Yes, both “supply-sider” and “Keynesian” economic theories have proved surprisingly flawed. My view is that economic growth is primarily a function of demographics. Today as older boomers approach 65, the effects of a smaller generation in their mid-20s to mid-40s (aka Generation X) will be a drag on economic growth for the next decade.

In these circumstances, I see a renaissance of the shopkeeper, restaurateur, and sole practitioner.  Or put another way, “I’m on my own” is the new “I’m with Big Blue”. This is good. Once an entrepreneur enjoys a bit of success, there’s no looking back or even considering stopgap employment in the future.

So while being frugal may seem the right response to economic uncertainty, an entrepreneur should instead be agile, flexible and most importantly, set him or her self apart from the competition.  Yes. Watch your expenses. But don’t neglect the proactive steps you can take to achieve a healthy and successful business.

Answer: Fair and reasonable estimates based on actual events and transactions are permitted as long as a lack of receipts is not habitual.

Please note that credit card and debit card transactions listed on monthly bank and credit card statements can be used in lieu of a lost receipt.

And if you write a fair number of checks rather than pay by electronic means, then make certain you receive an optical image of each check from your bank with your monthly statement.  A small service fee may be charged but it’s worth the outlay.

Answer: I haven’t heard of this particular product.  Five or ten years ago I often recommended to clients a varied of accounting software product options.  Today, Intuit’s QuickBooks is to small business accounting software what Microsoft’s Windows 7 is to PC operating systems.

In other words, straying from the most popular application will likely cost you time and money in the long run, especially in finding outsourced parties who know how to use, maintain or fix problems with an uncommon software application.  Therefore, analyze carefully before you leap.

January got the best of us and we’re now just in the process of finalizing and issuing our 1099s.

At least we’re not late in filing with the IRS (due February 28th).

In our efforts to collect names, addresses and social security numbers, one of our contractors said she wasn’t aware that she would be getting one and has already filed her taxes.  Do you know what she needs to do about this?

Answer:

The contractor will have to amend her return if she did not include the nonemployee compensation earned from your company on her originally filed tax return.  Please note that it’s the taxpayer’s (payee) responsibility to report appropriate income to the Internal Revenue Service.  You as the payor are responsible for merely assisting the IRS in determining if individual taxpayers report accurate and correct information on their Form 1040, individual income tax return.

In other words, the contractor did what many taxpayers do in reporting only the income that was issued on W-2s and 1099s and elected not to report any earned income that wasn’t evidenced by a tax document.

“Tax Cheat” might be a little harsh, but in essence cheating is what your ‘payee’ did ….as she intentionally did not report all of her earned income to the Internal Revenue Service.

That’s her problem, not yours.

Back in November a number of my clients received  a nonfiler notification letter regarding online wage withholding tax filing for Q3:  July–September 2009.

I had hoped that the State would have corrected the online processing problems prior to January.  Apparently the State was not successful in fixing the problem as, once again, a number of my clients are now receiving (or will shortly) a nonfiler notification letter regarding online wage withholding tax filing for Q4 – October–December 2009.

Accordingly, business taxpayers have four options:

1. Go online to the ZeroFile System and re-file your Oct-Dec 2009 return.
2. Fill out the “paper” coupon in your small blue booklet and mail your Oct-Dec 2009 return.
3. Make a copy of your prior Oct-Dec 2009 return confirmation and mail along with a copy the notice.
4. Call the State at the number provided (303-238-7378) to resolve the matter over the phone.

Given the persistent computer issues the Colorado Dept of Revenue is continuing to have, I recommend that you perform both Option 1 and Option 2.

No penalties will be assessed as no tax was owed; therefore, also include a copy of your original confirmation in regards to Option 2.

Further, I recommend that you file all future wage withholding tax returns via “paper” until we’ve been assured that the Colorado Dept of Revenue online tax return processing system is fully operational.

How do I Best Report a Large Increase in Income FAQ?

My income is going to increase dramatically this year.

I think I’m going to do a 529 with some of my windfall.  At least that gets me out of the state tax.  Do you have any other advice?

Answer:  The 529 College Savings Plan Contribution has a subtlety that’s easy to miss unless you’re a careful reader.

Here’s the State’s instructions:

Payments or contributions you made during 20XX to a qualified state tuition program administered by CollegeInvest can be deducted, but only to the extent they are included in federal taxable income.

See FYI 44  (State Tuition Program Contribution Program).

The second part of the sentence is what many paid-preparers and self-preparers miss. It means that a taxpayer can only deduct an amount related to a 529 College Savings Plan if it was taxable on the Federal individual income tax return.  This occurs generally in only two instances:

• The parent receives a distribution due to account closure (taxed on earnings, not principal).

• A portion of the distribution was not used for postsecondary education purposes (taxed on applicable pro-rated earnings).

Form 1099-Q for payments from qualified education programs (529 College Savings Plan) is issued for all withdrawals. It reports the following to the Internal Revenue Service – gross distribution, earnings, basis, and whether or not the recipient is the designated beneficiary. Contributions to 529 College Savings Plans are never deductible while withdrawals of prior contribution are not taxable, just the allocated earnings if not used for postsecondary purposes.

Further, a Colorado resident can only deduct the earnings taxed at the Federal level if the 529 College Savings Plan was with Colorado CollegeInvest.

Unfortunately most people don’t read instructions and thus, many Coloradoans mistakenly report and deduct amounts contributed annually on Form 104, Line 10 – Tuition Program Contribution.

Answer: More and more companies are not mailing out tax forms and instead, account holders must go online to retrieve the appropriate tax information necessary to prepare a complete and accurate tax return. This is ostensibly an effort to be ‘green’ .

While this approach saves postage and printing costs, going green condenses our timeframe to complete tax returns before the April 15th deadline.  In other words, along with a few other required reporting changes brokerage houses will have to adhere to in the future (cost basis statements on all investments,)  fewer and fewer investors will be able to complete their individual income tax returns in February.

Further, many brokerage houses are waiting to send out tax forms at the end of  FEBRUARY  rather than the end of JANUARY in order to avoid sending out corrected tax forms.  This is now commonplace because during the last several years many brokerage houses have had to send out a second tax form after the initial tax form contained erroneous or incorrect information.

We want to hire one person to work full-time for our ancillary company that is set up as a separate limited liability company.  Do we run this payroll through our primary operating company or do we instead set up this person as an employee of our ancillary company?

Answer:

Of course “it depends”.

If the individual will work exclusively for the ancillary firm,  then it may make sense to run payroll through the ancillary company.  However, if there is any crossover, then it makes sense to run payroll through the primary company.

Ultimately, your decision hinges on certain long-term considerations – will there be a retirement plan, will there be a section 125 cafeteria plan with health insurance benefits, full-time crews, etc.

Since both the primary company and the ancillary company have common ownership, the companies are treated as one for most retirement and employee benefits plans.  And there is nothing wrong with having a management fee agreement between the two.

Thus it may make sense to run all payroll through the primary company with accounting allocations (journal entries) between the primary company and the ancillary company rather than running and maintaining two separate payrolls.  Accordingly, administrative burden logically should also be a consideration, especially for an already taxed staff department.

There is no one correct answer.  You have options and you can always change your position should the ancillary company become a flourishing stand-alone venture.

Answer: The term statutory employee includes the following:

1. Life insurance agent
2. Agent-driver or commission-driver
3. Salesperson who solicits orders from other business establishments on behalf of a principal
4. Home-based worker performing piece work on behalf of a production or manufacturing company

While there are certain factors other business enterprises can consider for such employment status, please note that the employer and the statutory employee both are subject to employment payroll taxes, specifically FICA and Medicare taxes.

Therefore, there is no tax advantage for the employer to extend statutory employee status, if even applicable in the first place.

Further, I suspect the employee wants to be able to deduct out-of-pocket unreimbursed expenses directly from gross income on Schedule C directly rather than report these “employment” expenses on Form 2106 and instead deduct on Schedule A as miscellaneous itemized deduction subject to 2% Adjusted Gross Income limitation.

Accordingly, if your employee does not fit into one of the four groups listed above, then statutory employment status should not be considered.  And please note that there are additional critical requirements even within the four groups listed above.

In other words, few employees actual qualify for statutory employee status.

Answer: My sympathy, first and foremost.

Then the answer is it could be a few; it could be several.

The most important and often overlooked is formally dissolving your legal enterprise with the Colorado Secretary of State. This particular online filing takes about 5 minutes and includes a $25 filing fee.

If you have a State wage withholding tax license and/or State sales tax license, then you should file Form DR 1102 – Account Change or Closure.  This manually filed Colorado Dept of Revenue form can be located near the front of your small blue booklet – labeled either as Employer’s Withholding Tax Forms or Colorado Sales Tax Returns.

No fee is payable.

If you have a State unemployment insurance account number, then you should file Form UITL-2 – Employer Change Request.  This manually filed Colorado Dept of Labor & Employment form can be obtained online at http://www.colorado.gov/cs/Satellite/CDLE-UnempBenefits/CDLE/1248095315884.

No fee is payable.

Don’t forget to contact your local government agencies should you also have a county and/or city sales tax license or separate home occupation permit.

Finally, check the “final” box on your annual Federal and State business income tax returns should you be taxed as an S Corporation (Form 1120S), C Corporation (Form 1120) or Partnership (Form 1065).

And do the same with your final commercial personal property declaration schedule (yellow legal-sized form) due April 15th with the appropriate Colorado County.

Good luck in your new endeavors!