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by Stephen Parezo

Mar. 22, 2004 — As the April 15th filing deadline draws closer, it's easy for small business owners to be overwhelmed with complex tax returns but it doesn't have to be that way. While the tax season crunch has arrived, there's no need to panic. The following information is offered to help you avoid the kinds of mistakes made by other taxpayers but perhaps the best antidote for curing tax filing anxiety is to contact your local tax professional.

More confusing than ever

"With the number of tax law changes, the tax code has become more confusing than ever before," said Andy Martin, Fiducial's Manager of Tax Services. "The IRS has written and then rewritten new tax rules, leaving the door open to wide-ranging interpretation by accounting professionals and financial institutions."

As far as tax season trends go, Fiducial's Tax Preparation Center (TPC) is seeing more taxpayers this year asking about several key areas including whether to opt out of bonus depreciation for new property purchases; will they be subject to the Alternative Minimum Tax (AMT) and how to file amended returns for reporting dividend income from corrected statements.

Businesses are allowed to take an additional 30% in depreciation for new property purchased after September 10, 2001, and before May 4, 2003, and 50% for new property purchased after May 5 until Sept. 11, 2004. These are, of course, subject to qualifications.

Due to the current economic climate, business owners with low incomes in 2003 are finding that they may be better off claiming these bonus deductions in future years when their income is expected to be higher.

Before visiting your tax professional, make sure you have adequate records to determine the date you purchased the asset so you know which depreciation bonus you can claim. Also, have an idea of what income you are expecting in the next few years and be prepared to discuss this with your advisors so that they can help you with making the bonus depreciation decision.

The AMT, which was originally intended to catch high-income earners who paid very little or no income tax, is actually having the opposite effect and now impacts more than three million taxpayers annually.

"Taxpayers should make sure their tax professionals are computing the AMT," Andy said. "Some will disregard the calculation for taxpayers who they don't believe are in the AMT without actually doing the calculations."

Another area high on the minds of filers is the revised 1099s for reassessment of qualifying dividends. The new tax act of 2003 significantly changed the tax rates to be applied to certain types of dividend income which is reported to the taxpayer from the issuing brokerage firm or reporting company. The 2003 "qualified dividends" are taxed at a maximum rate of 15%, or 5% if the taxpayer is in the 10% or 15% tax bracket, so it makes a big difference if the dividend income is qualified or not.

Tax returns revisited

However, this law contains exceptions that prevent the favorable taxation of what one would normally think of as a qualified dividend. This has caused problems for brokerage houses, mutual fund companies and other preparers of IRS Form 1099-DIV, and now many of these companies are issuing amended 1099s. Taxpayers who have already filed their returns based on the 1099-DIVs they received must amend their returns.

Typically, 5% to 15% of 1099 forms get corrected but this year that number could climb as high as 25%. The IRS says about half of all individual tax returns contain some type of 1099 data.

"We've already had to redo a number of tax returns this season which were incorrectly reported by financial institutions," Andy said. "This is a big problem."

To make sure you include the most accurate information on your return, confirm with your brokerage company that their 1099-DIV as issued is correct. Then bring in their brokerage statements so that your tax professional can help determine certain holding periods of the stock and determine if dividends are qualified. Be prepared to have your professional spend more time performing the necessary calculations to maximize this benefit. If you are unsure about a qualified dividend, file an extension and give your broker time to review your portfolio.

Don't miss potential tax savings; filing extensions

People are filing electronically in record numbers this year with the latest IRS figures indicating that e-filed returns are up more than 10% ahead of last year. The biggest increase is being seen in home computer use which has increased 23%.

With returns being filed at such a hurried pace, this greatly increases the likelihood of committing errors. To avoid the last-minute rush, resist the temptation to put off having your taxes done until the zero hour. Tax professionals advise that your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.

That's why Andy advises that entrepreneurs should not get so caught up in rushing to meet filing deadlines that they forget to fill in important information on their returns. He suggests they file a four-month extension as long as they can properly estimate the amount of taxes owed.

"There's nothing wrong with filing an extension," he said. "This gives you more time so you don't have to rush and can make sure that all the data has been filled in on the return. It also gives you more time to make sure you don't miss any deductions."

Those not able to file their federal individual income tax return by the due date, may be able to get an automatic four-month extension of time by filing IRS Form 4868, Application for Automatic Extension of Time to File U.S. Income Tax Return by the due date for filing your calendar year return (usually April 15) or fiscal year return.

Most of the filings with common tax return mistakes as identified by the IRS are a result of "math errors" or things that are obviously wrong and the IRS has the authority to correct as it processes the returns.

For example, a taxpayer may list an incorrect Social Security number (SSN) for a dependent, enter the wrong tax amount, or claim the Earned Income Tax Credit when the return shows no earned income. Accordingly, the IRS can deny the dependent's exemption amount until the taxpayer provides the correct SSN, change an incorrect tax amount, or remove an improperly claimed tax credit.

The IRS reports that taxpayers forgetting they receive as much as a $400 advance rebate on the child care tax credit. Of the more than 1.3 million 2003 returns filed to date with child tax credit errors, the most frequent mistake which affects more than 900,000 returns is failure to subtract last year's advance payment from the credit amount.

Taxpayers are also reminded to steer clear of tax-avoidance scams that purportedly reduce or eliminate taxes such as "a taxpayer can deduct any amount paid to maintain his household by establishing a home business." Unless the expenses relate to a bona fide, profit-seeking business, business expenses including expenses related to a home-based business are not deductible.

Keeping up with the changes

Many types of mistakes can be avoided by entrusting the return for your small business in the hands of a tax professional that makes your job easier by providing everything your business needs from one trusted source that utilizes the latest tax software and technology available.

Since there are literally thousands of changes in the tax code each year, seek out experts that receive continuous training and updates on all the latest changes that impact small businesses. It also helps to have a large national network of professional advisors that includes enrolled agents, certified public accountants and attorneys who are on-call to answer any question related to your return.

Tax return errors draw unwanted attention from the IRS whose enforcements efforts have increased by 24% in FY 20003 with audits of taxpayers with income over $100,000 up over 50% from two years ago and overall audits up 14% from 2002.

Fiducial franchisee Sam Smith of Middletown, MD, advised area realtors at a recent meeting to talk with a tax professional throughout the year to keep up with tax law changes and find out what they can do to keep as much of their income as possible. He also stressed the need for being thorough when preparing tax filings.

"Last year 50% of the filings had errors in them and 42% of those filed by preparers had errors," said Smith. Problems ranged from "a lack of knowledge on what records are needed to not including interest on returns."

Stephen Parezo is the Media Manager for Fiducial.

Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: stephen.parezo@fiducial.com.

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