Standard Mileage Rates for 2013

The Internal Revenue Service issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56.5 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate.  The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51.  Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

http://www.irs.gov/uac/2013-Standard-Mileage-Rates-Up-1-Cent-per-Mile-for-Business,-Medical-and-Moving

More Subchapter S Corporation Audits Are Coming

Dear Friends,

I hope you are having a wonderful summer!  It’s hard to believe that we’re almost in August already.

A new report by the Treasury Inspector General for Tax Administration notes that IRS audits have led to a substantial number of recommended adjustments reported on S corporation returns; however, the number of no-change audits was 62% in fiscal year 2011 for returns selected by the “Discriminant Index Function system”.

The IRS plans to analyze data files to better identify productive S corporation returns for audit. The growth in the number of S corporation returns processed has continued since 1997 when they became the most common type of corporation return filed.

The IRS estimates there will be a 26% increase in S corporation returns from the 2011 processing year to the 2015 processing year. What’s the take-away from this information?  There will be a lot more S Corporation audits and IRS wants to focus on “Productive” S Corporation returns.

If you are a stockholder in a “Productive” Subchapter S Corporation, there are some things that, at a minimum, you should ensure are being handled properly.  First of all, make sure that stockholder/employees are being compensated adequately.  We can’t emphasize enough how big an issue this is and we have suspected that IRS would intensify its focus here.

Secondly, make sure that vehicle mileage logs are prepared and maintained for company owned or leased vehicles utilized by stockholder/employees (or family members or, frankly, any one else that drives a company vehicle).  Personal use of company vehicles is always covered in any business tax return audit.  If your S Corporation is not maintaining mileage logs, you will lose tax deductions.

Finally, verify that all transactions between stockholders and the S Corporation are supported by appropriate documentation.  If transactions aren’t properly documented, IRS would reclassify them as disguised compensation subject to payroll taxes (including the new ObamaCare medicare tax that takes affect in 2013).  Reclassification of these amounts as additional compensation would also result in IRS claiming that previously filed payroll tax returns were incorrect and subject to additional tax, penalties, fines and interest.

Transactions requiring appropriate documentation would include, for example:

·        Lease agreements for S corporation rental of stockholder owned property(ies),

·        Board minutes prepared for all board meetings (with at least an annual board meeting, at a minimum),

·        Stockholder distributions are made in direct proportion to stock ownership and as a part of a plan of distribution (rather than indiscriminately),

·        Stockholder/Employees should submit expense reports for reimbursement of out-of-pocket expenses, just like every other employee.

This is serious news and it will require a large number of Subchapter S corporations to take a good hard look at how they are doing things.  We have learned that, in many cases, IRS agents like “form” over “substance” so it’s imperative that you have all of your S Corporation documentation handled properly. 

Time is on our side.  Take some time to review your business practices and make sure that you’ve got your Subchapter S Corporation “I’s” dotted and “T’s” crossed.  We can help – please let us know if you need some guidance.

~Franty & Company

In Defense of Capitalism

Do you like Twitter?  I really enjoy it and find it to be an amazing place to get information.  If you’re not Tweeting, it’s something that you should spend some time exploring. 

I read a “Tweet” a few days ago that really got me thinking.  Most of our clients are in business and I wanted to thoughtfully address the Tweet we read about Capitalism. The Tweet in question read as follows:  “#Capitalism is a political economy based on the private ownership of production for class exploitation.”  Really?  I thought you were all in business or working to make a profit.  I didn’t realize that you were a bunch of exploiters.  Let’s take a look at that.

About 120 years ago, French sociologist Gabriel Tarde (http://en.wikipedia.org/wiki/Gabriel_Tarde) addressed the popularization of luxuries. Tarde identified that “an industrial innovation enters the market as an extravagance for the elite before it finally turns, step by step, into a something considered indispensable to all in a society.”  This was more than 120 years ago!!  I found that quote to be quite prophetic.

The history of technology and marketing confirms Tarde's thesis. There used to be a considerable time lag between the emergence of some new & amazing product and it’s becoming affordable for everyday use 

Think: Apple & the iPhone

It sometimes took centuries before an innovation was generally accepted. Think of the slow popularization of the use of forks, soap, handkerchiefs and of a great variety of other things.  While Tarde was publishing his observations, the famous industrialist and philanthropist Andrew Carnegie (http://en.wikipedia.org/wiki/Andrew_Carnegie) concisely wrote that “Capitalism turns Luxuries into Necessities.”

From its beginnings, Capitalism displayed the tendency to shorten this time lag and finally, in today’s world, to eliminate it almost entirely. This is not merely an accidental feature of capitalistic production; it is inherent in its very nature.

Capitalism is essentially mass production for the satisfaction of the wants of the many. Its trademark is large scale production by big business. For big business to prosper there can be no question of producing limited quantities for the sole satisfaction of small elite. The larger big business becomes, the more and the quicker it makes accessible to the whole people its newest technologies (Again, Think: Apple and the iPhone).

The evolution of the automobile from a plaything of the wealthy into a universally used means of transportation required more than twenty years.  The same can be said of airline travel.  In my youth, I had the impression that only wealthy people could afford an airline ticket but today it is an everyday occurrence to book a flight on the internet.  There was practically no period in which the enjoyment of such innovations as television or the products of the frozen food industry were restricted to the wealthy. I think of things like air conditioning, microwave ovens, personal computers, iPhones, GPS devices and Wi-Fi; these items were virtually unheard of only forty years ago but today they are often considered necessities.

The author of the offensive tweet and other disciples of Karl Marx (http://en.wikipedia.org/wiki/Karl_Marx) are anxious to describe the "unspeakable horrors of capitalism" which, as Marx believed results "with the inexorability of a law of nature in the progressing impoverishment of the masses." The Marxists’ prejudices prevent them from noticing the fact that capitalism tends, by the necessity of big-scale production, to wipe out the striking contrast between the way of life of the wealthy elites and that of the rest of us. 

Did you use your GPS this week?  I sure did.  I started writing this on my PC and finished it on my iPad connected to the internet via Wi-Fi.  I'm in my air conditioned home and we just finished a delish meal of leftovers fresh out of the microwave.  Indeed, Capitalism turns luxuries into necessities.

Homework Assignment for the Self-Employed

If you're self-employed, you may have a tough time relating to traditional financial advice.  The financial self-help publications are targeted towards mutual fund investing and the on-line sources of information are geared towards employees earning paychecks and not having to worry about all of the things that go through the mind of a self-employed person.

It's harder to budget when you don't make the same amount of money each month.  If your monthly income isn’t consistent and you have no employer withholding your tax contributions, budgeting and financial planning gets a little more complex.

From saving money for taxes to ensuring your retirement needs are met, here are seven tasks to you should consider implementing if you're self-employed.

Save percentages, not fixed $$ amounts

If your monthly income fluctuates, designating a specific dollar amount to emergency savings and retirement accounts could lead you to save too little during high-income months and too much during low-income months.

Instead, allot a percentage of your monthly income to retirement and emergency savings. That way, you'll contribute more to your most important financial goals when you have more money, and less when you have less. Regardless of what you make in a given month, 10 percent of your monthly net income is always a good rule of thumb for how much you should set aside for your retirement account and emergency savings fund (we’ll tackle “Taxes” next).

Pay Taxes First

The “Pay Yourself First” theory goes out the window when we’re talking about Taxes! If you are self-employed, your contributions to federal & state taxing authorities must take precedence. While paycheck earners have their taxes withheld, self-employed individuals must set aside taxes on their own. One of the biggest mistakes that self-employed people make is failing to set aside money for taxes and learning they owe $10,000 or more at tax time.  And because that first big tax bill is generally unexpected, we find that many self-employed clients don’t have that money when they need it.

Self-employed people also must make estimated tax payments on a quarterly basis. If you pay late, you'll end up paying interest and penalties, which will ultimately cost you more. To make sure you have enough set aside, stash away 30 percent to 35 percent of your net profit each month for taxes. After we’ve worked with you to maximize your business tax deductions, it’s likely that your actual tax bill will be lower than that range, but it's better to be safe than sorry.

Take Advantage of Time

While you're preparing for that tax bill, it's perfectly acceptable to make a little money on the money you're using to pay your taxes. Though you won't get rich off of the investment returns, an interest-bearing checking or savings account will at least let you make something on the money that you're stashing aside. That’s how companies like ADP and Paychex make most of their profits.

While you won't be writing many checks from this account, make sure you won't be penalized for low balances because you will be hitting the account hard every quarter to pay your taxes.

Short-term CDs are another option for those who want to make a little money on their tax savings. Unlike checking and savings accounts, which offer more liquidity, CDs tie up your money for a set period of time.  For self-employed individuals who know they won't be touching that money for three or more months, a three-month CD could be a good option for your tax money.

Make a Budget and Stick to it

You may not be able to predict your income from month to month, but you can determine how much money you need to live on. Figure out how much you must spend on housing, utilities, food and other living expenses, and then use that money to determine how much you'll be allotted to spend each month. We suggest that you transfer this amount each month from your business checking account to your personal checking account.

If you're not reaching this number consistently, you're not making enough money.   No crafty accountant can help you achieve your financial goals or save on taxes if you don’t make enough money to live on.  If this is the case, make an investment in our services because we may be able to help with a plan to grow your revenue.

If you are making more than what you need to cover your living expenses, don't increase your spending! We find that some of the wealthiest people we work with are often the most careful with how they spend their money – and that’s smart no matter how much money you have.   Ben Franklin’s famous adage “a penny saved is a penny earned” still holds true today.

Build Financial Confidence by Building Cash Reserves

If your small business is anything like ours, you’ll have more income in some months than others (did someone say “Tax Season”?). When you have a month in which you double or even triple your typical income, take out your percentages for taxes, retirement and emergency funds, give yourself your salary, and put the rest in what we like to call your “Reserve” Fund – and Never, Ever use the money that’s in your Reserve fund!  OK, that’s not really true but it’s the mindset you should adopt.  If you find that you need funds to cover a substantial expense, be creative and figure out how you can pay for it without touching the Reserve Fund.

As the balance in your Reserve Fund builds up, you'll gain confidence and increase that much-needed feeling of financial security. 

Tackle Other Financial Goals

Once you have six months' worth of operating & living expenses in your Reserve Fund, you should focus on other financial goals. If you have substantial debt, you'll want to tackle that first. After that, ask yourself how you can best use your extra cash flow. Do you need to invest in your business for expansion, do you have two teenage kids to send to college, do you want some permanent life insurance, or do you want have other financial goals? 

Since your basics are covered at this point, the extra money you make in a good month can go toward paying down that debt or building up that 529 college savings plan. If you're consistently making more money than you need, increase the percentages you're allotting to retirement and savings. If you’ve made it to this point in the plan, it’s time to begin working with a qualified personal wealth advisor.

Communicate With your Tax Professional

Once your plan is set and working, check in with us periodically to make sure you're also on track with taxes.  If you haven’t learned this already, you’ll find that taxes can really hit you hard when you’re not prepared.

We're Back in the Saddle Again!

Hi Folks,

Well, we here at Franty & Company are all somewhat relieved to have completed another challenging tax season and we are back in the saddle again.  We wanted to remind you that we are here for you year 'round and always available to assist our clients with any tax, accounting and management consulting needs.

I can honestly say that there was a little bit of panic when the Kuerig suddenly stopped working on April 10th, but Ellen solved that problem with a quick trip to Bed, Bath & Beyond.  The good folks at the BBB gladly replaced our old non-working K-Cup dispensing unit with a brand-spanking-new one and it was on the house.  No Charge!  Wow...what a surprise and what a treat.

I hate to admit it, but the last week of the filing season would have been much more trying without the assistance of caffeine.  Our staff is full of lovely people but we can get a bit crabby when there's no Java in the house (or English Breakfast Tea for me).

With the coffee flowing again (and Decaf featured in the evening hours) we got through to April 17th.  Just wanted to let you know that we're all okay, we're back at work and we're handling the returns on extension and a number of other projects for our valued clients.

We'll be posting some news you can use to the blog again in the coming weeks, so keep an eye out for the updates.  As always, please call or email if we can be of any assistance.

News You Can Use as we near the end of February

Here in western Pennsylvania, we are enjoying a mild winter (for a change).  Let’s pray that trend continues.  While we are keeping ourselves busy here in the heart of tax season, we came across a few news items that we thought worth sharing with you.  Let us know what you think…especially about the good news for some of our brave soldiers that suffered under Saddam’s torturous regime in the first Gulf War.


IRS has released a revised Form 941, Employer's QUARTERLY Federal Tax Return, that reflects the extension of the 2-percentage-point payroll tax cut through 2012 by the “Middle Class Tax Relief and Job Creation Act of 2012.” As a result of this Act, employees will pay only 4.2% Social Security tax for 2012 up to $110,100 (wage base for 2012), and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income on wages up to $110,100. Employees need not do anything to receive 4.2% SS tax withholding rate, which was 2011 rate and 2% lower than pre-2011 rate. Also, self-employed workers will receive similar 2% rate reduction in SS portion of self-employment tax.


Damages Received as Prisoner of War: In this information letter, the IRS discusses a settlement agreement involving a Congressman's constituent who was a former prisoner of war in the 1991 Gulf War. The taxpayer sued Iraq and received a settlement that was paid by the U.S. government. According to the IRS, it appeared likely the payment would be excluded from gross income under IRC Sec. 104(a)(2) since the underlying lawsuit indicated the prisoners were physically tortured, beaten, starved, and deprived of medical care.


Bartering Income: The IRS reminds small business owners that the fair market value of property or services received through barter is taxable income. Barter exchanges, whether operated out of a physical office or through the Internet, generally are required to issue Form 1099-B to its members and the IRS. Income from bartering is taxable in the year it is performed and may result in ordinary income, capital gains or losses, or nondeductible personal losses. Bartered goods and services used as part of compensation packages are subject to the same employment tax withholding and information reporting as cash compensation. For more information, see the Bartering Tax Center on www.irs.gov.

Couples who filed joint returns must now file separate powers of attorney

“The line it is drawn and the curse it is cast, The slow one now will later be fast,

As the present now will later be past, The order is rapidly fadin’,

And the first one now will later be last, For the times they are a changin’.” 

One of my favorite classic Bob Dylan songs…the times, they are a changing.

Starting March 1, the IRS will no longer accept old versions of Form 2848, Power of Attorney and Declaration of Representative, and will accept only the version released in October 2011. The new version of the form requires a husband and wife who filed a joint tax return to each file a separate power of attorney on separate Forms 2848 to designate the representative he or she chooses, even if it is the same person (Instructions to Form 2848 (rev. October 2011)).

Under the most recent prior version of Form 2848 (rev. June 2008), a husband and wife who filed a joint return and wanted to have the same representative could file one Form 2848 (Instructions to Form 2848 (rev. June 2008)).

Another change in the form is that the representative must provide his or her preparer tax identification number (PTIN). A new category of representative—registered tax return preparer—has been added to the form.

In discussions with Benson Goldstein, senior technical manager, tax, for the AICPA, the IRS has indicated that only the new version of Form 2848 will be accepted, starting on March, 1. Husbands and wives who already had a power of attorney on file as of that date do not have to file new separate forms.

Source:  http://www.journalofaccountancy.com/Web/20125103.htm

Let us know what you think of this new wrinkle.  Is this a good thing or is it something else?  You can post your comments below.

Carpe Diem!

PS:  The tax-day count down is on.  April 18^th is right around the corner~!

The Dirty Dozen - IRS Audit Targets

Hi Folks,

Hope you’re all happily settled into a busy 2012.

When meeting with a tax client, we are often asked “if I do this, will it send up a red flag”?  Good question.  Well, our friends at Kiplinger’s have compiled a dirty dozen list of IRS Targets.  Here is a run-down of the top 12 and a link to the full article is at the bottom of the message.  

1. Making too much money

Although the overall individual audit rate is about 1.11%, the odds increase dramatically for higher-income filers. IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 3.93%, or one out of slightly more than every 25 returns. Report $1 million or more of income? There's a one-in-eight chance your return will be audited.

2. Failing to report all taxable income

The IRS gets copies of all 1099s and W-2s you receive, so make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill.

3. Taking large charitable deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

4. Claiming the home office deduction

Like Willie Sutton robbing banks (because that's where the money is), the IRS is drawn to returns that claim home office write-offs because it has found great success knocking down the deduction and driving up the amount of tax collected for the government. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That's a great deal. However, to take this write-off, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work. "Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

5. Claiming rental losses

Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. But this $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000.

6. Deducting business meals, travel and entertainment

Schedule C is a treasure trove of tax deductions for self-employeds. But it's also a gold mine for IRS agents, who know from experience that self-employeds sometimes claim excessive deductions. History shows that most underreporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both higher-grossing sole proprietorships and smaller ones.

7. Claiming 100% business use of a vehicle

Another area ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it's extremely rare for an individual to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.

8. Writing off a loss for a hobby activity

Your chances of "winning" the audit lottery increase if you have wage income and file a Schedule C with large losses. And if the loss-generating activity sounds like a hobby -- horse breeding, car racing and such -- the IRS pays even more attention.

9. Running a cash business

Small business owners, especially those in cash-intensive businesses -- think taxis, car washes, bars, hair salons, restaurants and the like -- are a tempting target for IRS auditors.

10. Failing to report a foreign bank account

The IRS is intensely interested in people with offshore accounts, especially those in tax havens, and tax authorities have had success getting foreign banks to disclose account information.

11. Engaging in currency transactions

The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. A report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agrees, and it will make greater use of these forms in its audit process. So if you make large cash purchases or deposits, be prepared for IRS scrutiny.

12. Taking higher-than-average deductions

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

Read more: http://www.kiplinger.com/features/archives/12-audit-red-flags-the-irs-looks-for.html#ixzz1kONt6av7 

New Year, New Tax Rules

Happy New Year everybody~!  We hope you’ve all enjoyed the holidays and are well rested for the big, New Year we’ve got to get on with.

Below we’ve highlighted some tax law “changes” that took effect with the New Year.  The business changes are significant, especially for well managed real estate holders and for other capital intensive businesses.  The highlight to the individual items is the temporary reduction in the FICA tax rate for wage earners.  Happy Reading!

Business changes taking effect in 2012 and late 2011. Business changes effective in 2012 (or went into effect in December of 2011and are thus “new”), include the following:

... Longer write-off period for certain property. For specialized realty assets (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) placed in service after 2011, a 39-year (up from 15-year) write-off period generally applies.

... Reduced bonus depreciation allowance for qualified property. For qualified property acquired and placed in service after 2011 and before 2013 (after 2012 and before 2014 for aircraft and certain long-production period property), a 50% (down from 100%) bonus first-year depreciation allowance applies under Code Sec. 168(k).

... Reduced expensing. For a tax year beginning in 2012, the Code Sec. 179 expensing election is reduced to $139,000, with a $560,000 investment-based ceiling (down from $500,000/$2 million). For tax years beginning after 2012, it will be further reduced to $25,000 with a $200,000 investment-based ceiling. Additionally for a tax year beginning after 2011, expensing can no longer be claimed for qualified real property. 

Individual changes taking effect in 2012. Individual changes that apply in 2012 include the following. Note that Congress may retroactively amend one or more of these rules:

... 2012 Social Security Wage Base. The wage base for “FICA” tax increased from $106,800 in 2011 to $110,100 in 2012.  As in prior years, there is no limit to the wages subjected to the Medicare tax, so all wages are subject to the 1.45% tax (which is matched by the employer).  Currently, there is a 2 month FICA tax rate of 4.2% for employees through the end of February and the employer portion of the tax will be 6.2% for the entire year.  Pending further legislation, the employee’s tax rate will increase back to 6.2% on March 1, 2012.  We think the reduced rate will ultimately be enacted for all of 2012 and we’ll keep you posted on those developments.

... Reduced alternative minimum tax (AMT) exemption amounts. Absent another AMT “patch,” the AMT exemption amounts for tax years beginning after 2011 revert to the significantly lower “permanent” amounts of $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for married filing separately.  Crikey! If there’s no patch enacted, this little beauty will reach out and bite tens of millions of taxpayers [make sure to read that last passage out loud in your best “Crocodile Hunter” Australian accent].  We expect a legislative “patch” to be worked out either early in the year or some time after the November elections.  Again, we’ll keep you posted.

... Reduced adoption credit. For 2012, the total expenses that may be taken as a credit for all tax years with respect to the adoption of a child by the taxpayer will be limited to $12,650 (down from $13,360 for 2011), and the credit for the adoption of a special-needs child will also be $12,650 (down from $13,360 for 2011). Furthermore, the adoption credit will no longer be refundable.

... No parity for exclusion from income for employer-provided mass transit and parking benefits. For 2012, unless Congress changes the rules, the exclusion for qualified parking rises from $230 to $240 due to an inflation adjustment, but falls from $230 to $125 for employer-provided transit and vanpooling benefits.  Again, we expect that the higher exclusion amount for parking will be extended in 2012.

... Reporting foreign assets. Beginning in 2012, U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 must report those assets to IRS on Form 8938, Statement of Specified Foreign Financial Assets, with their tax return.