Just as we prepare to close the books on 2010, year-end tax time is upon us.
To that end, Lincoln Fajardo, of H&R Block, met with members of the Palmerton Area Chamber of Commerce recently to discuss the tax implications associated with the Small Business Jobs Act, and how it will affect people this year and next.
Fajardo shared four tax tips with the chamber that pertain to: the new 1099-K procedures; slow depreciation in slow times; Roth IRA conversions; and the tax gap starts with us.
With regard to the new 1099-K procedures, Fajardo explained that it's important for merchant credit card information to be correct and match what the Internal Revenue Service has on file.
Otherwise, he said merchant credit card providers will have no choice but to withhold 28-percent of a customer's total revenue.
As of January, merchant card providers will report monthly credit card revenues to the IRS, Fajardo said. In the event the account information doesn't match their records, the IRS will send the provider a "Notice B" to withhold 28-percent of revenue, he said.
Fajardo said the provider will then withhold and remit to the IRS 28-percent of that person's February revenue and monthly thereafter. The only way to recover the money would be on that person's 2011 tax return, he said.
As to why slow depreciation should be considered, Fajardo rationed that may accountants usually take the fastest depreciation method for equipment placed into service, such as Section 179 full write off or the 50-percent Bonus depreciation.
In these tough economic times, he said marginal tax brackets could be in the zero to 10 percent range, which means it makes more sense to stretch out the depreciation schedule for when the tax bracket is in the 25 to 35 percent range.
Because most tax pundits believe tax rates will also increase in future years, those who sell their equipment at a higher tax rate may ultimately have to pay more depreciation recapture than the original deduction, Fajardo said.
"The laws are written based on the assumption you're under the same tax bracket year after year," Fajardo said. "If you sell that piece of equipment, you could end up being in the higher tax bracket; it behooves you to look at this carefully."
As it relates to Roth IRA conversions, Fajardo said most taxpayers find that after careful analysis, the opportunity to convert a Traditional IRA into a Roth IRA doesn't add up for them because they have to pay too much tax now.
One possible benefit, he said, is to create a Roth account for grandchildren. But, Fajardo cautioned that a separate Roth account should be set up for each grandchild so that it may be willed explicitly to avoid estate taxes.
"Roth IRA's are good because they're tax free once you start taking out," he said. "The bad news is you have to pay; so, for most people, it doesn't make much sense."
As it pertains to the tax gap, Fajardo said that from random estimates, the IRS estimates a $345 billion underpayment of taxes, and that the main source of this is due to small business owners.
That they have increased audits of small businesses makes it essential to keep accurate records of business mileage, travel and meals, he said. It is also crucial to record what, when, who and the business purpose of the expense, Fajardo said.
Finally, Fajardo alluded to the Small Business Jobs Act. A federal law passed in September by Congress, the Act authorizes the creation of the Small Business Lending Fund Program administered by the Treasury Department to make capital investments in eligible institutions in order to increase the availability of credit for small businesses.
"Be very careful with your math," he said. "Be prepared to pay your taxes now, rather than later."
Fajardo told the chamber the federal 1040 tax forms are due by April 18.
Peter Kern, chamber president, said Fajardo's office is ready and able to assist residents with their taxes.
"I'm sure that once the year ends and people start to put together their taxes, that you are able to do that," Kern said.
Along with tax preparation, H&R Block provides year-round services to business owners such as bookkeeping, payroll and advice.
Fajardo's H&R Block office is located at 202 Delaware Avenue, Suite III, Palmerton.