Anyone can cash checks made out to cash, and IRS agents look for them in audits.  To protect your firm:

1. Organize all cash register slips, gas slips and invoices that the check will be payment for.
2. Run an adding machine tape for the total amount.
3. Staple the tape, slips and invoices together.
4. Enter check no., amount and date on a sheet of paper.
5. File in a folder marked with the check number.

Now you have the documentation if you are audited.

1. Gather your records…now! It’s never too early to start getting together any documents or forms you’ll need when filing your taxes: receipts, canceled checks, and other documents that support an item of income or a deduction you’re taking on your return. Also, be on the lookout for W-2s and 1099s, coming soon from your employer.

2. Find your forms. Whether you file a 1040 or 1040-EZ, you can download all IRS forms and publications on our Web site, IRS.gov.

3. Do a little research. Check out Publication 17 on IRS.gov. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return. Review Pub 17 to ensure you’re taking all credits and deductions for which you’re eligible.

4. Think ahead to how you’ll file. Will you prepare your return yourself or go to a preparer? Do you qualify to file at no cost using Free File on IRS.gov? Are you eligible for free help at an IRS office or volunteer site? Will you purchase tax preparation software or file online? There are many things to consider. So, give yourself time to weigh them all and find the option that best suits your needs.

5. Take your time. Rushing to get your return filed increases the chance you will make a mistake and not catch it.

6. Double-check your return. Mistakes will slow down the processing of your return. In particular, make sure all the Social Security Numbers and math calculations are correct as these are the most common errors made by taxpayers.

7. Consider e-file. When you file electronically, the computer will handle the math calculations for you, and you will get your refund in about half the time it takes when you file a paper return.

8. Think about Direct Deposit. If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a check by mail.

9. Visit IRS.gov often. The official IRS Web site is a great place to find everything you’ll need to file your tax return: forms, tips, FAQs and updates on tax law changes.

10. Relax. There’s no need to panic. If you run into a problem, remember the IRS is there to help. Try IRS.gov or call the customer service number at 800-829-1040.

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When issuing a duplicate W-2: Type “REISSUED STATEMENT” in the upper right-hand corner on all W-2 copies. It is acceptable to use a copy of the employer’s copy.

• Sending W-2s to former employees. Photocopy the envelope in a way that shows the recipient’s address, and write on the duplicate copy the date you mailed it.

• Handling returned W-2s. If you mail W-2s, keep a returned one in the envelope. If you hear from the employee, put this envelope in another envelope and mail it to the corrected address.

If you don’t hear from the employee, keep it for at least 4 years as proof that it was mailed by the deadline.

Alternative: IRS final regs offer an easy new way to retain returned W-2s. You can meet regulatory requirements by scanning W-2 copies B and C, then shredding the originals.

We advise: Also scan the envelope in which the W-2 was mailed (because the postmark and address are proof that you mailed it and when).

Scanning has a privacy benefit: W-2s with names, addresses and SSNs are not accessible simply by opening a drawer. Be sure your electronic storage is secure. [Rev. Proc. 97-22, 1997-3 I.R.B. 9, Guidance on Electronic Records]

AIPG.ORG

Everyone who files a federal tax return must determine which filing status applies to them. It’s important you choose your correct filing status as it determines your standard deduction, the amount of tax you owe and ultimately, any refund owed to you.

There are two things to consider when determining your filing status:

First, your marital status on the last day of the year determines your filing status for the entire year. Secondly, if more than one filing status applies to you, choose the one that gives you the lowest tax obligation.

Here are the five filing status options:

1. Single. This will generally apply to anyone who is unmarried, divorced or legally separated according to your state law.

2. Married Filing Jointly. A married couple may file a joint return together. If your spouse died during the year, you may still file a joint return with that spouse for the year of death.

3. Married Filing Separately. A married couple may elect to file their returns separately.

4. Head of Household. This generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.

5. Qualifying Widow(er) with Dependent Child. You may be able to choose this filing status if your spouse died during 2006 or 2007, you have a dependent child and you meet certain other conditions.

There’s much more information about determining your filing status in Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Link – Publication 501, Exemptions, Standard Deduction, and Filing Information (PDF 196K)

1. Dependents may be required to file their own tax return. Even though you are a dependent on someone else’s tax return, you may still have to file your own tax return. Whether or not you must file a return depends on several factors, including: the amount of your unearned, earned or gross income, your marital status, any special taxes you owe and any advance Earned Income Credit payments you received.

2. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,500 on your 2008 tax return. Exemptions amounts are reduced for taxpayers whose adjusted gross income is above certain levels, which is determined by your filing status.

3. Dependents may not claim an exemption. If you claim someone as a dependent, such as your child, that dependent may not claim a personal exemption on their own tax return.

4. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return and were not the dependent of another taxpayer.

5. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.

For more information on dependents and exemptions, including whether or not you or your dependent needs to file a tax return, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

Links:

IRS Publication 501, Exemptions, Standard Deduction, and Filing Information

You probably already keep records in your daily routine. This includes keeping receipts for purchases and recording information in your checkbook. Keeping these and other records will help you avoid headaches at tax time. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience.

Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents – such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property – should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

Good recordkeeping throughout the year saves you time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will assist the preparer in quickly and accurately completing your return.

For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Taxing a cash (or cash equivalent) bonus

You are required to treat any cash bonus as wages and to apply FITW, FICA, FUTA, and state and local payroll taxes. If you give the bonus separately from regular wages, or with regular wages but identified as separate, the supplemental withholding rate-25% for 2008-can be used. [26 CFR 31.3402(g)-1]

A discretionary bonus is a lump sum that the employer decides when to give and how much to give. It cannot be required by a contract, agreement or promise nor be part of a pattern that leads employees to expect it. To qualify as discretionary, the bonus must be a complete surprise to the employee. An exception is holiday bonuses that, even if given each year (leading employees to expect them), can be treated as discretionary. A discretionary bonus for hourly employees does not affect their overtime pay rate. [29 CFR 778.211]

A nondiscretionary bonus is one required under a contract, agreement or promise, express or implied-e.g., for higher or faster production, as an inducement to take a job or stay with the company-or a bonus that employees have come to expect (except for holiday bonuses). A nondiscretionary bonus given to hourly employees must be added to gross pay for the week in which it is earned and included when computing any overtime for the week. [29 CFR 7788.209]

Example: Pat earns $11/hr. One week she works 43 hours and earns a $30 prorated production bonus.

Pat’s normal pay: $473 for the week ($11 x 43 hrs) + $30 bonus = $503 straight-time pay.

Pat’s overtime pay: $503 earned for the week (including the nondiscretionary bonus)/43 hours worked = $11.70 regular rate of pay x 50% premium rate = $5.85 x 3 hours’ overtime = $17.55 premium pay.

Pat’s gross pay: $503 straight-time pay + $17.55 premium pay = $520.55 gross pay for the week.

Source: AIPB.ORG

A credit application is a great way to avoid granting credit to bad risks–but only if it asks the right questions and all the blanks are filled in. The application is given during “the honeymoon period,” the most friendly period, so this is the best time to ask important, revealing questions. Credit is based on trust, but trust is more reliable when you get the right answers on a well-designed credit application.

Make sure your credit application asks:

• The legal form of the prospect’s business. Are you dealing with a corporation, partnership or individual? If it is a corporation, it’s crucial to know the correct legal name-down to the last comma and period. (See below for details.) Check with the state to determine the correct corporate name and to see if the corporation is “in good standing”-that its corporate charter is still on the state’s active files.

If it is a partnership or sole proprietorship, get each owner’s home address and SSN (if the customer goes out of business, you need to find the owners quickly to ask for payment), whether each owner previously owned another firm and, if so, what happened to it. You may want to ask if the firm is adequately capitalized, rather than depending only on credit reports.

• Who at the customer’s firm has authority to sign contracts, place orders and sign checks? This may or may not be the same person. Knowing who can sign checks allows you to telephone the right person for payment right away.

• Two creditors currently extending the greatest credit and permission to contact them to confirm that payments are being made according to terms. Much more effective than just asking for “credit references” (which allows the prospect to be very selective). Make sure that your application includes a statement giving you the right to contact the references.

• The date on which the prospect’s business began. Unfortunately, few applications ask this. Because a large percentage of businesses fail in the first few years, the firm’s age is important. How quickly would you extend $100,000 in credit to a firm that opened last month? Professor Bruce Kirchoff, New Jersey Institute of Technology, reports that about 18% of all new firms fail during the first 8 years, 26% survive only because of a change in ownership and 28% voluntarily go out of business without losses to creditors.

• “Was this firm previously part of another company?” This wording is important. A “yes” should prompt an investigation into why the separation occurred. Sometimes, profitable companies spin off an unprofitable division in a way that prohibits the parent from being called for payment.

• “Is a written purchase order required?” If it is, your firm can comply from the outset rather than arguing with the customer later.

• A statement making the person signing the application liable for lying. For example: “I warrant that the foregoing information is true and correct, and realize it will be relied upon in the granting of future credit.” If the application is signed personally and turns out to be materially (seriously and substantially) false, you may be able to pursue the signer personally even if the credit your firm granted was to a corporation.

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Contributions to flexible savings accounts (FSAs) face the “use it or lose it” rule: Balances not spent by the deadline are forfeited by the employee. Balances used to reimburse qualified medical expenses are tax free.

Traditionally, FSA balances had to be spent by the end of the plan year (usually December 31) to avoid forfeiture. In 2005, the IRS allowed employers to extend the deadline 2½ months (usually March 15), at their option.

Employers should alert employees to the deadline for their plan. Employees also should be aware that eligible expenses are broader than many realize. A doctor’s prescription or recommendation is not required for an expenditure to be eligible. Medical expenses that can be reimbursed from an FSA include:

· nonprescription drugs

· elective noncosmetic surgery

· dental checkups and surgery

· corrective eye surgery

· flu shots

· programs and aids to stop smoking

· weight-loss programs

· co-pays, deductibles, and co-insurance payments

· prescription eyeglasses and sunglasses

Source: AIPB.ORG

The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or is engaged in as a hobby.

Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

Taxpayers may need a clearer understanding of what constitutes an activity engaged in for profit and the tax implications of incorrectly treating hobby activities as activities engaged in for profit. This educational fact sheet provides information for determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.

Is your hobby really an activity engaged in for profit?

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income.  Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

What are allowable hobby deductions under IRC 183?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

• Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
• Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
• Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

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