Retirement Plan and IRA Rollover Advice

When moving your retirement money to an IRA, you should follow this one rule of thumb.

If you fail to follow the rule I’m about to reveal, you can face two big problems.

• First, your check will be shorted by 20 percent.
• Second, you will be on the search for replacement money.

Here is this very important rule of thumb that you need to follow: Move the money using a trustee-to-trustee transfer. Nothing else.

There are two types of transfers that can be used to move qualified plan distributions into IRAs in a tax-free manner: (1) direct (trustee-to-trustee) rollovers and (2) what we will call traditional rollovers.

If you want to do a totally tax-free rollover, do nothing other than the direct (trustee-to-trustee) rollover of your qualified retirement plan distribution into the rollover IRA.

This is easy to do. Simply instruct the qualified plan trustee or administrator to (1) make a wire transfer into your rollover IRA or (2) cut a check payable to the trustee of your rollover IRA (this option is less preferable than a wire transfer).

Your employee benefits department should have all the forms necessary to arrange for a direct rollover.

If you want to discuss the trustee-to-trustee rollover with me, please don’t hesitate to call me on my direct line at (805) 264-3305.

Robert W Craig, EA Tax Services

P.S. Also use the trustee-to-trustee rollover when moving your IRA to another IRA.

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Tax Traps to Avoid in Retirement

Tax Traps to Avoid in Retirement
By Charles Sherry, M.Sc.

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”

It’s a quote that comes down to us from Benjamin Franklin, who uttered the phrase in 1789.

Taxes–federal, state, local, sales tax, property tax, gasoline tax, payroll tax, tolls, fees, taxes on capital gains, dividends and interest, gift tax, inheritance tax, and cigarettes and alcohol. There has even been a rising chorus that is calling for a special tax on junk food.

Yes, Ben Franklin nailed it. We can’t escape taxes. Before we jump in, let me say that this is a high-level summary. It’s designed to educate and avert surprises. Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam. But preparation can reduce the tax bite and eliminate unexpected surprises.

As I always emphasize, feel free to reach out to me with specific questions, or consult with your tax advisor.

That said, let’s get started.

1. Estimated quarterly tax payments may be required.

If you have never been self-employed, you are accustomed to having federal, state (if your state has an income tax), and payroll taxes withheld from each paycheck.

When you stop working, there are no more W-4s to complete and no one is withholding taxes for you. But that doesn’t absolve you of your year-end tax liability.

You can make estimated payments each quarter. You can also have taxes withheld from your pension, social security, or IRA distribution.

If you have yet to file for social security, you may choose to have Social Security withhold 7%, 10%, 12% or 22% of your monthly benefit for taxes. Or you may decide not to have anything withheld.

But make sure enough is withheld or your estimated quarterly payments are sufficient. Otherwise, you may face a penalty.

Does it sound complicated? You don’t have to go it alone. Tax planning is a part of retirement income planning. If you have any concerns or questions, please reach out to me.

Check out this IRS link:

Link to IRS Withholding Calculator:

2. Social security may be taxed.

If you file as an individual and your combined income (adjusted gross income?+ nontaxable interest?+?half of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.

If the total is more than $34,000, up to 85% of your benefits may be taxable. Additionally, 13 states–Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia–tax Social Security.

3. Beware of the required minimum distributions for retirement accounts.

Let me put this right up front: failure to take the required distribution could subject you to a steep penalty.

Required minimum distributions (RMDs) are minimum amounts that retirement plan account owners must withdraw annually starting with the year they reach 70½ years of age or, if later, the year in which they retire.

However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, RMDs must begin once the account holder is 70½, regardless of whether he or she is retired (IRS: Retirement Plan and IRA Required Minimum Distributions FAQs).

RMDs are not required for Roth IRA owners.

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.

The RMD rules also apply to SEP IRAs and Simple IRAs, 401(k), profit-sharing, 403(b), 457(b), profit sharing plans, and other defined contribution plans.

If you expect to have large RMDs that could push you into a higher tax bracket, it may be beneficial to begin taking distributions prior to 70½. Or, you could convert some of your IRA into a Roth, which will help shelter gains and future distributions from taxes. You pay a tax upfront, but it’s one strategy that can help minimize taxes long-term.

4. The hidden cost of selling your primary residence.

Downsizing can generate cash and reduce your daily expenses. But beware that it may also trigger a tax liability.

If you’ve lived in your primary residence for at least two of the last five years prior to selling, you can exempt up to $250,000 of the profit from taxes if you are single and up to $500,000 if you are married. If you are widowed, you may still qualify for the $500,000 exemption (IRS: Publication 523 (2017), Selling Your Home).

The sale may also trigger the 3.8% tax on investment income. It’s a complex calculation that can ensnare single filers who have net investment income and modified adjusted gross income above $200,000 and $250,000 for married filers. (IRS: Questions and Answers on the Net Investment Income Tax).

The decision to sell shouldn’t be strictly governed by the tax code. However, it’s important to understand the tax ramifications. Timing income streams might be beneficial if a sale will trigger a taxable event.

There are other methods to lower your taxes, including charitable donations. How we structure retirement income, your investments, and distributions from retirement accounts can help to reduce the tax burden. If you need assistance on any of the points I’ve shared, we are happy to assist. Please email me at or call me at (805) 264-3305 and we can talk.


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2018 New IRS Withholding Calculator and Article

The new tax law could affect how much tax someone should have their employer withhold from their paycheck. To help with this, the IRS urged taxpayers to visit the Withholding Calculator on The Withholding Calculator can help prevent employees from having too little or too much tax withheld from their paycheck. Having too little tax withheld can mean an unexpected tax bill or potentially a penalty at tax time in 2019. And with the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks. Please click this link which will take you to the IRS website with information on the new tax law and how it affects your paycheck:

If you have questions please feel free to contact me.

Robert W Craig, EA Tax Services

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Proving Travel Expenses After Tax Reform 2018

As you likely know by now, your travel meals continue under tax reform as tax-deductible meals subject to the 50 percent cut.

And tax reform did not change the rules that apply to your other travel expense deductions.

One beauty of being in business for yourself is the ability to pick your travel destinations and also deduct your travel expenses. For example, you can travel to exotic locations using the seven-day travel rule and/or attend conventions and seminars in boondoggle areas.

From these examples, you can understand why the IRS might want to see proof of your business purpose for any trips, should it examine them.

With deductions for lodging, a meal, or other travel expenses, the rules governing receipts, business reasons, and canceled checks are the same for corporations, proprietorships, individuals, and employees. The entity claiming the tax deduction must keep timely records that prove the four elements listed below:

1. Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
2. Time. Your dates of departure and return, and the number of days on business.
3. Place. Your travel destination described by city or town.
4. Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.

When in tax-deductible travel status, you need a receipt, a paid bill, or similar documentary evidence to prove:

• every expenditure for lodging, and
• every other travel expenditure of $75 or more, except transportation, for which no receipt is required if one is not readily available. I suggest saving ALL receipts regardless of amount.

The receipt you need is a document that establishes the amount, date, place, and essential character of the expenditure.

Hotel example. A hotel receipt is sufficient to support expenditures for business travel if the receipt contains:

• the name of the hotel,
• the location of the hotel,
• the date, and
• separate amounts for charges such as lodging, meals, and telephone.

Restaurant example. A restaurant receipt is sufficient to support an expenditure for a business meal if it contains the:

• name and location of the restaurant,
• date and amount of the expenditure, and
• number of people served, plus an indication of any charges for an item other than meals and beverages, if such charges were made.

You can’t simply use your credit card statement as a receipt. Like a canceled check, it proves only that you paid the money, not what you purchased. To prove the travel expenditure, you need both the receipt (proof of purchase) and the canceled check or credit card statement (proof of payment).

In a nutshell, a travel expense is an expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here are some examples from the IRS:

• Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
• Costs of traveling by ship (subject to the luxury water travel rules and cruise ship rules)
• Costs of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals
• Costs for baggage and shipping of business items needed at your travel destination
• Costs for lodging and meals (meal costs include tips to waiters and waitresses)
• Costs for dry cleaning and laundry
• Costs for telephone, computer, Internet, fax, and other communication devices needed for business
• Tips to bellmen, maids, skycaps, and others

The travel deduction rules are the same whether you operate your business as a corporation or a proprietorship, with one important exception. When you operate as a corporation during the tax years 2018 through 2025, you must either:

• have the corporation reimburse you for the expenses, or
• have the corporation pay the expenses.

If you would like my help in planning the business and personal parts of your next trip, please don’t hesitate to call me.

Robert W Craig, EA Tax Services (805) 264-3305

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2018 Client Business Meals Update

Here’s the updated strategy on deducting business meals with your clients or customers: deduct your client and business meals as if tax reform never took place. At first glance it appeared that the new tax law that went into effect on January 1, 2018 would disallow business meal deductions along with entertainment. Looking deeper it appears that was not their intent.

Wow. Is this aggressive? Not if:
• the IRS comes out with regulations that follow a model set by the American Institute of CPAs, or
• the Joint Committee on Taxation in its explanation of the Tax Cuts and Jobs Act (TCJA) states that client and business meals continue as deductions, or
• lawmakers enact a new tax code section that authorizes client and business meal deductions.

How big is the “if” in the if? We have some insights that say business meals will be deductible for all of 2018. Of course, nothing is certain except the current uncertainty.

Let’s put it this way: if you do what you need to do to deduct the meals, then you are in a position to claim the business meals deduction when one of the above happens. So, make sure you have your 2018 business meals documented as follows:

• The name of the person you had the meal with.
• The name of the restaurant where you had the meal.
• A short description of the business discussed.
• If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people at the table, and itemized list of food and drink consumed.

If you want to discuss the business meals deduction with me, don’t hesitate to call.

Note that meals associated with customer or client entertainment (eg, eating while at the theater or baseball game) are NOT deductible due to the new tax law in 2018. Business deductions for entertainment are gone-period.

Bob (805) 264-3305

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The Unpardonable Sin in an IRS/FTB Audit

Mileage Log Required for Vehicle Tax Deductions

When it comes to your tax records, there’s one record that you really must keep, and it’s easily overlooked. It’s the mileage log. In an IRS audit, the mileage log often creates the first impression of your tax records, and not having a good log is the biggest unpardonable sin of an IRS/FTB audit. Whether you use the IRS mileage rate method or the actual expense method, you need a written record that proves your business percentage of use.

  Various records can be used, but the IRS three-month sampling record is the preferred choice for those who know about it. With this method, you keep a mileage log for three months and then apply that three-month business percentage to either the miles you drove for the year (mileage method), or the expenses you incurred for the year (actual expense method).

  The three months must be consecutive and must represent your driving pattern. Otherwise you must keep the mileage log for the entire year.

  Technology & APP’s: With respect to keeping your mileage log, technology has made your job a lot easier. You can find very affordable apps that work with your smartphone, such as Mileage Expense Log, Mile IQ, and Trip Log. These apps track where you go and where you stop, and that takes away a big part of the record-keeping hassle. Make sure you also add the business reason for the stops. This takes a few minutes, but it’s critical. Don’t skip this step.

  If you would like an example of what a mileage log should look like, feel free to contact Bob at (805) 264-3305.

Robert W Craig, EA Tax Services
431 2nd Street, Suite 3
Solvang, CA 93463

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Tax Deductions – Travel, Meals & Entertainment

Travel, Meals and Entertainment Expenses

Commuting Expenses.  To open this section I want to be sure we understand that, in general, the costs of commuting between a taxpayers home and work location are nondeductible commuting expenses.  But under certain circumstances these commuting expenses can be deductible if:

1)      The expense is for going between the taxpayers home and a temporary work location outside the metropolitan area where the taxpayer lives and normally works.

2)      The taxpayer has one or more regular work locations away from home and the expenses are for going between home and a temporary work location in the same trade or business, regardless or distance or

3)      The taxpayers home is the taxpayers principal place of business, and the expenses are for going between home and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance.

A temporary work location means a job or contract that is expected to last, and actually does last for one year or less.

What we strive for is to make as much vehicle mileage deductible as possible.  Learn the commuting rules above.  Mileage around town in the course of your business is generally deductible.  Having a home office really helps as your business miles are determined as you drive away from your home.

If you do not qualify for a home office, your miles to your business are nondeductible commuting miles, but all the rest of the miles you drive for business are deductible.  If you do not go into the office, the miles to your first client or job is commuting, then miles from job 1 to job 2 to job 3 and back and so on are deductible, and the miles from the last job or client is nondeductible commuting.  These are very important concepts as by knowing them you can design your day to optimize deductible miles.

Tax Commandment – Keep A Mileage Log!!!  More on this later.

Travel Away From Home.  Expenses for transportation, meals and lodging are deductible for business travel away from the taxpayer’s tax home.  The term ‘tax home’ includes the entire city or general area where the taxpayer regularly conducts business.  The tax home is determined without regard to where the taxpayer’s family home is located.  Actually, a husband and wife can have different tax homes if each works in a different area.  The ‘tax home’ concept is important to understand.

I recall a client who lived in Solvang who took a job in Los Angeles, so he had to drive there every week.  Many times he’d get a motel and stay and drive back on weekends.  This was a permanent position (not temporary).  He wanted to deduct his miles back and forth as well as his lodging.  No dice.  He doesn’t qualify for any of the commuting exceptions above.  The IRS says it is his choice to work so far away from his job.  His tax home is in LA where he works, therefore, no deduction.

There are a number of special rules on tax home such as for; transients, airline pilots, military, etc.

To deduct travel expenses one must meet the ‘overnight rule.’  You must be away from your tax home longer than an ordinary work day, and must be away long enough that you cannot reasonably expect to complete the trip without sufficient sleep or rest.  And the rest period must be of sufficient duration that is necessary to secure lodging.  A cat nap at a rest stop is not sufficient rest for this purpose.

Once you meet the requirements, you can deduct ordinary and necessary reasonable costs of; transportation, bus, taxi, baggage, vehicle, lodging and meals, dry cleaning, telephone, tips, internet access, computer rental fees, etc.

Special rules apply when business travel is mixed with personal travel.  When a trip is made:

  • Entirely for business – all travel expenses are deductible.
  • Primarily for business – facts and circumstances must be looked at but usually the transportation is deductible for taxpayers cost (not spouse or children unless they are employees and an integral part of the business).  Same with meals, hotel, etc.
  • Primarily for personal reasons – The entire cost of the trip is nondeductible however, any direct business related expenses incurred at the location are deductible.

  Special rules are there for luxury water travel, conventions in North America, conventions outside of North America, cruise ship conventions, travel outside of the United States and the like.

Meals and entertainment.  The cost of entertaining a client, customer or employee can qualify as an ordinary and necessary business expense.  Entertainment activities can include the cost of meals (food, beverage, tax, tip).  Entertainment can be provided at facilities such as nightclubs, social clubs, sports facilities or theaters, or on hunting, fishing, vacation and similar trips.  However, a deduction is generally not allowed for the cost of renting or owning an entertainment facility such as for country club dues.

To qualify for a deduction, the entertainment expenses must be directly related to or associated with the active conduct of a trade or business, or for the production or collection of income.

Directly related:  The taxpayer must show that the main purpose of the event was business, engaged in business with a person or persons during a meal or entertainment activity and have more than a general expectation of receiving income or some other specific business benefit in the future.

Associated with:  The taxpayer provides entertainment or a meal directly before or after a substantial business discussion. The taxpayer must actively engage in a meeting, discussion or other business transaction to obtain income or some other specific business benefit.  It is not necessary that the taxpayer devote more time to business than to entertainment.

Note: Meals with business associates and coworkers are generally not deductible unless that taxpayer can establish a clear business purpose.

Lavish or extravagant:  Expenses are not allowed for entertainment that is lavish or extravagant (remember the ordinary and necessary discussion).  Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs or resorts. However, the expenses must be reasonable considering the facts and circumstances.

50% Deduction Limitation:  Per the IRS Code, expenses for meals and entertainment are only allowed at 50% (unless subject to Department of Transportation rules, then they’re 80% deductible).  So if you entertain a client or deduct meals while on business travel and spend $500, your deduction is only $250.

Record Keeping Requirements

  Most of us do not like the record keeping part of the tax system, but it is critical to your tax health.  It’s also important to your business health, as good records help you monitor and improve your business.  You can only control what you measure and, without good records, it’s hard to measure.

You simply cannot depend on the begging the IRS for mercy when it comes to your records.  Getting your tax records right is not difficult when you know what to do, set up a system to do it, and form the habit of doing what the system requires. 

What do you think is the unpardonable sin in an IRS audit?  If you said, lousy records you win the prize.  I’ve been in IRS audits with good records and bad, and believe me, good records saved the client taxes and, it saved the client fees for me to represent them in the audit.  Of course, bad records did just the opposite, but you already knew that.

Here are some guidelines to follow:

Set up separate business checking accounts.  Do not comingle with personal funds, or funds of separate businesses.  Deposit receipts only in the account that earns the money.

Record deductible expenses daily.  Okay, weekly is fine.  The longer things sit, the harder it is it seems to get it in, and the harder it might be to remember what it is for.

  Keep mileage logs.  To deduct your vehicle expenses, you need proof of business use.  This is true whether you operate as a sole proprietor, partnership, corporation, LLC or anything else.  If you are an employee of your corporation, you must submit business use substantiation to your corporation.  Partners reimbursements should be set up the same.

A great way to track your business mileage is in your appointment book so it reflects your business activity each day.  Further, the appointment book facilitates the use of a sampling method that allows you use a three month log to prove business use for the year if your mileage is fairly repetitive. 

Use a separate log for each vehicle and for each business or rental property if applicable.

If you don’t use an appointment book, there are special auto mileage logs you can buy at staples or office depot that fit in your pocket, software, or you can design your own.

You also need to show how many miles your business vehicle(s) went for the whole year, as well as how many business miles.  I suggest having an oil change as close to January 1st of each year as possible.  This gives you the beginning and ending miles for each year. 

Again, remember that information, expenditures, and mileage logs must be kept separately for each business vehicle.  Unless you plan to just take the standard mileage rate where you figure business miles and apply an IRS rate to it, you need to know how much was spent for vehicle #1, #2, etc separately along with their respective logs.

There is just no really fun way to do all this.  But if you want the maximum deduction, bullet-proof audit protection, and peace of mind, you must develop the habit of keeping up auto and all business records.

Records for travel and entertainment.  You need to prove, for each day of travel, where you were and why you were there.

For meals and entertainment, you need to record who, what, when, where, why, and how much.  A tip is to add a short note to each receipt with the name of the person you entertained, why you entertained this person, what relation this person has to your business, and what the meeting did for your business (the future benefit).  The receipt itself contains the remaining documentation; what, when, where, how much.  Be sure to write the tip on the receipt as well.

Important:  If you operate a corporation (C or S), you need to turn the documentation in to the corporation, and the corporation needs to either pay for the entertainment and travel expenses directly (with a corporate credit card) or reimburse you dollar for dollar for the amounts spent.  Do not neglect this step or you will lose deductions.

Proof for other business expenses.  For all expenses, from the purchase of your desk and computer to pens and staples, you need to:

  1. Prove what you bought.  Get receipts and save all your receipts!
  3. You need to prove you paid for what you bought. Cancelled check, credit card receipt or other proof of payment.
  4. You need to show that what you bought is an ordinary and necessary business expense for your business.  Be able to prove they are not personal use items.

As a general rule, don’t pay in cash.  It’s like putting fresh meat in front of a bear.  The radar flips to high and all sorts of questions fly out of the auditors mouth:

  • Where did the cash come from?
  • How can you track the cash to the payment?
  • Was an ATM withdrawl evident before the cash payment?
  • Did you really spend the cash or just make up this deduction?

By using checks or credit cards, you don’t endure this line of questioning.  If you have to pay in cash, get a receipt and jot the answers to the above questions on it and save it.

When I walk into an IRS audit with receipts, documentation, and perfect logs, I blow away the auditor right off the bat, and the rest of the audit slides like a sled on snow.

When I walk into an audit with bad records, the auditor takes a more aggressive stance.  “If this record is bad, maybe there’s more to go after.”  As the old saying goes, “you never get a second chance to make a first impression.”  It’s as true here as anywhere.

Call me with any questions you may have. (805) 264-3305


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Tax Deal Made

Well, they did it. They drug it out to the last minute, but they did it. Weeelll, they did some of it. And I’d really like to thank all of them in Washington for dragging us through this during the holidays and leaving us to sort this all out this morning while at the same time trying to digest all the holiday turkey, food and fun.

Most taxpayers got the extension of the Bush-era tax cuts, a good thing. As you’ll read below, individuals making more than $400,000 single and married couples making more than $450,000 were not so lucky. For those of you in these income levels, we will be talking personally as soon as all the details are ironed out for where we go from here.

Also, the debt ceiling and spending issues have not been addressed, that’s been ‘kicked down the road ‘ a couple months. If we think this over the holidays bickering was nasty and ugly, I fear we ain’t seen nothin yet.

Tax changes included in Congress’ fiscal cliff legislation (01-01-2013)

Here is a summary of the provisions included in the bill, which the President is expected to sign.

Tax rates beginning January 1, 2013:
A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint.

2% Social Security reduction gone

AMT permanently patched
A permanent AMT patch, adjusted for inflation, will be made retroactive to 2012.

Dividends and capital gains
The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on filing status, as noted above).

Itemized deduction and personal exemption phase-outs
The Pease itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single.

Estate tax
The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012).

Personal tax credits
The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017.

Other personal deductions and exclusions
The following deductions and exclusions are extended through 2013:

  • Discharge of qualified principal residence exclusion;
  • $250 above-the-line teacher deduction;
  • Mortgage insurance premiums treated as residence interest;
  • Deduction for state and local taxes;
  • Above-the-line deduction for tuition; and
  • IRA-to-charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).
Business provisions
  • The Research Credit and the production tax credits, among others, will be extended through 2013;
  • 15-year depreciation and §179 expensing allowed on qualified real property through 2013;
  • Work Opportunity Credit extended through 2013;
  • Bonus depreciation extended through 2013; and
  • The §179 deduction limitation is $500,000 for 2012 and 2013.

Remember, these are only tax changes with regards to the fiscal cliff legislation. As I have stated in prior emails, there are a batch of new taxes that went into effect on January 1st as part of Obama’s 2010 health care reform legislation. To avoid confusion, I will follow up this email with a separate one addressing these new taxes.

I will have a bit of work sifting through all this in the next few days and as details emerge There are sure to be things that were slipped in to this bill that will need to be looked at. For example, there is apparently a $59 million break to algae growers to encourage biofuel production and I will need to see who of you this may affect…

Please email any questions you may have on any of this and how it may affect your situation. For now, gotta hit the books.

Take care,


Robert W. Craig, E.A. Tax and Business Services (805) 264-3305

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Year-End Payroll Tips for Employers

Year-end payroll tips for employers

The Winter 2010 edition of the SSA/IRS Reporter included an article by the American Payroll Association (APA) which noted some tasks that employers should perform in December and January to make year-end processing go more smoothly. We have listed those tasks below that were included in the APA article plus added a few others:

Remind workers who have had life changes, such as marriage, divorce, or a change in the number of dependents, to make the appropriate changes to their withholding on Form W-4.

Remind employees who wish to continue claiming exemption from withholding to submit a new Form W-4 by Feb. 15, 2012. Beginning Feb. 16, 2012, you must withhold based on a marital status of “single” with zero withholding allowances for employees who claimed exemption from withholding in 2011, but who have not submitted a 2012 Form W-4.

Collect benefit and payroll adjustment information and post to employees’ payroll records. This information should include relocation, educational assistance, group-term life insurance, third-party sick pay, company cars, manual checks, and void checks.

Order enough W-2 forms for all the employees who have worked for you this year, as well as some extras to allow for any mistakes. Consider preparing, printing, and filing W-2s online at the Social Security Administration (SSA) website, if you don’t do this already.

Verify employees’ names and Social Security Numbers (SSNs) at

Run a special payroll, if necessary, to record all manual and voided checks issued between the last regular payroll and December 31st.

Conduct a final review of the general ledger for hidden wages (generally, taxable noncash fringe benefits).

Verify that the bank reconciliation is complete through November and ask the bank to prepare an early cutoff statement for December.

Make sure your payroll system will be updated by January 1 to take into account any changes in federal tax-free limitations and state unemployment taxable wage bases.

Observation: The tax free exclusion for the combined value of mass transit passes, reimbursement for mass transit expenses, and payment of vanpooling expenses is currently scheduled to decrease from $230 a month to $125 a month, effective Jan. 1, 2012, unless legislation is enacted that makes this exclusion equal to the exclusion for qualified parking expenses ($240 a month in 2012). A provision included in H.R. 1, The American Recovery and Reinvestment Act of 2009, made the exclusion for the combined value of mass transit passes, reimbursement for mass transit expenses, and payment of vanpooling expenses equal to the exclusion for qualified parking expenses from March 2009 to December 2011, but that legislation is no longer in effect in 2012.

Obtain new forms, withholding tables, and publications. Review the new Social Security wage base, deferred compensation limits, mileage rates, and state unemployment wage bases.

Let employees know about changes to tax figures. The above communications may help reduce the number of questions that you receive from employees in the coming months.

January 1
Reset all year-to-date balances to zero.

Reset all wage bases, rates, and taxable limits.

Reconcile W-2 totals against the four quarterly 2011 Forms 941.

Run a report to verify W-2 information before printing forms. Make sure you have a Social Security number for each employee. Review the report for employees with: (1) wages over the 2011 Social Security wage base limit of $106,800; (2) benefits that must be reported in box 10 or 12 of Form W-2; or (3) statuses that must be checked in box 13 of Form W-2.

Buy postage for mailing W-2 forms.

If you offer any pre-tax deductions, prepare a notice for employees that explains the calculations in boxes 1, 3, and 5 of Form W-2.

W-2 electronic filing improvements. Beginning with this filing season, employers will be able to submit up to 50 W-2 forms to the SSA through W-2 Online (previously, up to 20 W-2 forms). Employers may now submit both current year and prior year W-2 forms electronically. Previously, only the current year could be submitted electronically.

W-2 deadline. W-2s must be mailed or delivered to employees by Jan. 31, 2012.

If you have any questions on the above, feel free to contact me at (85) 264-3305 or email

Thank you,
Robert W. Craig, E.A. Tax and Business Services
1444 Aarhus Drive, Solvang, CA 93463

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Quickbooks – 5 Steps

Even though Quickbooks is a very intuitive, inexpensive, and easy to use bookkeeping and accounting software, there are many areas where things can go off kilter. If one is not trained in bookkeeping or accounting, they may not find out about the problem until their tax preparer gets the file to do the tax return.

This can cause a number of problems. First, the estimated taxes you paid, if based on numbers from reports throughout the year, may be overpaid or underpaid. This could cause you to be penalized at tax time.

Second, having your tax preparer diagnose, find and correct these errors at tax time could cause your tax preparation bill to skyrocket. For corporations, LLC’s and partnerships, the balance sheet may have to be adjusted to match the prior year end tax return, and then corrections to the current year must be made. This is time consuming and will up your bill.

Third, not having a real-time set of books will not help you run your business. If the books are wrong, all the planning and management decisions based on your financial reports are based on erroneous data.

Here are 5 Quickbooks reports that can help diagnose problems that may be rectified before submitting the file to your tax person:

1. Go to ‘Reports’ then ‘Company and Financial’ then ‘Balance Sheet Standard’. Go to ‘Dates” and select “Last Fiscal Year’ if doing this check in the next year, or ‘This Fiscal Year’ if working on in the same year. That is, if you’re doing this as of July 31, 2010, then just enter 12/31/10 in the date box. It should show the correct date in for your tax year (eg, 12/31/2009). Now, scroll down to the Equity section of the Balance Sheet and be sure there is no figure in the account ‘Opening Balance Equity’. If there is, double click on the amount shown to see if you can determine where the number came from. If you can correct it or contact your accountant/preparer for instructions.

2. Next, look at Accounts Receivable. Make sure your Balance Sheet shows the ‘accrual basis’ (unless you are strictly on the cash basis for books and taxes). Print out an Accounts Receivable Aging Report for the same date as your balance sheet. Go to Reports, Customers & Receivables, AR Aging Summary and enter the date (12/31/xx) or whatever date your Balance Sheet shows. Check to see that the balance matches the figure on the Balance Sheet Accounts Receivable figure. If so, review the list of customers to insure that the customer balances are correct. Make any necessary corrections that need to be made. Write-off any bad debts. If the balance doesn’t agree and you don’t know how to fix it, contact your tax person or accountant.

Also, check the Accounts Receivable balance on the ‘cash basis’ to make sure there is not a figure as a balance. If so, you need to determine what it might be. Could be a problem with an invoice, or receipt of cash, or a negative balance may be an unrecorded invoice or a prepayment/customer deposit paid in advance. In either case any discrepancies need to be corrected.

3. Check the Undeposited Funds account on the Balance Sheet and verify the balance is correct. This account is for monies you’ve collected from customers or clients that have not been deposited yet. Go to Banking, Make Deposits, and see if the total detail there matches the balance on the Balance Sheet. If not, reconcile and correct the numbers.

4. Check the Balance Sheet liabilities for any negative balances and determine why they are off. Ensure credit card balances, accounts payable balances, and loan balances are correct at year end. Check them against the statements from the credit card and loan companies.

5. Next, go to Reports, Company & Financial, Profit & Loss Standard. Go to ‘Date” and select ‘Last Fiscal Year’ if into the next year, or ‘This Fiscal Year to Date’ if working in the current year. Or you can just enter the dates you want (eg, 1/01/10 thru 7/31/10). Look thru the statement for ununsual looking balances in the accounts. Maybe there is $12,000 in Office Expenses. Double click the amount and you can check all the entries from 1/01/10 thru 7/31/10 or whatever date you’re working with.

There may be a new computer system in there for $3,000…you’ll want to alert your tax preparer about this as it needs to be reclassified onto the Fixed Asset Computer section of the balance sheet.

Also, look for expenses that may be ‘personal’ in nature. Weed any of these out and put them into the Draw account of your Balance Sheet. By double clicking the amounts it will take you the check or bill entry and you can reclassify it. If any are in doubt I set up an account on the Balance Sheet in the Other Asset section called ‘Suspense’ and put questionable items in there. You can discuss these with your tax preparer.

I have had a number of new clients that have come in with their Quickbooks file saying they only made $30,000 for the year only to find that they’ve been paying personal expenses, groceries, medical bills, home utilities, etc into P&L accounts. If they had $10,000 in personal expenses that have to be pulled out, their profit would jump by $10,000, throwing all their tax situation in chaos. It could have been avoided if these items were checked out and fixed before year end.

There are other things to be checked but are beyond the scope of this article, but attention to these will go a long way towards giving your preparer a much more accurate and streamlined set of books. When we get them like this, our time and your money is much better spent on tax reducing strategies as opposed to ‘clean up’ work.

If you need any assistance in working with your Quickbooks files or wish to do some mid-year or before year-end tax planning, please call Bob at (805) 264-3305.

Thank you, Bob

Robert W. Craig, E.A. Tax and Business Development Services
1444 Aarhus Drive, Solvang, CA 93463

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