CPA Blog | Tax & Business Accounting Q&A

Thursday, 17 June 2010

Last tax season I received a thumb drive with a Quickbooks data backup and the thumb drive had a virus on it. My accounting practice could have been put completely at risk if I had let a virus disrupt or destroy my server. Additionally, I have files and data that are very sensitive, I can't imagine writing letters to all of my clients informing them that their financial information may have been compromised.

That is why I am no longer exchanging quickbooks disks with clients. Fortunately there is a simple solution, that makes a lot of sense.

Quickbooks Online

Manage your books from Anywhere :As the business owner, you can manage your books from anywhere. For business owners who travel regularly or business owners doing their books at night at home (like so many of us), this is a real benefit.

Automatic Updates : The site is hosted by Quickbooks and the interface is constantly being updates with new features and advances. In the 2 years that I have been using it myself, the features have evolved to closely rival the desktop features
FRAUD / EMBEZZLEMENT MINIMIZATION : in the 20 years that I have been doing accounting, I have worked on dozens of embezzlement cases. In almost all of the cases, there were several things that contributed to the embezzlement:

Lack of oversight
Lack of internal controls
Lack of transparency
Lack of an audit trail
Deliberate concealment of financial transactions.

Using Online Quickbooks does not guarantee that these circumstances go away, but certainly gives even the most trusting business owner the ability to review the financial transactions as they are processed buy the bookkeeper. There is no excuse for the business owner or CPA to peek over the shoulder of the bookkeeper once a month and make sure that the bank accounts are reconciled. If the business owner lets the CPA set up the audit trail and user settings, the risk of embezzlement will be lower
Employees can work from anywhere :QuickBooks Online is especially good for businesses with a distributed workforce. If you have employees or independent contractors working from home or from remote locations they can have access to the software as needed (up to 3 simultaneous users, plus your accountant or up to 20 users for an additional fee). For instance, you or your employees can create estimates directly at a customer's site using a laptop.

Timesheet Reporting : You can even give hourly employees or independent contractors the authority to log in for the limited purpose of filling out timesheets. Then you can process payroll or contractor payments easily.

No More Thumb Drive Data Sharing With Your Accountant : QuickBooks Online makes it easy to share data with an outside accountant. For instance, if your accountant helps you close or balance your books each month or quarter, you don't have to hassle with exchanging data. Your accountant logs in from his or her office and can nip errors in the bud by following an activity log.
Simultaneous Collaboration with your Accountant : Your accountant can even log on simultaneously with you to show you how to do something.

No More Data Crashes : You get the advantage of your data being backed up offsite.

Monthly Costs are Lower Than Annual Renewal Costs : You pay a lower recurring monthly payment, instead of paying a software license fee up front.

No More Software You do not have to install software on your hard drive. The online application is designed for do-it-yourselfers and walks you through a wizard to help you get set up.

Support Is Included You get support included in the monthly fee. The website says that if you submit a question via email, they usually get back to you within 30 minutes.

Works With A Mac or Apple - There is only one other accounting package that I am aware of that supports Apple and Mac

POSTED BY: AT 04:07 pm | Permalink | 0 Comments | E-mail this

Thursday, 10 June 2010

Taxability of Mortgage Forgiveness and Debt Cancellation

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here's a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

These exceptions are discussed in detail in Publication 4681.

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
separately.

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

POSTED BY: dz AT 10:02 pm | Permalink | 0 Comments | E-mail this

Thursday, 10 June 2010

New Legislation Imposing FICA Tax on S Corporation Profits

The House Ways and Means Committee recently released a package of tax extenders, which is partially offset by an increase in the S corporation payroll tax on firms in service industries.

The proposed legislation targets certain business including professional or personal services firms that specialize in architecture, engineering, law, performing arts, accounting, health, actuarial science, lobbying, consulting, brokerage services, investment management, and sports. These small personal service S-corps will be hit if there services are defined as where their principal asset is the reputation and skill of three or fewer workers.

Specifically, the legislation aims to target owners of those S-Corps by subjecting their entire profit to SECA tax. The tax is currently 15.3% of the first $106,800 in profits and 2.9% above that. The days of taking a reasonable salary subject to SECA tax and taking the rest out as dividends may well be numbered for these small firms. This proposed legislation would eliminate one advantage of electing S-Corp status.

Also, firms with numerous employees could be affected, as long as only three are key to the business. Principal asset means that "skill and reputation" would have to be valued at more than the largest asset of the business.

There is also no exception for working capital left in the business for smaller professional S-Corps. Larger S-Corps that are not in the professional service fields will have their retained working capital continue to be exempt from self-employment taxes.

Keep your eyes open for this proposed legislation to be enacted.

POSTED BY: dz AT 09:14 pm | Permalink | 0 Comments | E-mail this