A picture is worth a thousand numbers. Does your accounting system give you pictures of your business’s performance? Do you understand how to use a graphics presentation to improve your net profit?
Numbers are important to every business, but only if you can turn them from rows and columns of figures into meaningful information.
You can have your business’s accounting data brought into focus to give you a clear picture of how your business is doing. The sample graphics enclosed show how a company’s sales and profitability can be translated into a clear, understandable picture.
The graph clearly shows that the net profit decreased even though the sales increased. Is the gross profit decline due to pricing change or is it cost of product?
We’d like to help you interpret your sales, gross profit, overhead, and expenses, as presented in these eye-opening graphics. That’s one of the surest ways of achieving a smoother running business that makes more money for you.
For a demonstration of how graphic analysis can provide you with more useful information on your business, call me at 773-792-1910.
Sincerely,
Kenneth Reid, ATP, CPB, CPP
Certified QuickBooks ProAdvisor
Certified QuickBooks Consultant
MasterType Accounting & Business Services, P.C.
773-792-1910
mastertype@mabspc.com
www.mabspc.com
P.S. There’s no charge for this brief demonstration. Do yourself and your company a favor; call me today.
Thursday, September 24, 2009
Another Money Quiz for Businesspeople
YES NO
___ ___ 1. Do you know whether you should incorporate your business to save taxes?
___ ___ 2. Are you taking all the business deductions you’re entitled to take?
___ ___ 3. Do you know you can currently deduct, rather than depreciate, a certain amount of business equipment you purchased this year?
___ ___ 4. Do you know whether your business is getting maximum efficiency from your computer use?
___ ___ 5. Do you know how to speed up your receivables collections and use your accounts payable to help your cash flow?
You may find the business quiz a rather unusual opening for a letter. The quiz makes a point of what you should be receiving for the accounting fees you pay. If you answered “no” to any of the questions, you may not be getting everything you should from your accountant.
You may be perfectly happy with your current financial program. If, on the other hand, you are dissatisfied with the direction your financial program is taking, or if you’d care to have a fresh look at your program, we’d be happy to talk with you.
Progressive businesses need a progressive accounting firm. We think we could help you improve your net profit and after-tax earnings – and that means having the financial resources to get what you want out of life.
If you would like to explore what our firm can do for you, please call me or return the enclosed card. I’d like to learn more about you and your business. Perhaps we can have lunch together and get acquainted.
Sincerely,
Kenneth Reid, ATP, CPB, CPP
Certified QuickBooks ProAdvisor
Certified QuickBooks Consultant
MasterType Accounting & Business Services, P.C.
773-792-1910
mastertype@mabspc.com
www.mabspc.com
___ ___ 1. Do you know whether you should incorporate your business to save taxes?
___ ___ 2. Are you taking all the business deductions you’re entitled to take?
___ ___ 3. Do you know you can currently deduct, rather than depreciate, a certain amount of business equipment you purchased this year?
___ ___ 4. Do you know whether your business is getting maximum efficiency from your computer use?
___ ___ 5. Do you know how to speed up your receivables collections and use your accounts payable to help your cash flow?
You may find the business quiz a rather unusual opening for a letter. The quiz makes a point of what you should be receiving for the accounting fees you pay. If you answered “no” to any of the questions, you may not be getting everything you should from your accountant.
You may be perfectly happy with your current financial program. If, on the other hand, you are dissatisfied with the direction your financial program is taking, or if you’d care to have a fresh look at your program, we’d be happy to talk with you.
Progressive businesses need a progressive accounting firm. We think we could help you improve your net profit and after-tax earnings – and that means having the financial resources to get what you want out of life.
If you would like to explore what our firm can do for you, please call me or return the enclosed card. I’d like to learn more about you and your business. Perhaps we can have lunch together and get acquainted.
Sincerely,
Kenneth Reid, ATP, CPB, CPP
Certified QuickBooks ProAdvisor
Certified QuickBooks Consultant
MasterType Accounting & Business Services, P.C.
773-792-1910
mastertype@mabspc.com
www.mabspc.com
A Money Quiz for Businesspeople
YES NO
___ ___ 1. Are you paying the lowest taxes possible?
___ ___ 2. Do you know how to increase the cash flow in your business?
___ ___ 3. Do you know how to put together a package that will get you the loan you need?
___ ___ 4. Will you have enough retirement income to fund your retirement plans?
___ ___ 5. Do you know what your business is worth?
If you answered “yes” to all the questions in the money quiz, your business and financial affairs are probably in good order.
But chances are you answered “no” to one or more of the questions. You may also have that nagging thought in the back of your mind that you’re not doing all you could do to improve your financial situation. You’re thinking you should be paying fewer taxes, your business profits should be greater, and you should be getting advice on your pricing, buying new equipment, and speeding up collections on receivables.
Maybe it’s time we got together. We think we can do a lot for you.
The professional assistance you need to take the work out of wealth accumulation and running a business are just what we have to offer.
We would start by taking a look at the financial end of your business and the way it operates to be sure that everything is running as smoothly as it should and that your net profit is as high as it can be.
Then we’d have a look at your tax situation and work with you to do whatever planning is needed to minimize your taxes.
We would talk with you about your overall financial goals – business expansion, funding an early retirement, etc. – and see what needs to be done to reach those goals.
Providing that extra service to our clients is important to us. One of those extras is our quarterly client newsletter to help our clients stay abreast of tax cutting and money making opportunities. I’ve enclosed a copy of our latest issue for you, and I’d like to offer you a year’s subscription – absolutely FREE.
Without imposing on your time, I would like an opportunity to discuss your needs. Please call me, and we’ll plan to have lunch. Neither the lunch nor my time will cost you anything. If after our meeting, you feel we cannot be profitable for your firm, you certainly will not be obligated to us.
We look forward to hearing from you.
Sincerely,
Kenneth Reid, ATP, CPB, CPP
Certified QuickBooks ProAdvisor
Certified QuickBooks Consultant
MasterType Accounting & Business Services, P.C.
773-792-1910
mastertype@mabspc.com
www.mabspc.com
___ ___ 1. Are you paying the lowest taxes possible?
___ ___ 2. Do you know how to increase the cash flow in your business?
___ ___ 3. Do you know how to put together a package that will get you the loan you need?
___ ___ 4. Will you have enough retirement income to fund your retirement plans?
___ ___ 5. Do you know what your business is worth?
If you answered “yes” to all the questions in the money quiz, your business and financial affairs are probably in good order.
But chances are you answered “no” to one or more of the questions. You may also have that nagging thought in the back of your mind that you’re not doing all you could do to improve your financial situation. You’re thinking you should be paying fewer taxes, your business profits should be greater, and you should be getting advice on your pricing, buying new equipment, and speeding up collections on receivables.
Maybe it’s time we got together. We think we can do a lot for you.
The professional assistance you need to take the work out of wealth accumulation and running a business are just what we have to offer.
We would start by taking a look at the financial end of your business and the way it operates to be sure that everything is running as smoothly as it should and that your net profit is as high as it can be.
Then we’d have a look at your tax situation and work with you to do whatever planning is needed to minimize your taxes.
We would talk with you about your overall financial goals – business expansion, funding an early retirement, etc. – and see what needs to be done to reach those goals.
Providing that extra service to our clients is important to us. One of those extras is our quarterly client newsletter to help our clients stay abreast of tax cutting and money making opportunities. I’ve enclosed a copy of our latest issue for you, and I’d like to offer you a year’s subscription – absolutely FREE.
Without imposing on your time, I would like an opportunity to discuss your needs. Please call me, and we’ll plan to have lunch. Neither the lunch nor my time will cost you anything. If after our meeting, you feel we cannot be profitable for your firm, you certainly will not be obligated to us.
We look forward to hearing from you.
Sincerely,
Kenneth Reid, ATP, CPB, CPP
Certified QuickBooks ProAdvisor
Certified QuickBooks Consultant
MasterType Accounting & Business Services, P.C.
773-792-1910
mastertype@mabspc.com
www.mabspc.com
Did you know that some of the best business experts are free?
Did you know that some of the best business experts are free?
You have valuable business information to trade with others. Why not arrange a trip to two or three businesses out of your competing area. Find those that are similar to yours (size, customer base, community) and arrange to exchange financial information, business plans, advertising campaigns, and employee policies. Perhaps a reciprocal trip from your new acquaintance will be in order. Or you can exchange photos or a video of your business premises.
Let the other businessperson know what information you will want to exchange. Ensure him or her of the confidentiality of any and all information traded. You will be coming from far enough away to provide comfort in exchanging “trade secrets.” Remember, they stand to gain a great deal in the exchange also.
Take your camera and photograph all items of interest (after getting permission). When you return home, you will have excellent information to share with your staff – more profitable information than most consultants would be able to provide.
If you have questions or would like more information about using this technique to improve your business’s profitability, please call me – no obligation to you, and no charge for the phone call. 773-792-1910
Ken Reid, ATP CPB, CPP
You have valuable business information to trade with others. Why not arrange a trip to two or three businesses out of your competing area. Find those that are similar to yours (size, customer base, community) and arrange to exchange financial information, business plans, advertising campaigns, and employee policies. Perhaps a reciprocal trip from your new acquaintance will be in order. Or you can exchange photos or a video of your business premises.
Let the other businessperson know what information you will want to exchange. Ensure him or her of the confidentiality of any and all information traded. You will be coming from far enough away to provide comfort in exchanging “trade secrets.” Remember, they stand to gain a great deal in the exchange also.
Take your camera and photograph all items of interest (after getting permission). When you return home, you will have excellent information to share with your staff – more profitable information than most consultants would be able to provide.
If you have questions or would like more information about using this technique to improve your business’s profitability, please call me – no obligation to you, and no charge for the phone call. 773-792-1910
Ken Reid, ATP CPB, CPP
Ten Tips for New Business Start-Ups
1. Determine the type of business entity in which you will conduct business. The major choices include sole proprietor, partnership, limited liability company LLC, corporation, nonprofit, and L3C (low-profit limited liability company).
2. Apply for your Federal Tax ID number if you haven’t already. Here is an IRS URL to give you some guidance on this:
http://www.irs.gov/businesses/small/article/0,,id=98350,00.html
3. Establish a separate bank account for your business. This will significantly reduce the time and cost you spend on bookkeeping and allow you, at a glance, to track how much cash is going in and out of the business.
4. Set up an accounting system that matches the complexity of your business. There are many flavors of QuickBooks to meet small business’s needs.
5. Set up the forms you need to track transactions. For example, you’ll need an invoice or receipt form and checks at the very least. You might also want to set up purchase orders, estimates, and statements. All of these forms are included in QuickBooks so that you don’t have to reinvent the wheel.
6. Check to make sure you have all of the business licenses you need. This usually includes a city license and sales tax license. You might also need food and beverage licenses, environmental permits, health permits, building approvals, and more. Go to www.business.gov to find out more.
7. Secure business insurance to protect your financial investment.
8. Create a realistic budget, and work within the budget as much as you can.
9. Make estimated tax deposits throughout the year, especially if your type of entity is a sole proprietor, partnership, or S-corp.
10. Value your time. Spend as much time as possible on your core business and outsource accounting, administrative, and legal work to experts and staff.
2. Apply for your Federal Tax ID number if you haven’t already. Here is an IRS URL to give you some guidance on this:
http://www.irs.gov/businesses/small/article/0,,id=98350,00.html
3. Establish a separate bank account for your business. This will significantly reduce the time and cost you spend on bookkeeping and allow you, at a glance, to track how much cash is going in and out of the business.
4. Set up an accounting system that matches the complexity of your business. There are many flavors of QuickBooks to meet small business’s needs.
5. Set up the forms you need to track transactions. For example, you’ll need an invoice or receipt form and checks at the very least. You might also want to set up purchase orders, estimates, and statements. All of these forms are included in QuickBooks so that you don’t have to reinvent the wheel.
6. Check to make sure you have all of the business licenses you need. This usually includes a city license and sales tax license. You might also need food and beverage licenses, environmental permits, health permits, building approvals, and more. Go to www.business.gov to find out more.
7. Secure business insurance to protect your financial investment.
8. Create a realistic budget, and work within the budget as much as you can.
9. Make estimated tax deposits throughout the year, especially if your type of entity is a sole proprietor, partnership, or S-corp.
10. Value your time. Spend as much time as possible on your core business and outsource accounting, administrative, and legal work to experts and staff.
Payroll for Small Businesses
Many small business owners try to do their own payroll, because it seems so easy to do. They cut checks to pay their employees, and go about their day running their business. The problem is that they forget about the federal and state income tax deposits that need to be met. The rules for these deposits vary depending on the size of your company's payroll liability.
This is where a payroll provider can save headaches and money for the business owner. The payroll provider will take care of calculating the payroll for employees, print the checks, make the required tax deposits (and other deductions such as child support), and file quarterly payroll tax returns, as well as handle W-2s for all employees.
Payroll providers provide a level of relief to business owners that can help the business owner to concentrate on running their business instead of dealing with paperwork and government entities. Paying a small fee to have a payroll provider handle your payroll is much cheaper than paying fines and penalties for not doing things right, filing to make tax deposits, or failing to file timely payroll tax returns.
MasterType Accounting & Business Services, P.C. provides payroll services to United States businesses with up to 500 employees. If you have a need for payroll services, or are unhappy with the service you are receiving from your current payroll provider, please feel free to contact us. We can be reached via email at mastertype@mabspc.com.
This is where a payroll provider can save headaches and money for the business owner. The payroll provider will take care of calculating the payroll for employees, print the checks, make the required tax deposits (and other deductions such as child support), and file quarterly payroll tax returns, as well as handle W-2s for all employees.
Payroll providers provide a level of relief to business owners that can help the business owner to concentrate on running their business instead of dealing with paperwork and government entities. Paying a small fee to have a payroll provider handle your payroll is much cheaper than paying fines and penalties for not doing things right, filing to make tax deposits, or failing to file timely payroll tax returns.
MasterType Accounting & Business Services, P.C. provides payroll services to United States businesses with up to 500 employees. If you have a need for payroll services, or are unhappy with the service you are receiving from your current payroll provider, please feel free to contact us. We can be reached via email at mastertype@mabspc.com.
Small business accounting-Involves hard work and dedication
Businesses of all sizes need to take care of the financial affairs of their company. Whenever someone starts a business, their ultimate goal is to make a profit. When the business is successful, the company should be making a profit. When a company makes a profit, the responsibility of the business owner becomes more difficult to handle alone. When the business is taking losses, the business owner feels that he needs to cut as many expenses as possible, and many times the accountant/bookkeeper is one of the first expenses to be cut - especially in the current sluggish economy.
Small businesses are hurt most by the sluggish economy because they don't have large cash reserves like many larger corporations have. Small businesses often have to cut corners in order to stay afloat, and doing so often means cutting back on the most critical areas of the budget, including accounting and advertising. Sometimes, it also means letting workers go — downsizing the workforce.
Because of the internet, and cheaper prices in other countries, many small businesses are outsourcing their accounting functions to these other countries to try to save money. From my experience with companies that have done this, it ends up costing small businesses a lot more money in the long run because the accounting is not done correctly.
Small businesses need to find a reliable accountant/bookkeeper in the USA to do their bookkeeping. Too often, small businesses believe that they have to have a CPA to do their accounting and/or bookkeeping work in order for the work to be done properly. This is NOT the case. Although there are CPAs out there that know how to work with small businesses, most CPAs have been trained to work for large corporations and know very little if anything about how small businesses operate.
Small business owners must interview the potential accountant/bookkeeper just as though they were hiring them to work at their company. That is what you are doing — you are hiring someone to do handle your company's financial affairs, whether the accountant/bookkeeper works at your location or at their own office. To properly maintain small business accounting (or accounting for any sized business), it requires an efficient and dedicated person. The accountant/bookkeeper is responsible for keeping accurate records. The business owner must keep accurate records and receipts for the accountant/bookkeeper to enter into the accounting records.
Any big or small transaction of the business should be properly accounted. Whether an organization is big or small, involvement of money is always there. Any and all companies require a competent accountant. The accountant needs to do many things, like maintaining balance sheets, profit and loss statements,maintaining journal sheets, keeping a track of the ledger books, having a thorough check on the bank reconciliation statements and so on. In any business, even a small mistake can prove to be fatal. Most small business accounting is done by outsourcing to a local accounting/bookkeeping firm.
An accountant should be perfect in his dealings and his any minor mistake may cause heavy loss to the company. The owner needs to know exactly where his company stands in the present competitive market. Maintaining accurate accounts of any small or large organization is a very tough job. The business owner should always look for an efficient accountant/bookkeeper. The owner should want accountant/bookkeeper to present a clear picture of the financial state of the company and suggest corrective measures as appropriate.
There are many private firms that provide accounting and/or bookkeeping services. Admittedly, there are more small businesses than there are accountants/bookkeepers to fill the need. Small businesses need to select a good accounting firm that will work with them, helping them to be the best they can be. When a small business hires the right accounting firm, it removes all or most of the tensions faced by the business owner. If the business already uses a specific accounting software package, the business owner MUST make sure that the accountant/bookkeeper they hire knows the software and is comfortable working with the software.
Business owners can adopt new strategies for their business if they have a clear financial picture of their business. Maintaining the financial affairs of any business is a very difficult job at times, and requires a knowledgeable, responsible, and dedicated person to perform the necessary tasks of properly maintaining the books for the business. When a business' books are properly maintained, it is possible for the business to reach for the stars and become a successful business.
Small businesses are hurt most by the sluggish economy because they don't have large cash reserves like many larger corporations have. Small businesses often have to cut corners in order to stay afloat, and doing so often means cutting back on the most critical areas of the budget, including accounting and advertising. Sometimes, it also means letting workers go — downsizing the workforce.
Because of the internet, and cheaper prices in other countries, many small businesses are outsourcing their accounting functions to these other countries to try to save money. From my experience with companies that have done this, it ends up costing small businesses a lot more money in the long run because the accounting is not done correctly.
Small businesses need to find a reliable accountant/bookkeeper in the USA to do their bookkeeping. Too often, small businesses believe that they have to have a CPA to do their accounting and/or bookkeeping work in order for the work to be done properly. This is NOT the case. Although there are CPAs out there that know how to work with small businesses, most CPAs have been trained to work for large corporations and know very little if anything about how small businesses operate.
Small business owners must interview the potential accountant/bookkeeper just as though they were hiring them to work at their company. That is what you are doing — you are hiring someone to do handle your company's financial affairs, whether the accountant/bookkeeper works at your location or at their own office. To properly maintain small business accounting (or accounting for any sized business), it requires an efficient and dedicated person. The accountant/bookkeeper is responsible for keeping accurate records. The business owner must keep accurate records and receipts for the accountant/bookkeeper to enter into the accounting records.
Any big or small transaction of the business should be properly accounted. Whether an organization is big or small, involvement of money is always there. Any and all companies require a competent accountant. The accountant needs to do many things, like maintaining balance sheets, profit and loss statements,maintaining journal sheets, keeping a track of the ledger books, having a thorough check on the bank reconciliation statements and so on. In any business, even a small mistake can prove to be fatal. Most small business accounting is done by outsourcing to a local accounting/bookkeeping firm.
An accountant should be perfect in his dealings and his any minor mistake may cause heavy loss to the company. The owner needs to know exactly where his company stands in the present competitive market. Maintaining accurate accounts of any small or large organization is a very tough job. The business owner should always look for an efficient accountant/bookkeeper. The owner should want accountant/bookkeeper to present a clear picture of the financial state of the company and suggest corrective measures as appropriate.
There are many private firms that provide accounting and/or bookkeeping services. Admittedly, there are more small businesses than there are accountants/bookkeepers to fill the need. Small businesses need to select a good accounting firm that will work with them, helping them to be the best they can be. When a small business hires the right accounting firm, it removes all or most of the tensions faced by the business owner. If the business already uses a specific accounting software package, the business owner MUST make sure that the accountant/bookkeeper they hire knows the software and is comfortable working with the software.
Business owners can adopt new strategies for their business if they have a clear financial picture of their business. Maintaining the financial affairs of any business is a very difficult job at times, and requires a knowledgeable, responsible, and dedicated person to perform the necessary tasks of properly maintaining the books for the business. When a business' books are properly maintained, it is possible for the business to reach for the stars and become a successful business.
Tuesday, September 22, 2009
Friday, September 18, 2009
NEW way to pay your bills from MasterType Accounting!
I have had this capability on my website (www.mabspc.com) for the last month or so, but could not get it working correctly. Clients can now pay what they owe directly from my website by going to the Pay Your Bill page and clicking on the PayNow button. It is finally working correctly! The PayNow button takes you to a secure PayPal payment page where you can pay your bill safely and securely online! You must have a valid credit card in order to pay your bill online.
The payment page does not show how much you owe, but it does allow you to enter the amount you want to pay. You must enter your credit card information (including your name and billing address information for the credit card) in order to make your payment online.
The payment page does not show how much you owe, but it does allow you to enter the amount you want to pay. You must enter your credit card information (including your name and billing address information for the credit card) in order to make your payment online.
First-Time Homebuyer Credit Provides Tax Benefits to 1.4 Million Families to Date, More Claims Expected
With the deadline quickly approaching, the Internal Revenue Service today reminded potential homebuyers they must complete their first-time home purchases before Dec. 1 to qualify for the special first-time homebuyer credit. The American Recovery and Reinvestment Act extended the tax credit, which has provided a tax benefit to more than 1.4 million taxpayers so far.
The credit of up to $8,000 is generally available to homebuyers with qualifying income levels who have never owned a home or have not owned one in the past three years. The IRS has a new YouTube video and other resources that explain the credit in detail.
The IRS encouraged all eligible homebuyers to take advantage of the first-time homebuyer credit but at the same time cautioned taxpayers to avoid schemes that help ineligible people file false claims for the credit. Currently, the agency is investigating a number of cases of potential fraud and is using computer screening tools to identify questionable claims for the credit.
Because the credit is only in effect for a limited time, those considering buying a home must act soon to qualify for the credit. Under the Recovery Act, an eligible home purchase must be completed before Dec. 1, 2009. This means that the last day to close on a home is Nov. 30.
The credit cannot be claimed until after the purchase is completed. For purchases made this year before Dec. 1, taxpayers have the option of claiming the credit on their 2008 returns or waiting until next year and claiming it on their 2009 returns.
For those considering a home purchase this fall, here are some other details about the first-time homebuyer credit:
• The credit is 10 percent of the purchase price of the home, with a maximum available credit of $8,000 for either a single taxpayer or a married couple filing jointly. The limit is $4,000 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $80,000 or more.
• The credit reduces the taxpayer’s tax bill or increases his or her refund, dollar for dollar. Unlike most tax credits, the first-time homebuyer credit is fully refundable. This means that the credit will be paid to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.
• Only the purchase of a main home located in the United States qualifies. Vacation homes and rental properties are not eligible.
• A home constructed by the taxpayer only qualifies for the credit if the taxpayer occupies it before Dec. 1, 2009.
• The credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on the taxpayer’s modified adjusted gross income (MAGI). MAGI is adjusted gross income plus various amounts excluded from income—for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the range is $75,000 to $95,000. This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.
• The credit must be repaid if, within three years of purchase, the home ceases to be the taxpayer’s main home. For example, a taxpayer who claims the credit based on a qualifying purchase on Sept. 1, 2009, must repay the full credit if he or she sells the home or converts it to business or rental use at any time before Sept. 1, 2012.
Taxpayers cannot take the credit even if they buy a main home before Dec. 1 if:
• The taxpayer’s income is too large. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
• The taxpayer buys a home from a close relative. This includes a home purchased from the taxpayer’s spouse, parent, grandparent, child or grandchild.
• The taxpayer owned another main home at any time during the three years prior to the date of purchase. For a married couple filing a joint return, this requirement applies to both spouses. For example, if the taxpayer bought a home on Sept. 1, 2009, the taxpayer cannot take the credit for that home if he or she owned, or had an ownership interest in, another main home at any time from Sept. 2, 2006, through Sept. 1, 2009.
• The taxpayer is a nonresident alien.
The credit of up to $8,000 is generally available to homebuyers with qualifying income levels who have never owned a home or have not owned one in the past three years. The IRS has a new YouTube video and other resources that explain the credit in detail.
The IRS encouraged all eligible homebuyers to take advantage of the first-time homebuyer credit but at the same time cautioned taxpayers to avoid schemes that help ineligible people file false claims for the credit. Currently, the agency is investigating a number of cases of potential fraud and is using computer screening tools to identify questionable claims for the credit.
Because the credit is only in effect for a limited time, those considering buying a home must act soon to qualify for the credit. Under the Recovery Act, an eligible home purchase must be completed before Dec. 1, 2009. This means that the last day to close on a home is Nov. 30.
The credit cannot be claimed until after the purchase is completed. For purchases made this year before Dec. 1, taxpayers have the option of claiming the credit on their 2008 returns or waiting until next year and claiming it on their 2009 returns.
For those considering a home purchase this fall, here are some other details about the first-time homebuyer credit:
• The credit is 10 percent of the purchase price of the home, with a maximum available credit of $8,000 for either a single taxpayer or a married couple filing jointly. The limit is $4,000 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $80,000 or more.
• The credit reduces the taxpayer’s tax bill or increases his or her refund, dollar for dollar. Unlike most tax credits, the first-time homebuyer credit is fully refundable. This means that the credit will be paid to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.
• Only the purchase of a main home located in the United States qualifies. Vacation homes and rental properties are not eligible.
• A home constructed by the taxpayer only qualifies for the credit if the taxpayer occupies it before Dec. 1, 2009.
• The credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on the taxpayer’s modified adjusted gross income (MAGI). MAGI is adjusted gross income plus various amounts excluded from income—for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the range is $75,000 to $95,000. This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.
• The credit must be repaid if, within three years of purchase, the home ceases to be the taxpayer’s main home. For example, a taxpayer who claims the credit based on a qualifying purchase on Sept. 1, 2009, must repay the full credit if he or she sells the home or converts it to business or rental use at any time before Sept. 1, 2012.
Taxpayers cannot take the credit even if they buy a main home before Dec. 1 if:
• The taxpayer’s income is too large. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
• The taxpayer buys a home from a close relative. This includes a home purchased from the taxpayer’s spouse, parent, grandparent, child or grandchild.
• The taxpayer owned another main home at any time during the three years prior to the date of purchase. For a married couple filing a joint return, this requirement applies to both spouses. For example, if the taxpayer bought a home on Sept. 1, 2009, the taxpayer cannot take the credit for that home if he or she owned, or had an ownership interest in, another main home at any time from Sept. 2, 2006, through Sept. 1, 2009.
• The taxpayer is a nonresident alien.
Ten Facts about the First-Time Homebuyer Credit
Many taxpayers who purchase a home this year will qualify for an $8,000 federal tax credit. The refundable first-time homebuyer credit is a major tax provision in the American Recovery and Reinvestment Act of 2009. But time is running out to qualify for this credit.
Here are ten things the IRS wants you to know about the first-time homebuyer credit:
1. To be considered a first-time homebuyer, you – and your spouse if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.
2. You cannot claim the credit before there is a completed sale and purchase of the residence. The sale and purchase are generally completed at the time of closing on the purchase.
3. To qualify for the credit, the completed purchase must occur before December 1, 2009.
4. The home must be located in the United States.
5. The credit is either 10 percent of the purchase price of the home or $8,000, whichever is less.
6. The amount of the credit begins to phase out for taxpayers whose modified adjusted gross income is more than $75,000 or $150,000 for joint filers.
7. The credit is fully refundable. A homebuyer with no taxable income, who qualifies for the credit, may file for the sole purpose of claiming the credit and receive a refund. The credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.
8. The credit is claimed on IRS Form 5405, First-Time Homebuyers Credit.
9. Taxpayers can claim the credit for a qualified 2009 purchase on either their 2008 or 2009 tax return. For those who have filed a 2008 return, a Form 1040X, Amended U.S. Individual Income Tax Return can be filed in order to get a refund in 2009.
10. The credit for qualified 2009 purchases does not have to be repaid, as long as the home remains your main home for 36 months after the purchase date.
Qualified taxpayers who have been considering a main home purchase may find extra incentive from this tax credit to buy now so they can complete the purchase before the December 1 deadline.
For more information on this and other key tax provisions of the Recovery Act visit the official IRS Website at IRS.gov/Recovery.
Here are ten things the IRS wants you to know about the first-time homebuyer credit:
1. To be considered a first-time homebuyer, you – and your spouse if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.
2. You cannot claim the credit before there is a completed sale and purchase of the residence. The sale and purchase are generally completed at the time of closing on the purchase.
3. To qualify for the credit, the completed purchase must occur before December 1, 2009.
4. The home must be located in the United States.
5. The credit is either 10 percent of the purchase price of the home or $8,000, whichever is less.
6. The amount of the credit begins to phase out for taxpayers whose modified adjusted gross income is more than $75,000 or $150,000 for joint filers.
7. The credit is fully refundable. A homebuyer with no taxable income, who qualifies for the credit, may file for the sole purpose of claiming the credit and receive a refund. The credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.
8. The credit is claimed on IRS Form 5405, First-Time Homebuyers Credit.
9. Taxpayers can claim the credit for a qualified 2009 purchase on either their 2008 or 2009 tax return. For those who have filed a 2008 return, a Form 1040X, Amended U.S. Individual Income Tax Return can be filed in order to get a refund in 2009.
10. The credit for qualified 2009 purchases does not have to be repaid, as long as the home remains your main home for 36 months after the purchase date.
Qualified taxpayers who have been considering a main home purchase may find extra incentive from this tax credit to buy now so they can complete the purchase before the December 1 deadline.
For more information on this and other key tax provisions of the Recovery Act visit the official IRS Website at IRS.gov/Recovery.
Saturday, September 12, 2009
Checklist of 25 Elements of Appropriate Controls with QuickBooks
By: Amy Vetter, CPA.CITP, Advanced Certified QuickBooks ProAdvisor, Executive Director, Technology in a Box, LLC
It’s always a shock to come across a client and uncover a fraud.
From best practices and practical experience in working with hundreds of businesses, I’ve put together the following list of 25 items for consideration when you work with your QuickBooks clients to implement controls and business processes.
1. Implement an Expense and Reimbursement Policy. All credit cards should be directly billed to the employee rather than to the company. Design expense reports for each employee to turn in with original receipts with the proper coding. The policy for expenses should set a per diem limit to control the amount of cash being spent. An expense policy enables all employees and officers to know which expenses are eligible for reimbursement. Employees are subject to greater accountability for spending when they become responsible for writing the checks themselves to pay their credit card balance.
2. Limit Manual Checks. Manual checks should always be kept to a minimum. When using QuickBooks Payroll, you are able to create “expense reimbursement” payroll items to properly code to the right General Ledger accounts without creating taxable income to the employee. Manual checks should be kept in a locked drawer or cabinet with a control log.
* Missing Checks. At regular intervals, use QuickBooks reports to help review the clients’ exposure. For gaps, under the Reports menu, choose Banking, then Missing Checks Report. This report allows you to review for any break in check numbers.
* Voided/Deleted Transactions. For attempted tampering, more recent versions of QuickBooks software provide another protection. Now if someone prints a check from QuickBooks, it forces the transaction to be saved before being printed. Therefore, if a check is deleted from the system after it has been issued, it can still be found under the Reports menu, Accountant & Taxes, Voided/Deleted Transactions Report.
3. Create a Credit Card Account to Track Business Expenses. In QuickBooks, create a Credit Card Liability type account in the Chart of Accounts for each business credit card. This will allow you to utilize Online Banking and download transactions on a daily basis to monitor the charges that are being made on the company’s behalf or uncover any potentially unauthorized transactions.
4. Ensure the Undeposited Funds Account Is Cleared; Move from Use of Clearing Accounts. The Undeposited Funds account in QuickBooks should always be cleared to a Bank Account. You should review this account to ensure that the funds are being deposited into real corporate accounts rather than fake accounts in QuickBooks. Additionally clearing accounts can be another way to make it harder to trace transaction flows in QuickBooks. By utilizing the features of QuickBooks and following the proper transaction flow shown on the Home Page, transactions can be easily tracked and clearing accounts are not necessary. When you are on a transaction screen in QuickBooks, such as with an Invoice, if you choose the Reports menu, and then Transaction History, you will be able to view a report that shows all of the transactions that are linked.
5. Perform Bank Reconciliations Once a Month for Each Bank Account. Different individuals should handle the duty of reconciling bank accounts and credit card accounts, so that the person who is cutting checks and/or receiving customer deposits is not also reconciling the accounts. To prepare a Bank Reconciliation, choose the Banking menu, then Reconcile. Utilize the Previous Reconciliation Discrepancy Report to track any transactions that may have been deleted or changed after the Bank Reconciliation was completed. This report can be found under the Banking reports in the Reports menu. Additionally, compare the checks (or check copies) that come back with the bank statement against the check register in QuickBooks.
6. Review Outstanding Checks and Deposits That Have Not Cleared the Bank and Are Aging. Typically transactions clear a bank within 2-3 days. Aged outstanding checks or deposits should be reviewed to make sure that they are not duplicate transactions, errors or way to hide fraudulent activity such as deposits that are not real. When viewing the Bank Reconciliation Detail report, modify the report by choosing the Modify Report button, then Filters tab, then choose the filter for Cleared, Choose No.
7. Utilize Online Banking to Match Expenses and Deposits Real-Time. With the Online Banking feature, you can download transactions on a daily basis to stay on top of what has cleared the bank. The person cutting checks or making deposits should not be the person with access to Online Banking. Related duties can also be segregated among employees, so that one staff member enters Vendor Bills and another staff person uploads the Bills through Online Banking for payment.
8. Integrate Third-Party Solutions with QuickBooks. When a client is using a third-party application outside of QuickBooks, it is best to try to integrate the software packages to provide more accurate record keeping and prevent people from completing transactions outside of QuickBooks. Under the Edit menu, Preferences, choose Integrated Applications. Applications that don’t integrate with QuickBooks should be upgraded or replaced with those that do integrate.
9. Review Accounts Receivable Reports and Be Sure That Customer Records Are Complete. Customer collections are key to verifying that Sales recorded in QuickBooks are accurate. If collection calls are not made and the customer records are incomplete, there is no verification that the sale really occurred. Under the Reports menu, choose Customers & Receivables, then Collections Report.
10. Calculate Sales Commission on Cash Received, Not Accounts Receivable. To help ensure that sales numbers are accurate and not inflated, commissions can be based on cash collected on Sales rather than open invoices. Sales Reps can be created in QuickBooks to track their sales and what has been collected. As an added benefit, this approach incentivizes the sales staff to help with collections.
11. Limit Permissions for People Entering the Bills So They Cannot Also Cut Checks Select the Company menu, Set up Users and Passwords. Ensure that employees that are entering the bills are not the same people authorized to issue and sign checks for the company.
12. Use Purchase Orders for Approval. A company’s purchasing department should utilize Purchase Orders in QuickBooks to show that products or services requested are approved. Additionally, Item Receipts can be created to verify goods have been received. The Accounts Payable clerk will then be able to match the vendor bill to the approved Purchase Order and Item Receipt.
13. Implement a Physical Inventory Count (if Applicable) at Least Once a Month. Under the Vendors menu, choose Inventory Activities. There are two functions that you can use – the Physical Inventory Worksheet and Adjust Quantity/Value on Hand. By performing a physical inventory, your client can stay on top of their inventory asset values to ensure inventory has not been stolen or is missing. Two people should do the inventory count together, if it is not done by the owner.
14. Ensure Vendor Records are Complete and W9’s Are Requested from All Vendors before Payments Are Issued. Make sure to always request a W9 from a vendor before payment is issued. The information from the W9 will be entered into the Vendor record in QuickBooks in the Vendor Center. One person should be in charge of setting up vendors and a different person assigned to enter vendor bills. Ensuring you have a W9 on file is a great way to prevent “fake vendors” from being created.
15. Have Sign-off Approval before Checks Are Issued to Vendors. Under the Reports menu, Vendors, choose Unpaid Bills Detail report. Before vendor checks are printed or sent to Online Banking for payment, management should approve and sign off and authorize which bills are to be paid.
16. Reconcile Petty Cash. Petty cash can be set up as a Bank type account in the Chart of Accounts. This will enable it to have its own register like any other bank account. Expenses then are properly tracked and recorded, and transfers between the Bank account to Petty Cash are monitored.
17. Prepare a Daily Flash Report Using the Company Snapshot. The Company Snapshot can replace outside reports created in the past for Cash, A/R and A/P Balances. This will give management up-to-date information on the critical information they need to track within the accounting system and ensure the system is maintained.
18. Set User Permissions to Limit Access According to Job Description. Under the Company menu, choose Set up Users and Passwords, Set up Users. The User Permission levels are very different depending on whether your client is on QuickBooks Pro/Premier versus Enterprise. No matter which version you are using, you should ensure that the permissions match a documented job description. Passwords should be set up for each user in the QuickBooks file.
19. Don’t Share Passwords! Many clients share passwords, especially when they don’t set up users for each staff person or need Administrator access to make changes in QuickBooks. Try your best to prohibit your clients from sharing their password, keeping it on a post it note, or giving out in any other way. It is recommended that only the Owner or someone in upper Management controls the Administrator password to make changes requested from QuickBooks users.
20. Set a Closing Date and Password. Under the Company menu, choose Set Closing Date. Then choose the Set Closing Date button on the Accounting Preferences screen. After month-end procedures are completed, set a Closing Date and Password so that other users in the QuickBooks file cannot modify the financial data.
21. Watch for Dates Being Changed on Transactions. If someone has access to the Closing Date Password or the Password was not set, utilize the Closing Date Exception Report, found under the Reports menu, Accountant & Taxes. This report will help you track if any transactions had any changes such as date, amount, coding, etc. since a prior period was closed.
22. Utilize the Audit Trail Report. Under the Reports menu, Accountant & Taxes, choose Audit Trail. This report will give you insight into anything that has been changed or modified. This report helps if you find a problem or have a concern about the accuracy of data entry. Additionally, it will let you know which user of the file made the change and when.
23. Perform a Physical Count of Fixed Assets at Least Once a Year. The Fixed Assets of a company are often ignored. As a result, these important assets can sometimes “walk” and be expensive to replace. Utilize the Fixed Asset Item List to track the Fixed Assets of the company and keep a detailed subledger.
24. Make Sure the External Accountant User in QuickBooks 2009 Is Only Used for the Accountant. The External Accountant user can be assigned in QuickBooks starting in 2009. This user should not be used within a client organization. This setting should only be given to an outside Accountant, Certified QuickBooks ProAdvisor or Consultant since this provides Administrator level access to the QuickBooks file.
25. Utilize the Client Data Review Feature Starting in QuickBooks 2009 to Track Changes in Lists. The Client Data Review feature allows the Accountant to view any changes in lists such as the Chart of Accounts and Items. It will identify what has been added, changed, deleted or merged. It will also allow you to troubleshoot beginning balances, review open credits and payments in Accounts Receivable and Accounts Payable, and many more of the preventive measures that have been discussed in this list.
Why Is Control So Important?
As set out in our case study, weak controls allow fraud to penetrate and persist in companies undetected for years, sapping the vigor of an otherwise sound business operation.
It’s always a shock to come across a client and uncover a fraud.
From best practices and practical experience in working with hundreds of businesses, I’ve put together the following list of 25 items for consideration when you work with your QuickBooks clients to implement controls and business processes.
1. Implement an Expense and Reimbursement Policy. All credit cards should be directly billed to the employee rather than to the company. Design expense reports for each employee to turn in with original receipts with the proper coding. The policy for expenses should set a per diem limit to control the amount of cash being spent. An expense policy enables all employees and officers to know which expenses are eligible for reimbursement. Employees are subject to greater accountability for spending when they become responsible for writing the checks themselves to pay their credit card balance.
2. Limit Manual Checks. Manual checks should always be kept to a minimum. When using QuickBooks Payroll, you are able to create “expense reimbursement” payroll items to properly code to the right General Ledger accounts without creating taxable income to the employee. Manual checks should be kept in a locked drawer or cabinet with a control log.
* Missing Checks. At regular intervals, use QuickBooks reports to help review the clients’ exposure. For gaps, under the Reports menu, choose Banking, then Missing Checks Report. This report allows you to review for any break in check numbers.
* Voided/Deleted Transactions. For attempted tampering, more recent versions of QuickBooks software provide another protection. Now if someone prints a check from QuickBooks, it forces the transaction to be saved before being printed. Therefore, if a check is deleted from the system after it has been issued, it can still be found under the Reports menu, Accountant & Taxes, Voided/Deleted Transactions Report.
3. Create a Credit Card Account to Track Business Expenses. In QuickBooks, create a Credit Card Liability type account in the Chart of Accounts for each business credit card. This will allow you to utilize Online Banking and download transactions on a daily basis to monitor the charges that are being made on the company’s behalf or uncover any potentially unauthorized transactions.
4. Ensure the Undeposited Funds Account Is Cleared; Move from Use of Clearing Accounts. The Undeposited Funds account in QuickBooks should always be cleared to a Bank Account. You should review this account to ensure that the funds are being deposited into real corporate accounts rather than fake accounts in QuickBooks. Additionally clearing accounts can be another way to make it harder to trace transaction flows in QuickBooks. By utilizing the features of QuickBooks and following the proper transaction flow shown on the Home Page, transactions can be easily tracked and clearing accounts are not necessary. When you are on a transaction screen in QuickBooks, such as with an Invoice, if you choose the Reports menu, and then Transaction History, you will be able to view a report that shows all of the transactions that are linked.
5. Perform Bank Reconciliations Once a Month for Each Bank Account. Different individuals should handle the duty of reconciling bank accounts and credit card accounts, so that the person who is cutting checks and/or receiving customer deposits is not also reconciling the accounts. To prepare a Bank Reconciliation, choose the Banking menu, then Reconcile. Utilize the Previous Reconciliation Discrepancy Report to track any transactions that may have been deleted or changed after the Bank Reconciliation was completed. This report can be found under the Banking reports in the Reports menu. Additionally, compare the checks (or check copies) that come back with the bank statement against the check register in QuickBooks.
6. Review Outstanding Checks and Deposits That Have Not Cleared the Bank and Are Aging. Typically transactions clear a bank within 2-3 days. Aged outstanding checks or deposits should be reviewed to make sure that they are not duplicate transactions, errors or way to hide fraudulent activity such as deposits that are not real. When viewing the Bank Reconciliation Detail report, modify the report by choosing the Modify Report button, then Filters tab, then choose the filter for Cleared, Choose No.
7. Utilize Online Banking to Match Expenses and Deposits Real-Time. With the Online Banking feature, you can download transactions on a daily basis to stay on top of what has cleared the bank. The person cutting checks or making deposits should not be the person with access to Online Banking. Related duties can also be segregated among employees, so that one staff member enters Vendor Bills and another staff person uploads the Bills through Online Banking for payment.
8. Integrate Third-Party Solutions with QuickBooks. When a client is using a third-party application outside of QuickBooks, it is best to try to integrate the software packages to provide more accurate record keeping and prevent people from completing transactions outside of QuickBooks. Under the Edit menu, Preferences, choose Integrated Applications. Applications that don’t integrate with QuickBooks should be upgraded or replaced with those that do integrate.
9. Review Accounts Receivable Reports and Be Sure That Customer Records Are Complete. Customer collections are key to verifying that Sales recorded in QuickBooks are accurate. If collection calls are not made and the customer records are incomplete, there is no verification that the sale really occurred. Under the Reports menu, choose Customers & Receivables, then Collections Report.
10. Calculate Sales Commission on Cash Received, Not Accounts Receivable. To help ensure that sales numbers are accurate and not inflated, commissions can be based on cash collected on Sales rather than open invoices. Sales Reps can be created in QuickBooks to track their sales and what has been collected. As an added benefit, this approach incentivizes the sales staff to help with collections.
11. Limit Permissions for People Entering the Bills So They Cannot Also Cut Checks Select the Company menu, Set up Users and Passwords. Ensure that employees that are entering the bills are not the same people authorized to issue and sign checks for the company.
12. Use Purchase Orders for Approval. A company’s purchasing department should utilize Purchase Orders in QuickBooks to show that products or services requested are approved. Additionally, Item Receipts can be created to verify goods have been received. The Accounts Payable clerk will then be able to match the vendor bill to the approved Purchase Order and Item Receipt.
13. Implement a Physical Inventory Count (if Applicable) at Least Once a Month. Under the Vendors menu, choose Inventory Activities. There are two functions that you can use – the Physical Inventory Worksheet and Adjust Quantity/Value on Hand. By performing a physical inventory, your client can stay on top of their inventory asset values to ensure inventory has not been stolen or is missing. Two people should do the inventory count together, if it is not done by the owner.
14. Ensure Vendor Records are Complete and W9’s Are Requested from All Vendors before Payments Are Issued. Make sure to always request a W9 from a vendor before payment is issued. The information from the W9 will be entered into the Vendor record in QuickBooks in the Vendor Center. One person should be in charge of setting up vendors and a different person assigned to enter vendor bills. Ensuring you have a W9 on file is a great way to prevent “fake vendors” from being created.
15. Have Sign-off Approval before Checks Are Issued to Vendors. Under the Reports menu, Vendors, choose Unpaid Bills Detail report. Before vendor checks are printed or sent to Online Banking for payment, management should approve and sign off and authorize which bills are to be paid.
16. Reconcile Petty Cash. Petty cash can be set up as a Bank type account in the Chart of Accounts. This will enable it to have its own register like any other bank account. Expenses then are properly tracked and recorded, and transfers between the Bank account to Petty Cash are monitored.
17. Prepare a Daily Flash Report Using the Company Snapshot. The Company Snapshot can replace outside reports created in the past for Cash, A/R and A/P Balances. This will give management up-to-date information on the critical information they need to track within the accounting system and ensure the system is maintained.
18. Set User Permissions to Limit Access According to Job Description. Under the Company menu, choose Set up Users and Passwords, Set up Users. The User Permission levels are very different depending on whether your client is on QuickBooks Pro/Premier versus Enterprise. No matter which version you are using, you should ensure that the permissions match a documented job description. Passwords should be set up for each user in the QuickBooks file.
19. Don’t Share Passwords! Many clients share passwords, especially when they don’t set up users for each staff person or need Administrator access to make changes in QuickBooks. Try your best to prohibit your clients from sharing their password, keeping it on a post it note, or giving out in any other way. It is recommended that only the Owner or someone in upper Management controls the Administrator password to make changes requested from QuickBooks users.
20. Set a Closing Date and Password. Under the Company menu, choose Set Closing Date. Then choose the Set Closing Date button on the Accounting Preferences screen. After month-end procedures are completed, set a Closing Date and Password so that other users in the QuickBooks file cannot modify the financial data.
21. Watch for Dates Being Changed on Transactions. If someone has access to the Closing Date Password or the Password was not set, utilize the Closing Date Exception Report, found under the Reports menu, Accountant & Taxes. This report will help you track if any transactions had any changes such as date, amount, coding, etc. since a prior period was closed.
22. Utilize the Audit Trail Report. Under the Reports menu, Accountant & Taxes, choose Audit Trail. This report will give you insight into anything that has been changed or modified. This report helps if you find a problem or have a concern about the accuracy of data entry. Additionally, it will let you know which user of the file made the change and when.
23. Perform a Physical Count of Fixed Assets at Least Once a Year. The Fixed Assets of a company are often ignored. As a result, these important assets can sometimes “walk” and be expensive to replace. Utilize the Fixed Asset Item List to track the Fixed Assets of the company and keep a detailed subledger.
24. Make Sure the External Accountant User in QuickBooks 2009 Is Only Used for the Accountant. The External Accountant user can be assigned in QuickBooks starting in 2009. This user should not be used within a client organization. This setting should only be given to an outside Accountant, Certified QuickBooks ProAdvisor or Consultant since this provides Administrator level access to the QuickBooks file.
25. Utilize the Client Data Review Feature Starting in QuickBooks 2009 to Track Changes in Lists. The Client Data Review feature allows the Accountant to view any changes in lists such as the Chart of Accounts and Items. It will identify what has been added, changed, deleted or merged. It will also allow you to troubleshoot beginning balances, review open credits and payments in Accounts Receivable and Accounts Payable, and many more of the preventive measures that have been discussed in this list.
Why Is Control So Important?
As set out in our case study, weak controls allow fraud to penetrate and persist in companies undetected for years, sapping the vigor of an otherwise sound business operation.
Using QuickBooks® to Prevent Fraud
By: Amy Vetter, CPA.CITP, Advanced Certified QuickBooks ProAdvisor, Executive Director, Technology in a Box, LLC
Your protection against fraud is only as good as your internal control and accounting procedures. Often business owners simply rely on software, yet software is only one component of the control environment. In this article, CPA and Advanced Certified QuickBooks ProAdvisor Amy Vetter shows how QuickBooks can contribute to a holistic approach to control. ~ Editor
A Case Study in Weak Controls
It was the day before I was going to have my second child. I was saying my “Goodbyes” at my client before leaving to go to the hospital the next morning. Just as I finished my last email ... the Accounts Payable Clerk came into the office I was working in. She informed me there was a problem.
When I first began the engagement with the client in question, they had few controls in place. They had hired me to assess their QuickBooks file and design a better process for their accounting department to improve financial reporting and cash management. However, as most of us realize once we are troubleshooting and asking questions of our clients, we uncover a whole lot more than just QuickBooks errors. We end up recommending proper business processes, procedures and controls for their company, while utilizing QuickBooks to run their back-office accounting.
A Few Small Problems
At this particular client, they were using QuickBooks for their accounting and inventory management, as well as a separate program for their Sales department. The following were business process failures and internal control risks I found:
* The Sales software application was not integrated with QuickBooks.
o Customer Invoices were created in Microsoft Word by the Sales department.
o Sales staff often modified and duplicated invoices.
o Sales Invoices were handed to the Accounting Department for entry into QuickBooks.
o Many of those invoices were modified and changed by the Sales Department without communicating with the Accounting Department.
o No consideration was given to the Accounts Receivable balances in QuickBooks.
* Many of their employees and contractors travelled all over the country. Each of them had corporate credit cards in the company’s name that were automatically paid by the company each month.
o It was very hard to get employees to turn in receipts, and if they did, they came in 60 to 90 days after the purchase.
o Credit card transactions were reviewed online against the statement, but not downloaded from the Internet in real time.
* Inventory was not properly monitored. Physical inventories were not taken.
Wait, there’s more.
* The Sales department was paid on Sales, not cash collected.
* Customer records were incomplete or inaccurate, so collection calls were unsuccessful many times.
* Employee timesheets were manual and employee reimbursements were created with manual checks.
* The Accounting staff freely deleted or changed prior period transactions in QuickBooks.
* Daily cash reports for Management were created outside of QuickBooks because information in QuickBooks could not be relied on.
* Everyone knew the Administrator Password and Closing Date Password.
Shall I go on…? You can see that these are procedural and control issues, not issues in the QuickBooks data file.
The Role of QuickBooks in the Control Environment
QuickBooks is designed to be an easy, flexible software tool for a wide array of users, but at the end of the day it is still part of an accounting system. We can help clients to fully utilize the security features in QuickBooks; just as importantly, we can help make sure the client complies with appropriate business processes and controls. So when teaching the client how to use QuickBooks, we should probe further and make sure the client also has the right controls in place, whether the client is a sole proprietor or a corporation with hundreds of employees.
So What Happened?
With all of the areas listed that were going wrong in this client’s environment, I implemented QuickBooks features and appropriate internal controls to prevent fraudulent activities. Based on that and other experiences in working with hundreds of businesses, I’ve put together a list of 25 areas or issues for you to consider when working with your QuickBooks clients to implement controls and business processes.
Checklist of 25 Elements of Appropriate Controls with QuickBooks
Fraud Surfaces with Proper Controls
So, are you still wondering what happened at my client? After months of implementing new policies of submitting expense reports with original receipts, tracking credit card expenses properly, creating Purchase Orders for approval and matching them against inventory received and completing a physical inventory count each month-end, the fraud was uncovered.
The Accounts Payable Clerk reviewed an expense report from one of the company employees and questioned some purchases. The receipt showed inventory that was purchased; however, the vendor on the invoice was not the typical vendor they purchased from, although the vendor name matched the credit card statement.
A Surprising Vendor
After further research with the Inventory Manager, it was found that the inventory listed didn’t have a Purchase Order and had not been received. They went online to research the vendor and found it was an adult entertainment company!
The invoice submitted was a fake with the vendor shown at the top matching the credit card statement. Upon further research of the credit card bill for the prior six-month period, it turned out that various employees of this company had spent more than $180,000 with this one vendor.
The Moral of the Story
When controls are weak, a fraud like this can subvert the accounting system for years without detection. Before this client implemented the proper internal controls and business processes, unprincipled employees were freely picking the owner’s pockets.
Although we rarely expect our clients to be a victim of fraud, this is a case where it is better to be safe than sorry.
Cash is the lifeblood of any business. When dishonest employees threaten cash, the fraud hampers business success and can even hasten business failure.
Your protection against fraud is only as good as your internal control and accounting procedures. Often business owners simply rely on software, yet software is only one component of the control environment. In this article, CPA and Advanced Certified QuickBooks ProAdvisor Amy Vetter shows how QuickBooks can contribute to a holistic approach to control. ~ Editor
A Case Study in Weak Controls
It was the day before I was going to have my second child. I was saying my “Goodbyes” at my client before leaving to go to the hospital the next morning. Just as I finished my last email ... the Accounts Payable Clerk came into the office I was working in. She informed me there was a problem.
When I first began the engagement with the client in question, they had few controls in place. They had hired me to assess their QuickBooks file and design a better process for their accounting department to improve financial reporting and cash management. However, as most of us realize once we are troubleshooting and asking questions of our clients, we uncover a whole lot more than just QuickBooks errors. We end up recommending proper business processes, procedures and controls for their company, while utilizing QuickBooks to run their back-office accounting.
A Few Small Problems
At this particular client, they were using QuickBooks for their accounting and inventory management, as well as a separate program for their Sales department. The following were business process failures and internal control risks I found:
* The Sales software application was not integrated with QuickBooks.
o Customer Invoices were created in Microsoft Word by the Sales department.
o Sales staff often modified and duplicated invoices.
o Sales Invoices were handed to the Accounting Department for entry into QuickBooks.
o Many of those invoices were modified and changed by the Sales Department without communicating with the Accounting Department.
o No consideration was given to the Accounts Receivable balances in QuickBooks.
* Many of their employees and contractors travelled all over the country. Each of them had corporate credit cards in the company’s name that were automatically paid by the company each month.
o It was very hard to get employees to turn in receipts, and if they did, they came in 60 to 90 days after the purchase.
o Credit card transactions were reviewed online against the statement, but not downloaded from the Internet in real time.
* Inventory was not properly monitored. Physical inventories were not taken.
Wait, there’s more.
* The Sales department was paid on Sales, not cash collected.
* Customer records were incomplete or inaccurate, so collection calls were unsuccessful many times.
* Employee timesheets were manual and employee reimbursements were created with manual checks.
* The Accounting staff freely deleted or changed prior period transactions in QuickBooks.
* Daily cash reports for Management were created outside of QuickBooks because information in QuickBooks could not be relied on.
* Everyone knew the Administrator Password and Closing Date Password.
Shall I go on…? You can see that these are procedural and control issues, not issues in the QuickBooks data file.
The Role of QuickBooks in the Control Environment
QuickBooks is designed to be an easy, flexible software tool for a wide array of users, but at the end of the day it is still part of an accounting system. We can help clients to fully utilize the security features in QuickBooks; just as importantly, we can help make sure the client complies with appropriate business processes and controls. So when teaching the client how to use QuickBooks, we should probe further and make sure the client also has the right controls in place, whether the client is a sole proprietor or a corporation with hundreds of employees.
So What Happened?
With all of the areas listed that were going wrong in this client’s environment, I implemented QuickBooks features and appropriate internal controls to prevent fraudulent activities. Based on that and other experiences in working with hundreds of businesses, I’ve put together a list of 25 areas or issues for you to consider when working with your QuickBooks clients to implement controls and business processes.
Checklist of 25 Elements of Appropriate Controls with QuickBooks
Fraud Surfaces with Proper Controls
So, are you still wondering what happened at my client? After months of implementing new policies of submitting expense reports with original receipts, tracking credit card expenses properly, creating Purchase Orders for approval and matching them against inventory received and completing a physical inventory count each month-end, the fraud was uncovered.
The Accounts Payable Clerk reviewed an expense report from one of the company employees and questioned some purchases. The receipt showed inventory that was purchased; however, the vendor on the invoice was not the typical vendor they purchased from, although the vendor name matched the credit card statement.
A Surprising Vendor
After further research with the Inventory Manager, it was found that the inventory listed didn’t have a Purchase Order and had not been received. They went online to research the vendor and found it was an adult entertainment company!
The invoice submitted was a fake with the vendor shown at the top matching the credit card statement. Upon further research of the credit card bill for the prior six-month period, it turned out that various employees of this company had spent more than $180,000 with this one vendor.
The Moral of the Story
When controls are weak, a fraud like this can subvert the accounting system for years without detection. Before this client implemented the proper internal controls and business processes, unprincipled employees were freely picking the owner’s pockets.
Although we rarely expect our clients to be a victim of fraud, this is a case where it is better to be safe than sorry.
Cash is the lifeblood of any business. When dishonest employees threaten cash, the fraud hampers business success and can even hasten business failure.
Six Recovery Tax Incentives for Individuals
The American Recovery and Reinvestment Act provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient, and parents and students paying for college.
Here are six things the IRS wants you to know about ARRA tax incentives for individuals:
1. First-Time Homebuyer Credit Taxpayers who haven’t owned a principal residence during the past three years prior to the purchase date of a home before Dec. 1 of this year may be eligible to receive a credit of up to $8,000 on an original or amended 2008 tax return. They can also wait and claim the credit on their 2009 return.
2. New Vehicle Purchase Incentive Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels.
3. Making Work Pay and Withholding The Making Work Pay Credit lowered employees’ tax withholding rates this year and has already put more money into the pockets of wage earners. Self-employed individuals will have an opportunity to claim this credit when they file their 2009 return. Taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is currently being withheld: multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers, workers without a valid social security number, some social security recipients who work and pensioners. Failure to adjust your withholding in these situations could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year.
4. Tax Credit for First Four Years of College The American Opportunity Credit can help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student.
5. Certain Computer Technology Purchases Allowed for 529 Plans ARRA adds computer technology to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
6. Energy-Efficient Home Improvements The credit for nonbusiness energy-efficient improvements is increased for homeowners who make qualified improvements to existing homes. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
For more information on this and other key tax provisions of the Recovery Act, visit the official IRS Website at IRS.gov/Recovery.
Here are six things the IRS wants you to know about ARRA tax incentives for individuals:
1. First-Time Homebuyer Credit Taxpayers who haven’t owned a principal residence during the past three years prior to the purchase date of a home before Dec. 1 of this year may be eligible to receive a credit of up to $8,000 on an original or amended 2008 tax return. They can also wait and claim the credit on their 2009 return.
2. New Vehicle Purchase Incentive Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels.
3. Making Work Pay and Withholding The Making Work Pay Credit lowered employees’ tax withholding rates this year and has already put more money into the pockets of wage earners. Self-employed individuals will have an opportunity to claim this credit when they file their 2009 return. Taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is currently being withheld: multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers, workers without a valid social security number, some social security recipients who work and pensioners. Failure to adjust your withholding in these situations could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year.
4. Tax Credit for First Four Years of College The American Opportunity Credit can help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student.
5. Certain Computer Technology Purchases Allowed for 529 Plans ARRA adds computer technology to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
6. Energy-Efficient Home Improvements The credit for nonbusiness energy-efficient improvements is increased for homeowners who make qualified improvements to existing homes. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
For more information on this and other key tax provisions of the Recovery Act, visit the official IRS Website at IRS.gov/Recovery.
Deadlines Near for Business to Choose Expanded NOL Election; Sept. 15 for Many Corporations, Oct. 15 for Individuals
Eligible taxpayers must act soon if they want to take advantage of the expanded business loss carryback option included in this year’s Recovery law. According to the Internal Revenue Service, eligible calendar-year corporations have until Sept. 15, and eligible individuals have until Oct. 15 to choose this special option.
This carryback provision offers small businesses that lost money in 2008 an excellent way to quickly get some much needed cash if they were profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it’s too late.
Under the American Recovery and Reinvestment Act (ARRA), enacted in February, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for up to five years, instead of the usual two. This means that a business that had a net operating loss (NOL) in 2008 could carry that loss as far back as tax-year 2003, rather than the usual 2006. Not only could this mean a special tax refund, but the refund could be larger, because the loss is being spread over as many as five tax years, rather than just two.
This option may be particularly helpful to any eligible small business with a large loss in 2008. A small business that chooses this option can benefit by:
• Offsetting the loss against income earned in up to five prior tax years,
• Getting a refund of taxes paid up to five years ago,
• Using up part or all of the loss now, rather than waiting to claim it on future tax returns.
Under ARRA, eligible taxpayers can choose to carry back a NOL arising in a taxable year beginning or ending in 2008 for three, four or five years instead of two. Eligible taxpayers are eligible small businesses (ESB) that have no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. This includes a sole proprietor that qualifies as an ESB, an individual partner in a partnership that qualifies as an ESB and a shareholder in an S corporation that qualifies as an ESB. This choice may be made for only one tax year.
Taxpayers must choose this special carryback by either:
• Attaching a statement to an income tax return for the tax year that begins or ends in 2008 or,
• Claiming a refund on Form 1045, Application for Tentative Refund or Form 1139, Corporation Application for Tentative Refund, or on an amended return for the tax year to which the NOL is being carried back.
Most taxpayers still have time to choose the special carryback and get a refund. A calendar-year corporation that qualifies as an ESB must make this choice by Sept. 15, 2009. For individuals, the deadline is Oct. 15, 2009. Deadlines vary for fiscal-year taxpayers, depending upon when their fiscal year ends and whether they are making the choice for the tax year that ends or begins in 2008.
A calendar-year taxpayer that chooses the special carryback by attaching a statement to the income tax return has until December 31, 2009, to claim the refund on Form 1045 or 1139, or 3 years after the due date (including extensions) for filing the 2008 income tax return to claim a refund on an amended return.
These forms, along with answers to frequently-asked questions about this special carryback, and other details can be found on IRS.gov
This carryback provision offers small businesses that lost money in 2008 an excellent way to quickly get some much needed cash if they were profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it’s too late.
Under the American Recovery and Reinvestment Act (ARRA), enacted in February, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for up to five years, instead of the usual two. This means that a business that had a net operating loss (NOL) in 2008 could carry that loss as far back as tax-year 2003, rather than the usual 2006. Not only could this mean a special tax refund, but the refund could be larger, because the loss is being spread over as many as five tax years, rather than just two.
This option may be particularly helpful to any eligible small business with a large loss in 2008. A small business that chooses this option can benefit by:
• Offsetting the loss against income earned in up to five prior tax years,
• Getting a refund of taxes paid up to five years ago,
• Using up part or all of the loss now, rather than waiting to claim it on future tax returns.
Under ARRA, eligible taxpayers can choose to carry back a NOL arising in a taxable year beginning or ending in 2008 for three, four or five years instead of two. Eligible taxpayers are eligible small businesses (ESB) that have no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. This includes a sole proprietor that qualifies as an ESB, an individual partner in a partnership that qualifies as an ESB and a shareholder in an S corporation that qualifies as an ESB. This choice may be made for only one tax year.
Taxpayers must choose this special carryback by either:
• Attaching a statement to an income tax return for the tax year that begins or ends in 2008 or,
• Claiming a refund on Form 1045, Application for Tentative Refund or Form 1139, Corporation Application for Tentative Refund, or on an amended return for the tax year to which the NOL is being carried back.
Most taxpayers still have time to choose the special carryback and get a refund. A calendar-year corporation that qualifies as an ESB must make this choice by Sept. 15, 2009. For individuals, the deadline is Oct. 15, 2009. Deadlines vary for fiscal-year taxpayers, depending upon when their fiscal year ends and whether they are making the choice for the tax year that ends or begins in 2008.
A calendar-year taxpayer that chooses the special carryback by attaching a statement to the income tax return has until December 31, 2009, to claim the refund on Form 1045 or 1139, or 3 years after the due date (including extensions) for filing the 2008 income tax return to claim a refund on an amended return.
These forms, along with answers to frequently-asked questions about this special carryback, and other details can be found on IRS.gov
Tax Benefits for Education: Information Center
There is a variety of tax credits, deductions and savings plans available to taxpayers to assist with the expense of higher education.
* A tax credit reduces the amount of income tax you may have to pay.
* A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
* Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
* An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit.
Credits
American Opportunity Credit
Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American opportunity credit, to pay for college expenses.
The American opportunity credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
Special rules apply to a student attending college in a Midwestern disaster area. For tax-year 2009, only, taxpayers can choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.
If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.
Hope Credit
The Hope credit generally applies to 2008 and earlier tax years. It helps parents and students pay for post-secondary education. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. The Hope credit you are allowed may be limited by the amount of your income and the amount of your tax.
The Hope credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. Normally, you can claim tuition and required enrollment fees paid for your own, as well as your dependents’ college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time.
Generally, you can claim the Hope credit if all three of the following requirements are met:
* You pay qualified education expenses of higher education.
* You pay the education expenses for an eligible student.
* The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.
You cannot take both an education credit and a deduction for tuition and fees (see Deductions, below) for the same student in the same year. In some cases, you may do better by claiming the tuition and fees deduction instead of the Hope credit.
Education credits are claimed on Form 8863, Education Credits (Hope and Lifetime Learning Credits). For details on these and other education-related tax breaks, see IRS Publication 970, Tax Benefits of Education.
Lifetime Learning Credit
The lifetime learning credit helps parents and students pay for post-secondary education.
For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 ($4,000 for students in Midwestern disaster areas) for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the Hope or American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.
Generally, you can claim the lifetime learning credit if all three of the following requirements are met:
* You pay qualified education expenses of higher education.
* You pay the education expenses for an eligible student.
* The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.
If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.
If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope or American opportunity credit for one student and the lifetime learning credit for another student in the same year.
Deductions
Tuition and Fees Deduction
You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.
You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.
Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:
* You pay qualified education expenses of higher education.
* You pay the education expenses for an eligible student.
* The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.
You cannot claim the tuition and fees deduction if any of the following apply:
* Your filing status is married filing separately.
* Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.
* Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).
* You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
* You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.
Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
Student Loan Interest Deduction
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $70,000 ($145,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2008.
The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040).
Qualified Student Loan
This is a loan you took out solely to pay qualified education expenses (defined later) that were:
* For you, your spouse, or a person who was your dependent when you took out the loan.
* Paid or incurred within a reasonable period of time before or after you took out the loan.
* For education provided during an academic period for an eligible student.
Loans from the following sources are not qualified student loans:
* A related person.
* A qualified employer plan.
Qualified Education Expenses
For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:
* Tuition and fees.
* Room and board.
* Books, supplies and equipment.
* Other necessary expenses (such as transportation).
The cost of room and board qualifies only to the extent that it is not more than the greater of:
* The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
* The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
Business Deduction for Work-Related Education
If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.
If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.
Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the Hope and lifetime learning credits. You may qualify for these other benefits even if you do not meet the requirements listed above.
To claim a business deduction for work-related education, you must:
* Be working.
* Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
* File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
* Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.
Qualifying Work-Related Education
You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:
* The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
* The education maintains or improves skills needed in your present work.
However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:
* Is needed to meet the minimum educational requirements of your present trade or business or
* Is part of a program of study that will qualify you for a new trade or business.
You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.
Education Required by Employer or by Law
Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.
* It is required for you to keep your present salary, status or job.
* The requirement serves a business purpose of your employer.
* The education is not part of a program that will qualify you for a new trade or business.
When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.
Education to Maintain or Improve Skills
If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.
Savings Plans
529 Plans Expanded
Tax-free college savings plans and prepaid tuition programs can be used to buy computer equipment and services for an eligible student during 2009 and 2010. These 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.
529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books, supplies, equipment and special needs services. For someone who is at least a half-time student, room and board also qualify.
For 2009 and 2010, the ARRA change adds to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit or tuition and fees deduction.
States sponsor 529 plans that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses.
Coverdell Education Savings Account
This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.
Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
Here are some things to remember about distributions from Coverdell accounts:
* Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
* There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible.
* Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
* If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.
For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.
Scholarships and Fellowships
A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.
A scholarship or fellowship is tax free only if you meet the following conditions:
* You are a candidate for a degree at an eligible educational institution.
* You use the scholarship or fellowship to pay qualified education expenses.
Qualified Education Expenses
For purposes of tax-free scholarships and fellowships, these are expenses for:
* Tuition and fees required to enroll at or attend an eligible educational institution.
* Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.
Expenses that Don’t Qualify
Qualified education expenses do not include the cost of:
* Room and board.
* Travel.
* Research.
* Clerical help.
* Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.
This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.
For more information, see Pub. 970.
Exclusions from Income
You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the Hope credit and the lifetime learning credit.
Employer-Provided Educational Assistance
If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.
Educational Assistance Program
To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.
Educational Assistance Benefits
Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items.
* Meals, lodging, or transportation.
* Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
* Courses involving sports, games, or hobbies unless they:
o Have a reasonable relationship to the business of your employer, or
o Are required as part of a degree program.
Benefits over $5,250
If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.
Working Condition Fringe Benefit
However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.
* A tax credit reduces the amount of income tax you may have to pay.
* A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
* Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
* An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit.
Credits
American Opportunity Credit
Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American opportunity credit, to pay for college expenses.
The American opportunity credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
Special rules apply to a student attending college in a Midwestern disaster area. For tax-year 2009, only, taxpayers can choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.
If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.
Hope Credit
The Hope credit generally applies to 2008 and earlier tax years. It helps parents and students pay for post-secondary education. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. The Hope credit you are allowed may be limited by the amount of your income and the amount of your tax.
The Hope credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. Normally, you can claim tuition and required enrollment fees paid for your own, as well as your dependents’ college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time.
Generally, you can claim the Hope credit if all three of the following requirements are met:
* You pay qualified education expenses of higher education.
* You pay the education expenses for an eligible student.
* The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.
You cannot take both an education credit and a deduction for tuition and fees (see Deductions, below) for the same student in the same year. In some cases, you may do better by claiming the tuition and fees deduction instead of the Hope credit.
Education credits are claimed on Form 8863, Education Credits (Hope and Lifetime Learning Credits). For details on these and other education-related tax breaks, see IRS Publication 970, Tax Benefits of Education.
Lifetime Learning Credit
The lifetime learning credit helps parents and students pay for post-secondary education.
For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 ($4,000 for students in Midwestern disaster areas) for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the Hope or American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.
Generally, you can claim the lifetime learning credit if all three of the following requirements are met:
* You pay qualified education expenses of higher education.
* You pay the education expenses for an eligible student.
* The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.
If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.
If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope or American opportunity credit for one student and the lifetime learning credit for another student in the same year.
Deductions
Tuition and Fees Deduction
You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.
You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.
Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:
* You pay qualified education expenses of higher education.
* You pay the education expenses for an eligible student.
* The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.
You cannot claim the tuition and fees deduction if any of the following apply:
* Your filing status is married filing separately.
* Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.
* Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).
* You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
* You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.
Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
Student Loan Interest Deduction
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $70,000 ($145,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2008.
The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040).
Qualified Student Loan
This is a loan you took out solely to pay qualified education expenses (defined later) that were:
* For you, your spouse, or a person who was your dependent when you took out the loan.
* Paid or incurred within a reasonable period of time before or after you took out the loan.
* For education provided during an academic period for an eligible student.
Loans from the following sources are not qualified student loans:
* A related person.
* A qualified employer plan.
Qualified Education Expenses
For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:
* Tuition and fees.
* Room and board.
* Books, supplies and equipment.
* Other necessary expenses (such as transportation).
The cost of room and board qualifies only to the extent that it is not more than the greater of:
* The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
* The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
Business Deduction for Work-Related Education
If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.
If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.
Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the Hope and lifetime learning credits. You may qualify for these other benefits even if you do not meet the requirements listed above.
To claim a business deduction for work-related education, you must:
* Be working.
* Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
* File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
* Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.
Qualifying Work-Related Education
You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:
* The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
* The education maintains or improves skills needed in your present work.
However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:
* Is needed to meet the minimum educational requirements of your present trade or business or
* Is part of a program of study that will qualify you for a new trade or business.
You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.
Education Required by Employer or by Law
Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.
* It is required for you to keep your present salary, status or job.
* The requirement serves a business purpose of your employer.
* The education is not part of a program that will qualify you for a new trade or business.
When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.
Education to Maintain or Improve Skills
If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.
Savings Plans
529 Plans Expanded
Tax-free college savings plans and prepaid tuition programs can be used to buy computer equipment and services for an eligible student during 2009 and 2010. These 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.
529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books, supplies, equipment and special needs services. For someone who is at least a half-time student, room and board also qualify.
For 2009 and 2010, the ARRA change adds to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit or tuition and fees deduction.
States sponsor 529 plans that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses.
Coverdell Education Savings Account
This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.
Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
Here are some things to remember about distributions from Coverdell accounts:
* Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
* There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible.
* Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
* If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.
For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.
Scholarships and Fellowships
A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.
A scholarship or fellowship is tax free only if you meet the following conditions:
* You are a candidate for a degree at an eligible educational institution.
* You use the scholarship or fellowship to pay qualified education expenses.
Qualified Education Expenses
For purposes of tax-free scholarships and fellowships, these are expenses for:
* Tuition and fees required to enroll at or attend an eligible educational institution.
* Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.
Expenses that Don’t Qualify
Qualified education expenses do not include the cost of:
* Room and board.
* Travel.
* Research.
* Clerical help.
* Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.
This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.
For more information, see Pub. 970.
Exclusions from Income
You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the Hope credit and the lifetime learning credit.
Employer-Provided Educational Assistance
If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.
Educational Assistance Program
To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.
Educational Assistance Benefits
Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items.
* Meals, lodging, or transportation.
* Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
* Courses involving sports, games, or hobbies unless they:
o Have a reasonable relationship to the business of your employer, or
o Are required as part of a degree program.
Benefits over $5,250
If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.
Working Condition Fringe Benefit
However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.
Wednesday, September 9, 2009
Retirement Initiatives
1. On September 5th, the Treasury Department issued the following statement:
Statement of Treasury Secretary Tim Geithner on the Administration’s New Retirement Security Initiatives
"Today, the Administration announced steps we are taking to make it easier for working families to save, particularly for retirement. Working Americans should be able to retire with dignity and security, but nearly half of the nation's workforce has little or nothing beyond Social Security benefits to get by on in old age. The measures we are announcing today will give more choices to families who want to save, and will complement the Administration's legislative proposals to expand retirement savings. Just as the Administration is dedicated to reviving the economy and getting people back to work, so too it is dedicated to helping put retirement security within the reach of all Americans."
Additionally, the IRS issued the following technical guidance.
2. Revenue Ruling 2009-30 provides guidance on how automatic enrollment in a § 401(k) plan can work when there is an escalator feature included. An escalator feature means that the amount of an employee’s compensation that is contributed to the plan, without the employee’s affirmative election, is increased periodically according to the terms of the plan. Two situations are described, one involves a basic automatic contribution arrangement and the other involves an eligible automatic contribution arrangement described in § 414(w) of the Code. Revenue Ruling 2009-30 is part of the "Savings Initiative" guidance issued by the Service.
3. Revenue Ruling 2009-31 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit annual contributions of an employee’s unused paid time off under the employer’s paid time off plan. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a contribution (including a section 401(k) contribution) or cash out of the unused paid time off, determined as of the end of the plan year (December 31). Rev. Rul. 2009-31 is companion guidance to Rev. Rul. 2009-32 and is part of the "Savings Initiative" guidance issued by the Service.
4. Revenue Ruling 2009-32 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit contributions for an employee’s accumulated and unused paid time off under the employer’s paid time off plan at a participant’s termination of employment. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a post-severance contribution (including a section 401(k) contribution) or cash out of the accumulated and unused paid time off. Rev. Rul. 2009-32 is companion guidance to Rev. Rul. 2009-31 and is part of the "Savings Initiative" guidance issued by the Service.
5. Notice 2009-65 provides two sample amendments that sponsors of § 401(k) plans can use to add automatic enrollment features to their plans. The first sample amendment can be used to add a basic automatic contribution arrangement with, if elected by an adopting employer, an escalation feature. The second sample amendment can be used to add an eligible automatic contribution arrangement ("EACA") as described in § 414(w) of the Code with, if elected by an adopting employer, an escalation feature. Final regulations under § 414(w) were published in the Federal Register on February 24, 2009 (74 F.R. 8200). Notice 2009-65, by providing sample amendments, facilitates the use of EACAs in § 401(k) plans. Notice 2009-65 is part of the "Savings Initiative" guidance issued by the Service.
6. Notice 2009-66 provides guidance to facilitate automatic enrollment in SIMPLE IRA plans, including questions and answers relating to the inclusion in a SIMPLE IRA plan of an automatic contribution arrangement. This notice also requests comments on whether the Department of the Treasury and the Service should issue guidance regarding SIMPLE IRA plans that include eligible automatic contribution arrangements under § 414(w).
7. Notice 2009-67 provides a sample amendment that can be used by a sponsor of a SIMPLE IRA Plan described in § 408(p) of the Code to add an automatic contribution arrangement to the plan. Only SIMPLE IRA plans that use a designated financial institution described in § 408(p)(7) can use the sample amendment. Notice 2009-67 is companion guidance to Notice 2009-66 and is part of the "Savings Initiative" guidance issued by the Service.
8. Notice 2009-68 contains two safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan in order to satisfy § 402(f) of the Code. The first safe harbor explanation applies to a distribution not from a designated Roth account, as described in § 402A. The second safe harbor explanation applies to a distribution from a designated Roth account. These safe harbor explanations update the safe harbor explanations that were published in Notice 2002-3, 2002-1 C.B. 289, to reflect changes in the law. Notice 2009-68 is part of the "Savings Initiative" guidance issued by the Service.
Statement of Treasury Secretary Tim Geithner on the Administration’s New Retirement Security Initiatives
"Today, the Administration announced steps we are taking to make it easier for working families to save, particularly for retirement. Working Americans should be able to retire with dignity and security, but nearly half of the nation's workforce has little or nothing beyond Social Security benefits to get by on in old age. The measures we are announcing today will give more choices to families who want to save, and will complement the Administration's legislative proposals to expand retirement savings. Just as the Administration is dedicated to reviving the economy and getting people back to work, so too it is dedicated to helping put retirement security within the reach of all Americans."
Additionally, the IRS issued the following technical guidance.
2. Revenue Ruling 2009-30 provides guidance on how automatic enrollment in a § 401(k) plan can work when there is an escalator feature included. An escalator feature means that the amount of an employee’s compensation that is contributed to the plan, without the employee’s affirmative election, is increased periodically according to the terms of the plan. Two situations are described, one involves a basic automatic contribution arrangement and the other involves an eligible automatic contribution arrangement described in § 414(w) of the Code. Revenue Ruling 2009-30 is part of the "Savings Initiative" guidance issued by the Service.
3. Revenue Ruling 2009-31 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit annual contributions of an employee’s unused paid time off under the employer’s paid time off plan. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a contribution (including a section 401(k) contribution) or cash out of the unused paid time off, determined as of the end of the plan year (December 31). Rev. Rul. 2009-31 is companion guidance to Rev. Rul. 2009-32 and is part of the "Savings Initiative" guidance issued by the Service.
4. Revenue Ruling 2009-32 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit contributions for an employee’s accumulated and unused paid time off under the employer’s paid time off plan at a participant’s termination of employment. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a post-severance contribution (including a section 401(k) contribution) or cash out of the accumulated and unused paid time off. Rev. Rul. 2009-32 is companion guidance to Rev. Rul. 2009-31 and is part of the "Savings Initiative" guidance issued by the Service.
5. Notice 2009-65 provides two sample amendments that sponsors of § 401(k) plans can use to add automatic enrollment features to their plans. The first sample amendment can be used to add a basic automatic contribution arrangement with, if elected by an adopting employer, an escalation feature. The second sample amendment can be used to add an eligible automatic contribution arrangement ("EACA") as described in § 414(w) of the Code with, if elected by an adopting employer, an escalation feature. Final regulations under § 414(w) were published in the Federal Register on February 24, 2009 (74 F.R. 8200). Notice 2009-65, by providing sample amendments, facilitates the use of EACAs in § 401(k) plans. Notice 2009-65 is part of the "Savings Initiative" guidance issued by the Service.
6. Notice 2009-66 provides guidance to facilitate automatic enrollment in SIMPLE IRA plans, including questions and answers relating to the inclusion in a SIMPLE IRA plan of an automatic contribution arrangement. This notice also requests comments on whether the Department of the Treasury and the Service should issue guidance regarding SIMPLE IRA plans that include eligible automatic contribution arrangements under § 414(w).
7. Notice 2009-67 provides a sample amendment that can be used by a sponsor of a SIMPLE IRA Plan described in § 408(p) of the Code to add an automatic contribution arrangement to the plan. Only SIMPLE IRA plans that use a designated financial institution described in § 408(p)(7) can use the sample amendment. Notice 2009-67 is companion guidance to Notice 2009-66 and is part of the "Savings Initiative" guidance issued by the Service.
8. Notice 2009-68 contains two safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan in order to satisfy § 402(f) of the Code. The first safe harbor explanation applies to a distribution not from a designated Roth account, as described in § 402A. The second safe harbor explanation applies to a distribution from a designated Roth account. These safe harbor explanations update the safe harbor explanations that were published in Notice 2002-3, 2002-1 C.B. 289, to reflect changes in the law. Notice 2009-68 is part of the "Savings Initiative" guidance issued by the Service.
Tuesday, September 8, 2009
Earnings and Profits - Revenue Ruling 2009-25
Revenue Ruling 2009-25 holds that disallowed interest under § 264(a)(4) reduces earnings and profits for the taxable year in which the interest would have been allowable as a deduction, but for its disallowance under § 264(a)(4). It does not further reduce E&P when the death benefit is received under a life insurance contract.
Revenue Ruling 2009-25 will be in I.R.B. 2009-38, dated September 21, 2009.
Revenue Ruling 2009-25 will be in I.R.B. 2009-38, dated September 21, 2009.
Saturday, September 5, 2009
Ten Tips for Taxpayers Making Charitable Donations
IRS Summertime Tax Tip 2009-21
Every year, millions of taxpayers itemize their deductions on their federal tax return. One of the most common itemized deductions is a donation made to a charitable organization.
Here are the top ten things the IRS wants every taxpayer to know before deducting charitable donations.
1. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization and most will be able to tell you. You can also check IRS Publication 78, which lists most qualified organizations. IRS Publication 78 is available at IRS.gov.
2. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.
3. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
4. If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.
5. Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you must maintain a record of the contribution such as a bank record – including a cancelled check or a bank or credit card statement – a written record from the charity containing the date and amount of the contribution and the donor’s name, or a payroll deduction record.
6. Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your deduction would be $200.
7. Include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.
8. For any contribution of $250 or more, you must have written acknowledgment from the organization to substantiate your donation. This written proof must include the amount of cash and a description of any property you contributed, and whether the organization provided any goods or services in exchange for the gift.
9. To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.
10. An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.
For more information see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Every year, millions of taxpayers itemize their deductions on their federal tax return. One of the most common itemized deductions is a donation made to a charitable organization.
Here are the top ten things the IRS wants every taxpayer to know before deducting charitable donations.
1. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization and most will be able to tell you. You can also check IRS Publication 78, which lists most qualified organizations. IRS Publication 78 is available at IRS.gov.
2. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.
3. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
4. If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.
5. Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you must maintain a record of the contribution such as a bank record – including a cancelled check or a bank or credit card statement – a written record from the charity containing the date and amount of the contribution and the donor’s name, or a payroll deduction record.
6. Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your deduction would be $200.
7. Include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.
8. For any contribution of $250 or more, you must have written acknowledgment from the organization to substantiate your donation. This written proof must include the amount of cash and a description of any property you contributed, and whether the organization provided any goods or services in exchange for the gift.
9. To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.
10. An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.
For more information see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Keeping Good Records Reduces Stress at Tax Time
Although most people won’t be filing their tax returns for several months, the dog days of summer are actually a great time to start planning for the tax filing season by ensuring your records are organized. Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time with good records because they will help you remember transactions you made during the year.
Here are a few things the IRS wants you to know about recordkeeping.
Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.
Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:
• 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
You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:
• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records
If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:
• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks
For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Here are a few things the IRS wants you to know about recordkeeping.
Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.
Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:
• 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
You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:
• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records
If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:
• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks
For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Eight Things To Know If You Receive an IRS Notice
Every year, the IRS sends millions of letters and notices to taxpayers. Many taxpayers will receive this correspondence during the late summer and fall. Here are eight things every taxpayer should know about IRS notices – just in case one shows up in your mailbox.
1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.
8. It’s important that you keep copies of any correspondence with your records.
For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax for Individuals. Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.
8. It’s important that you keep copies of any correspondence with your records.
For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax for Individuals. Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Employee vs. Independent Contractor – Ten Tips for Business Owners
IRS Summertime Tax Tip 2009-20
If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.
Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.
1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
6. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.
7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
8. Workers can avoid higher tax bills and lost benefits if they know their proper status.
9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.
10. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).
If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.
Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.
1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
6. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.
7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
8. Workers can avoid higher tax bills and lost benefits if they know their proper status.
9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.
10. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).
When businesses should file Form 8300 for cash transactions
Generally, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file Form 8300.
Learn more about Form 8300 requirements on a webinar Sept. 16.
Go to http://cs.sbtv.com/irswebinarreg/ to sign up for the webinar.
Learn more about Form 8300 requirements on a webinar Sept. 16.
Go to http://cs.sbtv.com/irswebinarreg/ to sign up for the webinar.
COBRA Health Insurance Continuation Premium Subsidy
The American Recovery and Reinvestment Act (ARRA) of 2009 establishes an employer-provided subsidy for employees who involuntarily lose their jobs. The IRS issued a news release Feb. 26 outlining information for employers. Individuals who qualify for the COBRA subsidy premium should see below for more information.
Looking for information on HCTC? The Health Coverage Tax Credit (HCTC) is different from the COBRA Health Insurance Continuation Premium Subsidy. HCTC helps certain trade-affected workers, retirees and their families pay their health insurance premiums. A new law called the Trade Adjustment Assistance Health Coverage Improvement Act — part of the ARRA — resulted in changes to HCTC.
Information for Employers
Do you have questions on how to administer the COBRA continuation premium subsidy to former employees? These questions and answers may help.
Employers should use the updated Form 941, Employer's Quarterly Federal Tax Return, to report their COBRA premium assistance payments.
The Form 941 Instructions explain how to complete lines 12a and 12b, which address the COBRA premium assistance payments.
Additional information may be found in Notice 2009-27, Premium Assistance for COBRA Benefits.
Information for Employees or Former Employees
Workers who have lost their jobs may qualify for a 65 percent subsidy for COBRA continuation premiums for themselves and their families for up to nine months.
Eligible workers will have to pay 35 percent of the premium to their former employers.
To qualify, a worker must have been involuntarily separated between Sept. 1, 2008, and Dec. 31, 2009. Workers who lost their jobs between Sept. 1, 2008, and enactment, but failed to initially elect COBRA because it was unaffordable, get an additional 60 days to elect COBRA and receive the subsidy.
This subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy.
Still have questions? We may have your answers on our question and answer page.
More information on the COBRA subsidy is available from the U.S. Department of Labor.COBRA subsidy recipients who later become eligible for insurance coverage should notify their former employer to avoid a penalty
Individuals who have qualified and received the 65 percent subsidy for COBRA health insurance, due to involuntary termination from a prior job, should notify their former employer if they become eligible for other group health coverage.
The American Recovery and Reinvestment Act of 2009 provides a subsidy of 65 percent of the COBRA health insurance premium for employees who are involuntarily terminated from September 30, 2008, to December 31, 2009. The subsidy requires only 35 percent of the premium to be paid for COBRA coverage for individuals, and their families, who have involuntarily lost their job and do not have coverage available elsewhere. The IRS announced the subsidy in a February 26, 2009, information release, IR-2009-15.
If an individual becomes eligible for other group health coverage, they should notify their plan in writing that they are no longer eligible for the COBRA subsidy. The notice that the United States Department of Labor sent to the individual advising them of their right to subsidized COBRA continuation payments includes the form individuals should use to notify the plan that they are eligible for other group health plan coverage or Medicare.
If an individual continues to receive the subsidy after they are eligible for other group health coverage, such as coverage from a new job or Medicare eligibility, the individual may be subject to the new IRC § 6720C penalty of 110 percent of the subsidy provided after they became eligible for the new coverage.
Taxpayers who fail to notify their plan that they are no longer eligible for the COBRA subsidy may wish to self-report that they are subject to the penalty by calling the IRS toll-free at 800-829-1040. In addition, taxpayers will need to notify their plan that they are no longer eligible for the COBRA premium subsidy.
Anyone who suspects that someone may be receiving the subsidy after they become eligible for group coverage or Medicare may report this to the IRS by completing Form 3949-A, Information Referral (PDF).
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