Yes, it's America's favorite season again. Tax season. By this time, you most likely have your paperwork together, all your forms have come in, and you've sent out any necessary W-4s and 1099s. We're assuming that it's also not the first time that you've filed an income tax return, whether as an individual or a business. So in the interest of saving time and not repeating information you've read elsewhere, this story will focus on major changes between this year and last.
Aldrich, whose Outright software has grown from zero to 150,000 customers since its introduction in 2009, first points to a new form that you may well have received by mail already, the 1099-K form. It's completely new, but there's no need to let it throw you for a loop. It is not a new reporting requirement for you.
You will receive the 1099-K form from credit card processors, Paypal, banks, and the like. The government instituted this form as a way to get a handle on the amount of money that is being remitted electronically, and to prevent companies from hiding income. Electronic payment is big business.
In the landscape business, Aldrich acknowledged that one example where it might be used often is with a service contract, where customers commit to a series of visits by the contractor over the course of the season.
"In that case," Aldrich says, "if the contractor takes a credit card number from the customer, and bills that customer's card on a monthly basis, that payment will now be reported to the IRS. Before the new form, businesses were required to report the income, but there was no cross-check."
Every company that has processed an electronic payment for you will send you a 1099-K. However, the government does not want to overburden small businesses. You are only required to file them with your tax return if you've made more than 200 electronic remittances, or more than $20,000 in annual gross receipts from those transactions.
If you've received your 1099-K forms already, you'll note that the forms only report gross revenue for the year that was processed by the form-issuer. Under the gross revenue number is a box that shows your income breakdown by month. Since you don't pay taxes on gross revenue, but on your net income, it's up to you to deduct transaction fees, returns, and all your usual business expenses. This form just provides the IRS with a window into how much gross income you earned via electronic remittance.
The other major change to the tax landscape for tax year 2011, according to Aldrich, has to do with the deductibility of business equipment—the so-called Section 179 deduction. The Small Business Jobs Act of 2010, part of the federal economic stimulus program, allows you to deduct immediately the full value purchase price of equipment purchased for your business.
However, there is a $500,000 limit.
“In 2011, if you bought and used tangible equipment like a mower, you can deduct the full value. If you bought and used an iPad that you use strictly for business, you can deduct the full value. If you bought and used office furniture, printers, or a vehicle that weighs more than 6,000 pounds, again you can deduct the full purchase price,” says Aldrich.
The interpretation of the term ‘business equipment’ is quite broad, Aldrich explains. “Let’s say you bought a prefab storage shed, and used it to store your new mowers and leaf blowers. The new storage shed itself can be deducted as business equipment, just like the mowers and leaf blowers.”
Calendar 2011 was a good year to invest in business equipment that can be fully deducted under Section 179. As stated, the limit for total Section 179 expenses is $500,000 for the year. That number drops to $125,000 for calendar year 2012.
Do note that the Section 179 deduction begins to phase out for 2011 if your total equipment investment exceeds $2 million. (For 2012, that number drops to $500,000). Contact your tax advisor for particulars.
If it is possible, in these difficult economic times, that you take a Section 179 deduction, or any other deduction or deductions, your business expenses and deductions for calendar 2011 exceeded your gross income.
It’s not a pleasant thing, when you discover that your business has been operating at a net loss. On the other hand, Aldrich reminds us that the IRS has made provision for you to carry forward your net operating losses, to lower your tax bill in future years. Consult your tax advisor for particulars.
The IRS currently permits you to carry back your loses for up to five years, depending on your situation. Again, consult your tax advisor for help.
Finally, about that extension thing, discussed at the top of this story? Many businesses file them as a matter of routine and cash flow management. The IRS gets millions of them a year. That’s why, observers say, that it’s unlikely that the mere filing of an extension will be any kind of red flag for the taxman. The form is Form 4868; if by the time you’re reading this story you haven’t made significant progress on your return, you might well want to download and file it.