The Upcoming Presidential Election and Taxes

As a business owner, I rarely discuss politics in most business situations.

However, the upcoming election and how it will impact the future of our tax code is one topic that requires a political discussion...

In the current state of the IRS Tax Code, there exists a unique situation that will provide a great deal of power to the sitting President in 2010. Currently, many areas of the code have built-in "Sunset Provisions" which mean that they are set to expire in 2010. Some areas that will be affected include:

Estate Tax
The "Marriage Penalty"
Retirement Plan Contributions
Tax Credits Relating to Children
College Tuition Credits/Deductions
Capital Gains Tax Rates
Various Other Items

With a democratic president in office come 2010, it is assumed that any current benefits set to expire in 2010 will either remain expired or be brought back on a smaller scale, providing less of a benefit. Similarly, any current taxes that are set to expire or reduce in 2010 will be reinstated and possibly even raised.

With a republican president in office come 2010, the opposite assumption holds true.

Whoever holds office in 2010 will have the unique opportunity to shape the future of the tax code. This is a very strong power that should be weighed heavily by voters when they decide who to pull the lever for in November.

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Gross Profit vs. Net Profit: A Common Mistake

One of the most common mistakes that I see small business owners make when discussing profit is failing to accurately differentiate "gross profit" from "net profit."

Gross profit is equal to your revenue minus your cost of goods sold (or cost of sales).

Net profit is equal to your revenue minus ALL expenses.

Turn to Virgin founder and Chairman Richard Branson for a simple mnemonic to help you remember the difference, "Pretend you're fishing. Net is all the fish in your net at the end of the year. Gross is that plus everything that got away." This is the advice that was given to him by one of his Virgin boardmembers after he consistently made this mistake early on in his career...he considers it the best financial advice he ever received.

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Don’t Let Your “On the Side” Accountant Get You Audited

Accounting is a field filled with many accountants who prepare tax returns “on the side” or have a “side business” in addition to their full-time job. While this presents many problems with communication, audit representation, availability, etc., perhaps the biggest problem is the additional audit risk that the clients who use these types of tax preparers face.

Since many of these accountants are looking to make some extra money without any overhead, they have a tendency to share software with other accountants or steal software from the company they work for. When this happens, you can pretty much count on the fact that the “Paid Preparer’s Information” section of your tax return will either be left blank altogether, have “Unpaid Preparer” checked off, or have “Self-Prepared” checked off.

When any of the above items appear in the Paid Preparer Information section of a tax return, the audit risk of that tax return skyrockets. This is looked at the same as if a CPA prepared a return and does not stand by it enough to feel comfortable signing it.

Although it could be a perfectly innocent case of your tax preparer trying to save a few bucks on tax preparation software, the IRS will not know this until you tell them during your audit!

Additionally, the IRS is currently working on a piece of detection software that will identify quarterly payroll tax returns that are not signed by the preparer. Once in place, this system will be used to identify preparers who have a tendency not to sign their clients’ payroll tax returns and subject these clients to higher-than-normal audit risks.

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When Your Partner Should Also Be Your Business Partner

There has been a lot of hype over the past couple of years surrounding a new piece of legislation that allows a husband and wife who operate a business together to forego filing a Partnership return in favor of filing a Schedule C on their joint tax return.

The argument for this is that the accounting fees will typically be $200-300 less each year and the couple wouldn’t have to go through the hassle of signing & mailing in their tax return.

However, the downside is that audit risk will jump from .3% to 2.7%, leaving your business nine times more likely to be pulled for a random IRS audit!

The best options for any husband and wife business partners would be to establish an S-Corporation or an LLC. The second best option would be to remain a Partnership and continue to file a separate Partnership tax return. The worst option would be to "take advantage" of this legislation and file a Schedule C.

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Tax Relief for Heroes

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax Act into law. This law provides various tax breaks for military personnel and their families. Here is a summary of the key benefits:

Penalty-Free Withdrawals
Reservists who get called into active duty will be allowed to withdraw funds from their retirement plans such as IRAs, 401(k)s, and 403(b)s without having to pay the standard 10% penalty. Note, these withdrawals will still be taxed as income, it is only the actual 10% penalty that is being waived.

Tax-Free Rollovers
Military death benefits and military insurance proceeds may be rolled over into ROTH IRAs or Coverdell Education Savings Accounts (ESAs) tax-free without regard to the standard limits/restrictions.

Economic Stimulus Payments
As long as one spouse is a member of the military, the couple will qualify to receive an economic stimulus rebate check.

Earned Income Credit
Non-taxable combat pay will be treated as earned income when calculating the Earned Income Credit.

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