Stortz and Associates
July 2008 Newsletter

2ND QUARTER PAYROLL INFORMATION DUE

PLEASE NOTE – all payroll information is due to our office no later than Monday, July 21st, 2008.  Any information received after the 21st will incur an additional $100 surcharge in addition to your payroll tax return preparation fees.  Please call our office if you have any questions.

NEW MILEAGE REIMBURSEMENT RATES

Effective 7/1/08 - 12/31/08:

  • Business mileage reimbursement = 58.5 cents per mile
  • Medical mileage reimbursement = 27 cents per mile
  • Moving mileage reimbursement = 27 cents per mile
  • Charity mileage reimbursement = 14 cents per mile

bethlehem office hours:

  • Wednesday - 8am - 4pm
  • Friday - 8am - 12pm

please note:  stortz & associates (EMMAUS & BETHLEHEM) will be closed on friday, july 4th, 2008 in observance of the independence day holiday.

ARM'S LENGTH TRANSACTIONS

We’ve all heard that you shouldn’t do business with friends and family.  However, if you, as many of us do, choose to do so you should keep the transaction at an “arms length”.  What does this mean and why it is so important?

An “arms length” transaction is a transaction entered into by unrelated parties; that each act in their own best interests in paying or charging prices based on fair market values.

The concept of an arm's length transaction commonly comes into play in the real estate market. When determining the fair market value of a piece of property, the price for the property must be obtained through a potential buyer and seller operating through an arm's length transaction, otherwise, the agreed-upon price will likely differ from the actual fair market value of the property.  On the other hand, a transaction that is not arms-length is typically not based on market factors.

The IRS takes a close look at financial transactions between family members.  Although each transaction must be examined on its own facts to determine whether it is a non arms-length transaction, certain factors are generally indicative of a non arms-length transaction. These factors include but are not limited to:

1) The lease transaction is not voluntary on the part of one of the parties;

2) The lessor and lessee are related to each other by blood relationship, marriage, or close prior social or business relationships;

3) The negotiated rent amount is not comparable to fair market value rents paid for similar properties.

Should the IRS deem the transaction as non-arm’s length they could withdraw the transaction as if it never happened.  Additionally, you would then lose whatever gain or loss you had.

Resources used:

IRS Publication 3218

http://www.answers.com/topic/arm-s-length-transaction?cat=biz-fin

http://www.state.vt.us/tax/pdf.word.excel/legal/tb/TB28.pdf

SETTING UP VENDOR PAYMENT TERMS

When getting a bill from a vendor, it is important to enter the bill correctly into your accounting software so that the vendor gets paid when he is expecting payment from you.  Your accounting software allows you to customize each vendor with the specific payment terms.

To set up a unique set of terms for each vendor, please complete the following:

If you are a Peachtree user:

  • Go to MAINTAIN.
  • Select VENDORS.
  • In the Vendor screen, select which vendor you want to update.
  • Click on either the Purchase Defaults Tab or Purchase Information Tab.
  • Click on TERMS and you can customize what the vendor terms are (i.e. due in 25 days or 1% 10 Net 30 – meaning payment due in 30 days with a 1% discount if paid within 10 days, etc.).
  • Once you have updated the information, click SAVE.

If you are a QuickBooks user:

  • Go to the Vendor Center.
  • You will see a list of all your vendors and select the vendor that you want to update.
  • On the right-hand side of the screen, click on EDIT VENDOR.
  • Click on the ADDITIONAL INFO tab and terms are listed in the middle of the screen.
  • There is a drop-down list for you to select the vendor terms (i.e. due in 25 days or 1% 10 Net 30 – meaning payment due in 30 days with a 1% discount if paid within 10 days, etc.).
  • If the terms that you are looking for are not available, you have the option to “add new”.
  • Once you have updated the information, click OK.

Having accurate payment terms will ensure more precise records and keep your business on track.  Please call our office if you need any further assistance setting up your payment terms.

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independent contractors vs. employees

Business owners beware - the IRS is taking a hard look at workers categorized as independent contractors.  The IRS is reminding employers that, generally, anyone who performs services for the employer is an employee if the employer can control what will be done and how it will be done.  Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.  An employer that classifies an employee as an independent contractor and has no reasonable basis for doing so may be liable for employment taxes for that worker.

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.  Facts that provide evidence of the degree of control and independence fall into three categories:

  • Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  • Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Are you classifying your employees and independent contractors correctly?  If you’re not sure, contact our office.  We’ll gladly take a look at your current situation and advise you on any changes which need to be made.

Source:  www.irs.gov

limits on home mortgage interest deductions

Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit.  What's your qualified loan limit?  This is your home mortgage debt that is not more than the limits for home acquisition debt and home equity debt.

Home Acquisition Debt 

Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home).  It also must be secured by that home.

If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt.  The additional debt may qualify as home equity debt.

The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately).  Debt over this limit may qualify as home equity debt.

Refinanced home acquisition debt – Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt.  However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing.  Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt.

Home Equity Debt

If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt.  In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit, may qualify as home equity debt.

Example:  You bought your home for cash 10 years ago.  You did not have a mortgage on your home until last year, when you took out a $20,000 loan, secured by your home, to pay for your daughter’s college tuition and your father’s medical bills.  This loan is home equity debt.

There is a limit on the amount of debt that can be treated as home equity debt.  The total home equity debt on your main home and second home is limited to the smaller of:

  • $100,000 ($50,000 if married filing separately), or
  • The total of each home’s fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt.  Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.

Deducting Points

The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage.  Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.

Deduction Allowed in Year Paid

You can fully deduct points in the year paid if you meet all the following tests:

  • Your loan is secured by your main home.  (Your main home is the one you ordinarily live in most of the time.)
  • Paying points is an established business practice in the area where the loan was made.
  • The points paid were not more than the points generally charged in that area.
  • You use the cash method of accounting.  This means you report income in the year you receive it and deduct expenses in the year you pay them.  Most individuals use this method.
  • The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  • The funds you provided at or before closing, plus any other points the seller paid, were at least as much as the points charged.  The funds you provided do not have to have been applied to the points.  They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose.  You cannot have borrowed these funds from your lender or mortgage broker.
  • You use your loan to buy or build your main home.
  • The points were computed as a percentage of the principal amount of the mortgage.
  • The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage.  The points may be shown as paid from either your funds or the seller’s.

If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan.

Home Improvement Loan

You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met.

Second Home

You cannot fully deduct in the year paid points you pay on loans secured by your second home.  You can deduct these points only over the life of the loan.

Refinancing

Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them.  This is true even if the new mortgage is secured by your main home.  However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds.  You can deduct the rest of the points over the life of the loan.

Points paid by the seller

When paid by the seller, the term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer.

  • Treatment by seller - The seller cannot deduct these fees as interest.  But they are a selling expense that reduces the amount realized by the seller.
  • Treatment by buyer – The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she has paid them.  If all the tests listed in “Deduction Allowed in Year Paid” above are met, the buyer can deduct the points in the year paid.  If any of those tests are not met, the buyer deducts the points over the life of the loan.

Source:  www.irs.gov – Publication 936: Home Mortgage Interest

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