Tax Guru-Ker$tetter Letter
Wednesday, January 30, 2002
Which Version of QuickBooks Is Appropriate?
There is a lot of confusion regarding the many flavors of QuickBooks Intuit is offering for the 2002 incarnation.
There have long been the Pro and Basic versions. This year, they have added the Premier and Accountant's versions. Both are much more expensive than the Basic and Pro.
For almost everyone, the Basic program is all that is needed. I have yet to see a big benefit for the Pro unless you are a contractor and want to prepare estimates through QuickBooks.
The issue of the remote access feature is tricky. If you look at the Intuit side by side comparison of the different versions of the 2002 program, it looks like only the Premier version has that capability. This is only partially true.
To do a remote access of the QB program, there are two persons involved and connecting over the web. The person who will be taking over the other person's QB program (normally the Accountant) does need to have the Premier version of QB 2002, while the person being controlled (normally the Client), can have any 2002 version of QB, even the Basic.
So if you are looking to buy the 2002 QuickBooks program and your use of the Remote access feature will most likely be with your Accountant taking over your computer to show you something, you can get by with the very inexpensive Basic version. If you will be using it to control the QB programs of other people, you will need to get the Premier version, which costs about four times as much.
Monday, January 28, 2002
Phony Black Tax Credits
For a number of years, I have been debunking the urban myth floating around about the supposed black tax credit of $40,000. This question comes up at least once a week on the tax question boards that I monitor.
Finally, IRS has succeeded in prosecuting one of the promoters of this scam, sending a Texas man to prison for 78 months. He is also required to reimburse the government for the $1.2 million of bogus credits that it accidentally paid out.
Maybe I have a twisted perspective on this; but I think it's ludicrous that IRS personnel are so sloppy that they would actually pay out over a million dollars in completely bogus tax refunds. Have a digit wrong in a Social Security number and IRS dings you. Claim an imaginary $40,000 tax credit on a form that has nothing to do with you, and IRS cuts you a check. Missing the big picture?
This time of year, the issue of preparing and receiving 1099s always creates a lot of confusion. I routinely see mistakes made that cause huge problems later; so I am passing on some key issues to keep everything straight.
Purpose of 1099s
In the USA, we have an income tax system based on self-assessment. It is not, as some tax protestors claim, a voluntary tax system. This means that each person is expected to report his/her income & expenses on a tax return that they or their hired professional prepare. Because not everyone reports fully the amount of income they have received, our rulers in Washington devised an informant system using W-2 and 1099 information reports. The one thing that IRS computers are very efficient at is matching up these forms with the amounts of income reported on the 1040s. If someone has failed to properly self-assess, by either not filing a tax return at all or by omitting an item of income, IRS will do the assessing of taxes, penalties and interest. When IRS does this assessment, they will assume that all income was 100% pure profit, with no expenses or deductions. I constantly have to remind people that filing a tax return is a self defense measure, especially when you had more expenses than income.
Contrary to popular belief, the fact that no W-2 or 1099 was submitted to IRS does not make the income tax free. That is a very dangerous argument to use and will hold no water in an IRS audit. Each person is required to report every dollar of income received, whether or not the payors submitted information on that to IRS. The first thing that any IRS auditor asks for is copies of all bank statements. The auditor than assumes every dime of money deposited is taxable income,unless you can prove otherwise. The auditor couldn't care less that any of the deposits weren't reported on 1099s.
Payments to unincorporated individuals of more than $600 total for services during the past calendar year are required to be reported to IRS if you are claiming business deductions for those payments. Payments for products are not required to be reported. When a contractor doesn't break out the costs for labor versus materials, you should err on the high side and report the full amount paid.
Payments to corporations are not required to be reported to IRS because many corporations have a different tax year than the calendar year on which 1099s are based. There are exceptions for business payments made to corporations for legal and medical services. IRS requires this because their studies have shown that - shocking as it may seem - some incorporated doctors and attorneys don't voluntarily report all of the income they receive and IRS needs the 1099s to assist enforcement.
As most people know, payers are required to give copies of 1099s to the payees by January 31. However, there is no penalty in the law for not meeting this deadline.
There is a small penalty for not meeting the other 1099 deadline, which is to send them in to IRS (and your State if applicable) by February 28.
A big mistake most people make is to send the payees and the IRS their copies of the 1099s all at the same time, in January. This ends up causing very big problems if there is an error, especially when the amounts are overstated. What then happens is that a corrected 1099 is sent to IRS, with the tiny "Corrected" box marked. The problem is that IRS computers almost never see that box. Instead they see two 1099s and expect the payee to report the amounts on both.
To avoid this problem, it has always been my practice to send the payees their copies of the 1099s in January along with a note to let me know if there are any errors by the middle of February. If there are any errors, it is a lot more efficient to correct the original form before sending it in to IRS. If the payees don't discover the errors until after the end of February, when the IRS copies have already been mailed, that is their problem to straighten things out.
Double Check Amounts
A big mistake is to just assume that the amounts on the 1099s are correct. That is just plain foolish. You should always be keeping track of the income you received during the year and you should compare it to the 1099 amounts. It is very common for payments made in January 2002 to be accidentally included in the 2001 total. It is also common for someone else's payments to be included in your total, especially if there are other workers with similar names.
No Excuse For Late 1040
As is well known, I have always been a big fan of filing tax returns well after the normal April 15 due date, for several reasons (including a special one this year). However, none of those reasons includes not receiving a 1099 from a payor. Your records should be good enough to show how much you received and that is the amount you should report on your 1040. Whether or not you ever receive a 1099 is irrelevant. However, if one does finally arrive and it is too high, you should demand that it be corrected. Too low of an amount won't cause any problems because IRS only looks for under-reported income. They are glad when you report higher amounts than are shown on 1099s.
Unlike W-2s, 1099 forms are not required to be attached to 1040s; so that is no justification for delays.
Sunday, January 27, 2002
Another Reason To Avoid LLCs
Another Reason To Avoid LLCs
As I've explained several times earlier, the current fad for business entities is the LLC (Limited Liability Company), which is treated basically the same as an S corp for tax purposes. Almost every day, on the AskMe.com question boards I review, there is some idiot who set up an LLC because he heard it was the cool thing to do and now wants to know how it works. I am constantly referring people to my page on the differences between S & C corps, which applies to LLCs as well.
Those issues are still as relevant as ever. Another one is the fact that some jurisdictions (states) are charging extra taxes on LLCs. The People's Republic of California (PRC), for example, charges $800 per year plus an additional tax (currently up to $9,377) based on the company's gross (not net) income. I just finished preparing an LLC return where there was a net loss of over $80,000. There was obviously no Federal tax because IRS only taxes the net income. However, because the gross sales were over a million dollars, the PRC tax was $7,051.
This is another reason why I have never liked the idea of reporting expense reimbursements as income on tax returns. Most cities also assess their business taxes based on gross revenues. Showing the reimbursements as negative amounts in the expense section avoids overly inflating the revenues, and thus minimizing any taxes & fees based on them.
Why would there be such a tax on LLCs? This is not a theory, but fact based on personal meetings with some of the PRC rulers in Sacramento. They have a mindset that anyone who owns an LLC or an S corp is filthy rich and can afford to pay any taxes they decide to levy. I can still remember Johan Klehs, an Assemblyman from Hayward answering our question as to why they were charging S corps an extra tax. "Because they can afford it" was his exact quote. I have heard that from several other politicians in the PRC and even here in the Arkansas Ledge in Little Rock.
With California's current budget crisis, with a projected deficit of at least $4 billion, you can expect the taxes on LLCs and S corps to be a very enticing target for increase. It was for this very reason, the control of the State by high taxers, that I decided to leave the PRC after 38 years there.
Saturday, January 26, 2002
Extra IRS Extensions
In a typical example of the right hand not knowing what the left hand is doing, different parts of the IRS don't communicate with each other. This is standard operating procedure for big government bureaucracies and has long ago ceased to be considered news when it concerns IRS.
Before October 15, when the normal second extension for 2000 1040s was set to expire, I sent IRS several additional extension requests for those tax returns, specifying a new due date of February 12, 2002 based on IRS's own Notice 2001-61 issued last October.
Some have been granted by IRS and some have been returned by IRS as denied, claiming that six months is the longest extension allowed by law. In typical IRS fashion, there has been no consistency in which Service Centers respond in which manner. It seems that some of the people opening the mail at the Service Centers didn't get the word about the September 11 terrorist attacks and the official IRS position of giving all affected parties until 2/12/02 to submit their 2000 income tax returns without penalty.
If this happens to you, it's no cause for alarm. First, no penalty will even be proposed if there is no tax due with the return. Second, if IRS does try to charge late penalties, more informed personnel will straighten matters out. I have already resolved some such cases with the Austin & Memphis Service Centers.
Wednesday, January 09, 2002
As I have mentioned, there are several new features in the 2002 version of QuickBooks that should entice more people to upgrade. One such new feature is the ability to export & import report templates. While QuickBooks does come with a huge assortment of preformatted reports, there are often times when custom ones are much more useful. I will be posting some of the most useful ones I have developed on my website in the next few weeks.
Intuit has set up its own site for templates that it and others have posted. They even give you the choice of signing up for automatic notification of additions.
Monday, January 07, 2002
Satellite Internet Is Working
We had a lot of snow on Sunday and most of it was still on the ground Monday morning; so I was really expecting the installer from Little Rock to call and reschedule his trip up to our ranch. Much to our surprise, he pulled up in front of my office at 12:30 and we promptly got to work installing everything. I can really understand why the satellite companies no longer allow do it yourself installations. It was very complicated, especially calibrating the dish for the strongest signals.
I had been told that the system didn't support Windows XP and was thus planning to install the satellite connection on my old box running Windows ME and then network it to all of the other computers in the house. The installer said that he has set up several on XP machines; so that's where we started.
Jason, the installer from Broadway Satellite did an excellent job mounting the satellite dish on the wall outside of my office, drilling a hole through the logs & wall for the cables and setting everything up. The speed we registered right off the bat was phenomenal compared to what we have been used to. He warned me that the first hour would be slow because the main office would be tweaking the settings for our account. I didn't mind a bit, because a download speed of 335kb was a huge improvement over the normal 31.6kb speeds we usually have on our dialups. Jason used two websites to check the speeds, this one and this one. Very handy.
As luck would have it, I started having problems keeping the connection alive on my XP system shortly after Jason left. Wisely, he had connected a very long set of cables and I was able to move the transmitter & receiver boxes over to my ME machine. After a few hours monkeying with the Internet sharing settings on both the ME & XP, I finally have it working simultaneously on both. Tomorrow, I will add Sherry's XP machine to the mix and we'll get a chance to see how it functions with two users online at the same time.
The number of email accounts has grown even more. Earthlink gave us nine accounts with that signup last week, and now DirecPC gave us five more. Add those to the 20 accounts we have for each of our two main web sites, and we should never run out of email accounts.
Sunday, January 06, 2002
QuickBooks Remote Access
I've finally had the chance to use the feature I had most eagerly anticipated in QuickBooks 2002, Remote Access, with a real client. For years, I had been hoping for such a feature, which would allow me to actually work with a client's QB program from the comfort of my mountain-top office. In the old days, I would have to physically drive out to a client's location to do the set-up work.
My verdict, after spending 75 minutes online & on the phone with the client in Texas? I was very impressed. It worked very well. The actual service is handled through WebEx in coordination with Intuit. The only drawback I encountered was the long lag-time between when I would click on something, it would go to the client's computer & then back to me. It made scrolling & selecting a little tricky. I'm sure this is due to the very slow dial-up Internet service we have. I'm optimistic that the new two-way satellite service that is to be installed in our main house tomorrow (with 400KB download speed) will dramatically decrease the lag.
I will be providing more tips on the Remote Access and other features of QuickBooks 2002 over the next months. To dispel one misconception about the Remote Access, it doesn't open up one's computer to uncontrolled acccess from outsiders. The other party (client) has to be online and has to manually accept the request from the Accountant to work with the QuickBooks program. The QuickBooks program is the only program that can be accessed.