We have a number of new clients who have been asking us this question, and you might be thinking, “Of course they are.” Actually, though, the tax treatment of website development costs — software, web page design, and consulting services — is complex. While certain costs may be deductible in the year incurred, others may have to be “capitalized” and deducted in increments over a multi-year period. To help in the analysis, businesses should be prepared to answer questions like these:
IRS Commissioner John Koskinen outlined the damage caused by an estimated $1.2 billion in cuts to the IRS’s budget since government-wide sequestration took place in 2013 during remarks delivered before the New York State Bar Association Section of Taxation on February 24. Among other problems, the budget has ensured that current staffing levels are insufficient to meet the IRS’s needs. As a result, Koskinen stressed that enforcement will suffer: 2014 audits for individual taxpayers dropped to their lowest level in a decade.
President Obama’s fiscal year 2016 revenue proposals were further defined by a senior Treasury official at the February 2nd press conference that took place shortly after the proposals’ official release. The 2016 proposals also aim to reform international taxation, particularly with respect to accumulated foreign earnings, simplify the tax system for small businesses, and enhance and streamline the myriad of education incentives available to middle-class individuals.
I recently got the following question from a small business owner: “Last year I paid $1,000 to someone to build my website. But his business is an LLC. I heard that I do not have to send a 1099-MISC form to a corporation.
Nope. He must send a 1099-MISC form to the software developer.
As you can see, the rules can be confusing – and sometimes far from clear cut.
So what to do? Well, here are the steps I go through with small business owners:
Step 1: The payment must be $600 or over per year for services, not goods, and it should be done in the course of your trade or business.
Example: Suppose you hire a contractor for $10,000 to remodel your house. In this case, there is no need to send out a 1099-MISC form because the work was for personal purposes. However, if it was to remodel your office, then you will need to send one out.
Step 2: Generally you do not have to report 1099-MISC forms to C Corporations and S Corporations. But there are some exceptions:
- Medical and health care payments (such as for pre-employment physicals)
- Fish purchases for cash
- Attorney’s fees
- Gross proceeds paid to an attorney (such as for legal settlements)
- Substitute payments in lieu of dividends or tax-exempt interest
- Payments by a federal executive agency for services
And what about an LLC? Well, you will need to send out a 1099-MISC form — regardless if the exceptions apply or not.
Step 3: The person who provides the service must not be an employee. Instead, he or she must be classified as an independent contractor. The bottom line: Do you have the right to control and direct how the work is done?
True, this can be fuzzy. So if you are not sure if a person is an independent contractor, you should seek out professional advice. Also keep in mind that 1099s should sent to the recipient by February 2, 2015.
The National Taxpayer Advocate Nina Olson is a strong and vocal advocate for taxpayer rights. Her annual report to Congress identifies a number of problems with the IRS implementation of the Affordable Care Act that will unnecessarily burden taxpayers.
Question – I retired last year, and started receiving Social Security payments. Do I have to pay taxes on my Social Security benefits?
As if the restaurant business was not hard enough, complying with IRS tip reporting rules is one of the most critical and important tasks facing restaurant owners! This is truer today than a decade ago as the IRS is accelerating its efforts to capture previously lost revenue in the form of income and FICA (Social Security & Medicare) tax.
As a restaurant owner you should therefore be aware of your responsibilities regarding the reporting of your employee’s tips. The IRS has long held the belief that certain employees have underreported tip income, and in the past the IRS has selectively targeted individuals employed in these areas. The IRS found that a large number of these individuals were not properly reporting tips and therefore owed significant taxes and penalties. The result has been sizable tax burdens for employees frequently not in a position to easily meet the burden.