguments and loss of the business. Every CPA has their share of horror stories resulting from disorganization. Many tax preparers refuse to prepare returns for the shoe box client, other's charge appropriately higher fees and attempt to train the client to keep better records. That goes one of two ways. One the client is rewarded with lower fees or the ex-client will seek a new tax preparer. Annual bookkeeping is useful only to the taxing authority and a money looser and waste of time for the tax preparer.
Business associates who see a shoe box record system know not to trust what the show box owner says. Would you trust a bank that recorded you deposit on a used napkin and dropped it into a bag marked This Year?
I will not waste more time persuading you to organize, you should know now or accept that your business and life will be confusing.
So, how should you keep your records? QuickBooks, Bookkeeper or other accounting software could be used. And unless you know what your doing the ease of use can make a bigger mess. If you have only a few transactions each month the cost and frustration of software is not worth it. 
For ten to twenty transactions a month a spiral bound note book and twelve envelopes works well - if you record the transactions the day they occure. Waiting until the end of the year will defeat the purpose of bookkeeping. Review the day's transactions each day recording the expense or deposit. One transaction to a line; noting the date, the payee, invoice number, the amount and the purpose. Be consistant in purpose. Use a short descriptive for the purpose, Cost of Goods Sold, Insurance, Meals. Reserve the first few lines of each page to record deposits and the lower lines for expenses. Ideally one page will record one month's activity, two pages consistantly shows the need for a little more sophistication. At year end total each month's amounts for like purposes; total Cost of Goods Sold for January thru December and record it on a page after the final month of activity. Do the same for other expenses, one line per expense. If you purchase a computer then just use Computer for the purpose. Same with Furniture. The idea is to create a useable summary, not an itemized list of every transaction.
To determine income or loss just subtract each month's total expenses from deposits.
The result of all this work will be an understanding of where you are really spending your business money and an opportunity to change spending before forced to. Also less stress and embarasment at tax time and a sense of professionalism. You will also be prepared when business takes off to upgrade your accounting to a more appropriate system.

 
Monday
Dec312012

Additional Medicare Tax on High Income Earners

In the prior post I explained the NIIT and the proposed regulations. In this post I will explain the Additional Medicare Tax on earned income above the thresholds given in the chart below. This tax is in effect for tax years starting after December 31, 2012. The proposed regulations (REG-130074-11) are not in effect until after the notice and comment period has ended and final regulations have been published in the Federal Register.

The threshold amounts are nearly identical to the NIIT except Qualifying widower's threshold is $50,000 less for the additional Medicare tax.  This tax is simple, once the taxpayer's income exceeds the threshold for the taxpayer's filing status the additional income is taxed. So for a single who earns $200,001 the additional $1.00 above the $200,000 is taxed.

The rate of the tax is .9%. So on that $1 above the threshold the taxpayer pays an additional 9 cents.

This is an additional tax on the employee's earnings and is not matched by the employer. An interesting bit of addition of the regular Medicare tax rate for the employee and employer's matching plus the employee's additional Medicare tax rate as shown results in a familiar total rate.

 1.45% + 1.45% + .9% = 3.8%

 Shifting income from passive to active (earned) will not shield it from the additional tax.

Employers will be required to start withholding the additional .9% once the taxpayer's gross wages exceed $200,000 regardless of filing status. Employee requests to cease this withholding can not be honored by the employer.

If you have two jobs or have a pass through entity such as a partnership, LLC, or S corp and you anticipate the gross earnings to exceed your filing threshold you can instruct your employers to withhold additional amounts or make estimated tax payments. You will receive credit for the estimated tax payments against the Additional Medicare Tax.

This tax becomes a little more complicated for individuals who have both W-2 income and SE income and is best explained by giving the rules and using an example.

 

  1. Calculate Additional Medicare Tax on any wages exceeding the threshold without regard for to whether any taxes were withheld.
  2. Reduce the applicable threshold in 1 by the total Medicare Wages received but not below zero.
  3. Calculate Additional Medicare Tax on any SE income in excess of the reduced threshold.

Example: Married filers have wages and self-employed income totaling $300,000; husband's wage of $150,000 and wife's self-employed income of $150,000. Individual neither exceeds the $250,000 threshold for MFJ but combined they do. The husband's wages do not exceed the threshold so the couple is not liable for additional taxes on the wages. Next the $250,000 threshold is reduced by the husband's wages of $150,000 lowering the threshold to $100,000. The couple have SE Income subject to the Additional Medicare Tax of $50,000 (wife's SE Income of $150,000 - $100,000 reduced threshold).

 Both new taxes apply to NR Aliens and U.S. taxpayers living abroad. So plan accordingly.

 Remember to make to included this tax in your estimated tax payment calculations to avoid penalties and interest. Since this is a new tax many will forget to include in their estimates.

 

 

 

 

 

 

 

 

 

Wednesday
Dec262012

NII Tax - Net Investment Income Tax

To pay for Healthcare and the other goodies we will receive Congress has created two new taxes for the coming year. While the final regulations are not out the proposed regs give an idea of how the tax will be collected and from whom. Remember, these are proposed regulations and are subject to change and are not effective until finalized. Both are a Medicare Tax; one on Net Investment Income and the other on earned income exceeding $250,000 for married filing jointly (MFJ), and $200,000 if a single filer (SF).

Net Investment Income Tax' (NII) is the first new tax and will be assessed on individuals with Modified Adjusted Gross Income (MAGI) above threshold amounts given in the chart below.

These threshold amounts are not indexed for inflation! If you are exempt from Medicare Taxes you may still be subject to the NII.

Investment Income comes from the taxpayer's passive income activities that generate interest, dividends, capital gains, rents, royalties, non-qualified annuities. This is not

an all inclusive list. Other forms of non-service income could be subject to this tax. Income not subject to this tax includes wages, unemployment compensation, operating income from non-passive businesses, social security, alimony, tax exempt interest, SE income.

Also the income from a business involved in the trading of financial instruments or commodities and businesses that are passive activities for the taxpayer is subject to NIIT. If you own an interest in a partnership, LLC or S corp and are not activiley involved in the enterprise your share of the income is subject to NIIT.

Capital gains from stocks, bonds and mutual funds are subject to NIIT as are capital gain distributions from mutual funds.

NIIT will not apply to any gain on the sale of a principle residence that is excluded from gross income for regular income purposes. However, the gain from investment real estate including the gain on the sale of a second home that is not a primary residence is subject to NIIT.

Gains from the sale of interests in partnerships and S corporations to the extent the taxpayer was a passive owner are subject to NII.

The tax is assessed on the Net Investment Income after applying deductions that are properly allocable to items of gross investment income; i,e, investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local property taxes.

Remember the regulations are proposed, the tax will be in effect for years beginning after December 31, 2012.

If you anticipate your MAGI exceeding the threshold and that you will have table net investment income you will want to make estimated tax payments. If you have substantial investment income increase your estimated tax deposit accordingly.