ANDERSON & OLSZEWSKI CPAs, P.A. CERTIFIED PUBLIC ACCOUNTANTS

The importance of documentation for expenses and deductions claimed on your tax return (business or personal) is becoming more and more apparent as both formal (audit) and informal (discrepancy) notices are increasing.  We are hearing that the IRS and state agencies are ramping up for increased examination and enforcement of several areas of taxation which are frequently abused.

By now many of you have heard our horror story of a taxpayer who was audited by the IRS.  She had prepared her own return but hired us to represent her during the examination.  The IRS reduced or totally disallowed many of her deductions because she lacked appropriate documentation showing the amount and/or business purpose for the items claimed.  In particular, $ 1,700 was claimed as non-cash contributions.  The taxpayer had 2 receipts but did not have an itemization of the items donated.  The IRS allowed a deduction of only $ 2!

While being able to document all of your expenses is important we want to focus on a few areas which are under additional scrutiny:

  Donations:

• Cash (monetary) donations which are made by cash, check, debit or credit card are only  deductible if you have a receipt or acknowledgement from the organization or have a bank record of the payment. If you put a $ 20 bill in the donation plate at church each week you will NOT be able to deduct it on your tax return.
• For non-cash contributions we suggest you keep a description of the items given (i.e. 6 men’s shirts, 4 pairs of shoes, etc., not just “2 bags of clothes”).  You must also be able to justify how you arrived at the item’s value (i.e. what they would sell for at a thrift shop, not what they cost originally).  It is usually up to the taxpayer to assign the value to donated goods.  Goodwill Industry and the Salvation Army have lists of dollar values typically allowed for commonly donated clothing, household and furniture items.  It will save us time (and you money) if you compute the exact value you intend to claim for each such donation.

  Mileage/Auto Expenses:

• Many of our clients use a personal vehicle for business purposes. Any time expenses for a vehicle are deducted you must be able to substantiate how the amount was determined.  You should keep a log book detailing the business mileage and total mileage of the vehicle.  This is true whether you use the mileage rate or a percentage of actual operating costs (you must document how you arrived at the percentage).  Records must also be kept if you claim Medical mileage, Charity mileage or include mileage as part of Moving expenses.

  Meals and Entertainment:

• Companies and individuals are entitled to a partial deduction for business-related meals and entertainment expenses.  There are very specific rules for documenting the date, place and nature of the expense as well as who the participants were.  This is a common area of abuse and is often the first thing an agent may examine.  If you incur such expenses it is very important to keep contemporaneous records and receipts to support the deduction.

  Travel Expenses:

• There are a variety of ways travel expenses may be deducted but all require documentation to support where and when the expenses were incurred and how they relate to your business.

It is up to the taxpayer to keep records to support all expenses and deductions claimed on their tax return.   “Same as last year” and “As much as we are allowed” are NOT acceptable answers if asked to provide specific details for deductions.  Records must be created at the time the expenses are incurred, not when it is time to prepare your tax return or respond to a notice.

If you have questions or would like more information about free IRS publications which explain many types of deductions in more detail please contact our office.

Effective December 31, 2010 taxpayers may no longer deposit federal taxes (payroll and/or corporate taxes) at their bank.  One local bank has already stopped accepting federal tax payments.

If you are required to make tax payments throughout the year which do not accompany a tax return (i.e. quarterly corporate estimates, monthly or weekly 941 payroll tax deposits, periodic federal unemployment tax payments) you must sign up with EFTPS, the Electronic Federal Tax Payment System, and initiate your payments through them.  The payments will be drafted out of a specified bank account rather than being paid by check.  There is no fee for using EFTPS and we have had many clients using it for years with very few problems.

When you sign up you are assigned a PIN number (and an Internet password if applicable) and may then either call payments in using a touch-tone telephone or enter the payment information online via the EFTPS website.  You must initiate tax payments in advance to be withdrawn on a specific future date (i.e. you calculate your payroll today but don’t want the payment to be withdrawn from your account until next Wednesday, the due date for the payment).  You must always initiate payments at least one day before they are due. Each time you make a payment you will be given an acknowledgement number which will serve as your proof of the date and time you initiated that payment.  You must be sure to have sufficient funds in the specified account to cover the payment on the date you want the amount withdrawn, and be sure to deduct each payment from your checkbook balance (since you will no longer be writing a check).  Some clients have chosen to set up a separate bank account for tax payments but that is not required.

If you want more information about using EFTPS please visit their website at www.eftps.gov or call 1-800-555-4477.  If you will be calling your tax payments in by phone rather than using their website we have a “fill-in-the-blank” worksheet which you can use to organize your deposit information before you call and on which you may record the acknowledgement number you will be given at the end of each call.

*** We suggest you go ahead and get your EFTPS information set up now even if you do not start using it until later this year.  It takes a few days for the bank information to be verified and it may be a few weeks before your first payment can be made using EFTPS.

North Carolina Department of Revenue has a similar procedure for making tax payments if you would like to start remitting state taxes electronically.  Information regarding the state program can be found on their website at www.dor.state.nc.us/electronic/business.

If you have questions, please send us an email or call us at 919-383-5826.

Beginning with the 2009 tax year, corporations subject to corporate income tax will be required to pay a surtax of 3% on the amount of North Carolina income tax due, before applying any payments or tax credits.

S corporations filing composite income tax returns on behalf of shareholders living outside of North Carolina must calculate the amount of North Carolina income due separately for each nonresident shareholder. That calculation must include the amount of individual income surtax based on the Surtax Percentage Table for individuals with a filing status of single.

For example, Company YY, a C corporation, calculates its total North Carolina income tax liability to be $14,500 before deducting any applicable payments or tax credits. YY must then multiply $14,500 times 3% ($14,500 * .03 = $435) and add the resulting amount to the “regular” income tax liability ($14,500 + $435 = $14,935) to produce the total NC income tax liability of $14,935. YY may then subtract any applied payments, estimated payments and applicable tax credits to determine whether a refund is due or additional income tax is owed.

Please note that there is no penalty/interest for underpayment of estimated tax if the underpayment is because of the surtax.

Please be advised that effective Tuesday, September 1, 2009 the sales tax in North Carolina increases by 1%. In most counties the new rate will be 7.75% (with some counties increasing to 8 or 8.25%).

As you know, the combined rate is comprised of a state tax component and a county tax component. The 1% increase is all applied to the state rate making it 5.5%.

Special instructions for completing your September tax coupon: If you are a monthly sales tax filer you must use the following procedure for revising the amount of taxable sales to report on the form in order to arrive at the correct amount of tax to remit. This formula applies only to the state portion of the form, not the county portion.

Multiply the amount of taxable sales by 5.5% to arrive at the state portion of the tax.

Divide the result by .045 to arrive at a revised taxable sales amount.

Use this revised sales amount for the state tax line.

Use the actual sales amount for the county tax line.

Example:
Taxable sales in September = $ 10,000.00

Tax collected in September = $ 775.00

$ 10,000 times 5.5% = $ 550.00 divided by .045 = $ 12,222.22

State tax line on coupon $ 12,222.22 x 4.5% = $ 550.00

County tax line on coupon $ 10,000.00 x 2.25% = $ 225.00

If you are a quarterly tax filer follow the instructions provided by the state for separating the sales for July & August from the sales for September. The state will be mailing you a bulletin explaining the procedure but it may also be found online at:

http://www.dor.state.nc.us/taxes/sales/rate_increase2009.html

Once there, click on the first link titled “Important Notice: Sales and Use Tax Rate Change” and follow the instructions in Section II.

Additional changes to NC Sales Tax law are scheduled to take place in October of this year but they have not yet been finalized. Among the changes are a minor increase to the state rate and an identical decrease to the county rate (the same thing they did last year). The state is also defining additional items and services which will now be subject to sales tax.

If you have questions about the new sales tax rules, or any other tax matters, please send us an email or call us at 919-383-5826.