There is no cookie-cutter, one size fits all template for taxes. While your situation may appear to be the same as another tax payer, even subtle differences can result in substantially different amounts of income tax.

There are so many  factors that impact an individual  tax return that it would be impossible to list them all here. Some examples of different types of taxpayers are;  wage earners, self employed individuals, salaried executives, real estate owners,  stock traders, taxpayers who live or do business in multiple states or countries, bankrupt individuals, disaster victims, victims of fraud, gamblers, military personnel, ministers, students, elderly etc.

There are different tax rules, deductions, credits, court decisions and rulings that apply to each individual set of circumstances.

Tax law is horribly complicated and poorly organized. Knowing the rules and how to apply them to your best advantage is a full time job; a job that  we do every year, all year.  We can’t  fix or simplify the tax code, but we can make your individual tax situation as painless as possible.

Use this simple guide to prepare for your tax appointment. The documents that you will need to bring to your appointment are listed below. Depending upon your individual situation, other supporting documents may be required to complete your return.

A Free Tax Organizer is available for download on our corporate website.

1. Date of Birth and Social Security numbers for you, your spouse, children or anyone else included on your return.

2. All income and wage statements, including W-2’s, 1099’s, unemployment compensation, pensions, IRA distributions, rents, royalties, K-1’s  from partnerships, S Corporations, Estates, Trusts etc.

3. Tax Credit information, including Child and dependant care (name, address and taxpayer ID number for each provider), tuition and fees paid for higher education, foreign tax credits, 2011 estimated tax payments.

4. Purchase date and total investment in any stocks or property sales.

5. Mortgage interest statements.

6. Escrow closing statements for any properties purchased or sold.

7. IRA contribution information.

8. If you use your car for business, a log of total of business miles used.

9. Copies of any IRS notices that you have received.

10. If this is your first year with 20/20 Tax Services, please bring a copy of your 2010 and 2009  tax returns.

Cash flow, simply defined, is the movement of money in and out of your business. Money flows into your business primarily from the sale of goods or services to your customers. The inflow of money only occurs when you make a cash sale or collect on receivables. Other examples of cash inflows are borrowed funds, income from sale of assets and investment income from interest.

Cash flows out of your business generally are the result of paying expenses. Examples include paying employee wages, purchasing inventory, purchasing fixed assets, operating costs, paying back loans and paying taxes.

Cash Flow vs Profit

Profit and cash flow are two entirely different concepts. The concept of profit only looks at income and expenses over a certain period of time. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of money takes place.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your business may still show a profit, but what about the bills it has to pay during that six month period?  This type of cash flow gap, if repeated too often, can lead to bankruptcy.

Here are the top 5 components of cash flow management that you should monitor and control:

1. Accounts Receivable – Accounts receivable represents sales that have not yet been collected in the form of cash.
2. Credit Terms – Credit terms are the time limits you set for your customers’ promise to pay for their purchases.
3. Credit Policy – A credit policy is the blueprint you use when deciding to extend credit to a customer.
4. Inventory – Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers.
5. Accounts Payable – Amounts you owe to your suppliers that are payable some time in the near future (30 – 90 days).

The ability to analyze and manage your cash flow is an important management skill that must be developed.  Sufficient cash flow allows you to pay your bills and expand your business.

Crossing your fingers and hoping for the best is not a Tax Plan

Many small business owners ignore tax planning, and don’t even think about their taxes until they’re scheduled to meet with their Enrolled Agent or Accountant in March, but tax planning is an ongoing process, and good tax advice is a very valuable commodity.

Tax planning is a process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions so that taxes are eliminated or considerably reduced.

You should review your income and expenses monthly, and meet with your Tax Professional  quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

There are countless tax planning strategies available to a small business owner. Some are aimed at the owner’s individual tax situation, and some at the business itself. But regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:

· Reducing the amount of taxable income

· Lowering your tax rate

· Controlling the time when the tax must be paid

· Claiming any available tax credits

· Controlling the effects of the Alternative Minimum Tax

· Avoiding the most common tax planning mistakes

In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

There is no crystal-ball method designed to give you the exact numbers. But, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates, the better the odds that your tax planning efforts will be successful.

The Internal Revenue Code includes valuable money saving strategies that are overlooked or undiscovered by many business owners. Each year, millions of dollars are mistakenly paid to the IRS. Dollars that should have remained in the business owners’ pocket.

There are two tax deduction methods for taxpayers to choose from when filing their Federal Income Tax Return. There is the standard deduction and the itemized deduction.  You should always choose the method that gives you the biggest tax advantage. Is it worth your time to keep a years worth of receipts so that you can take a tax deduction? It depends. If the receipts add up to less than your standard deduction amount, then don’t bother keeping them.

Not all taxpayers have the same standard deduction amount. Standard deduction amounts are based on your filing status and are subject to annual adjustments for inflation. The standard deductions for the 2010 tax year are as follows:

Single: $5,700

Married Filing Jointly: $11,400

Head of Household: $8,400

Married Filing Separately: $5,700

Qualified Widow(er): $11,400

Individuals who spend a lot on medical care, mortgage interest, state and local taxes, charitable contributions etc. are usually better off itemizing. There are many rules and guidelines that apply to itemizing deductions.  Keep in mind, not every dollar you spend on a deductible item can be subtracted from your income. For example, medical expenses must exceed 7.5 percent of your adjusted gross income to qualify as an itemized deduction.

Your deduction decision can be changed each year. You can claim the standard one year and itemize the next. Each year, choose the method that gives you the lowest tax bill.

Still not sure which to choose? Contact our office for a FREE CONSULTATION. We look forward to answering your questions.

Home Based Businesses, by their very nature, often have less structure. The lack of structure can lead to confusion as to what items or expenses are tax deductible. For some people, their home based business is not even a real business at all but rather a hobby or past-time. The IRS has specific standards for what constitutes a real business. Simply, buying into a venture and printing business cards does not qualify you to take business deductions. The good news is, once you have established yourself as a business by the IRS standards, there are numerous tax deductions available to you.

Key point to remember: A business operates to create a profit. One would think this goes without saying but unfortunately many small “business owners” are really enjoying a hobby and not generating a profit from their activity.

Home office expenses are classified into three categories:

Direct Business Expenses relate only to the taxpayer’s business activity (for example, supplies, mileage, photography, web design, business cards, stationary, professional organization dues, products that you are required to purchase as part of an MLM, trade show fees and supplies etc.).

Permissible Expenses are expenditures that could be included as itemized deductions in the individual’s tax return (for example, mortgage interest, real estate taxes and casualty losses).

Previously Non-deductible Expenses would not be deductible if not for the home office deductions (insurance, utilities and depreciation).

The treatment of home offices for income tax purposes is complicated and this article is in no way comprehensive.  If you have a home office or are considering one, contact your tax accountant or Enrolled Agent for advice regarding your particular situation.

September 15^th and October 17^th are important dates for certain tax payers.  The IRS expects to receive more than 140 million individual tax returns in 2011. Most of those returns were filed before the April 18^th deadline. If you filed an extension of time to pay (IRS form 4868) and you haven’t filed yet, beware time is running out.

Business owners on extension have until  September  15^th 2011 to file their 2010 corporation returns. Individuals on extension have until October 17^th, 2011 to file their 2010 personal returns. Normally the deadline is October 15^th, but since the 15^th is a Saturday this year, the deadline has been extended to October 17^th.

What happens if you do not file a tax return

If you do not file a return, an IRS employee will prepare a return for you. Unfortunately, the return prepared by the IRS will be based only on the information the IRS has from other sources. Most likely the return that the IRS files for you will overstate what you actually owe in taxes. Once the tax is assessed, the IRS will start the collection process, which can include placing a levy on wages or bank accounts or filing a federal tax lien against your property.

Failure to file your tax returns for a year or more will lead to IRS problems that are best avoided. Whether you have not filed because you don’t have the money to pay, you just keep putting it off or some other reason, the IRS will catch up with you and penalties and late fees will pile on; making a bad situation worse. Save yourself time, money and frustration: File before the deadline.

Millions of Americans enjoy a variety of hobbies and sometimes these hobbies result in a profit. On the other hand, sometimes someone is engaged in what they think is a business but it turns out that it’s really a hobby. The tax considerations are different for each activity so it is important for taxpayers to know the difference.

Definition of a Hobby vs. Business

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity carried on with the reasonable expectation of earning a profit.

Simply stated, you must report and pay tax on income from almost all sources, including hobbies. It is in the handling of expenses and losses that the two activities differ.

If you are not sure whether you are running a business or simply enjoying a hobby, here are some of the factors you should consider:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?

An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year.

The profit test is the primary test but the IRS says that it looks at all facts when determining whether a hobby is for pleasure or business.

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby.

Tax Evasion is a serious crime that can land you in jail.

Tax avoidance is a process of looking at various options in order to determine when, whether and how to conduct business transactions so that taxes are eliminated or considerably reduced.

Tax avoidance planning is legal. Tax evasion-the reduction of tax through deceit, subterfuge or concealment—is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was some fraudulent intent on the part of the business owner.
The following are four of the areas most commonly focused on by IRS examiners as pointing to possible fraud:
1. Failure to report substantial amounts of income, such as a store owner’s failure to report a portion of the daily business receipts.

2. A claim for fictitious or improper deductions on a return, such as a substantial overstatement of travel expenses.

3. Accounting irregularities, such as a business’s failure to keep adequate records.

4. Improper allocation of income to related taxpayer who is in a lower tax bracket, such as giving stocks to children that are really still owned by the parent.

There are countless tax planning strategies available to the small business owner. Some are aimed at the owner’s individual tax situation and some at the business itself. The purpose of tax planning is to reduce the amount of taxable income, lower the tax rate and control the time when tax must be paid.

Are You Looking for Tax Saving Strategies? Click here for a helpful checklist.

Avoid the big tax bill that often follows a job loss. Greg Fey, EA lists the top five issues that the recently unemployed should be aware of.

1. Getting laid off from your job may result in severance pay and accumulated vacation or sick leave payments. You should be aware that these payments are taxable. Make sure that your employer withholds enough taxes or make estimated payments. Otherwise, you may be faced with a big bill at tax time.

2. Unemployment compensation is taxable income. You can elect to have 10% withheld for federal taxes. Note: Unemployment benefits are taxable for federal purposes but are not taxable by the state of California.

3. You may be able to take a tax deduction for some of the expense of looking for a new job. Expenses like travel, resume preparation and placement agency fees may be deductible. Moving costs for a new job that is at least 50 miles away from your home may also be deductible.

4. Some companies go out of business and fail to send W-2s to their former employees. If you are not able to obtain a W-2, the IRS can help you file a substitute W-2 using your records. You should keep year to date records or paystubs until you receive your W-2.

5. The decision to withdraw money from your 401k or other pension plan should not be taken lightly. Taking money out of these accounts can create a very expensive tax bill. You should be aware of all the tax penalties involved before you withdraw any money. Generally, withdrawals from a pension plan are taxable unless they are transferred to a qualified plan (such as an IRA). If you are under age 59 ½, you may have to pay additional penalties.

For more information on this topic refer to the following IRS Publications: IRS Publication 17, IRS Publication 521 and IRS Publication 575. Of course, you can always contact our office to discuss the details of your specific tax situation. 20/20 Tax Services is located in Montrose, CA and we provide tax help to employers, employees and those who are retired or unemployed.