SelfInformed

January 2014


Tax Season is Here! Are You Ready?

Monday, January 27, 2014



BY AL RICKARD


Now that the holidays are over, the real “wonderful time of the year” begins for small business owners: Tax season!

As usual, the U.S. tax code is full of changes this year.

For starters, entrepreneurs face a new landscape of tax rates for higher income individuals: a 39.6 percent income tax rate, a 20 percent maximum tax rate on capital gains and dividends, a 3.8 percent net investment income tax and a 0.9 percent Medicare compensation surtax. New as well are requirements and opportunities surrounding the tax treatment of repairs, improvements, acquisition costs and other common business expenses.

Some usual tax breaks for businesses may have ended in 2013 if Congress did not renew them, such as bonus depreciation, enhanced “Section 179” expensing and a work opportunity credit. (The survival of these tax breaks was still pending as this issue of Self Informed went to press.)

Finally, although the “employer mandate” under the new health care reform law was recently postponed from 2014 to 2015, now is not too early to start planning to comply with rules that will be based on employee makeup starting January 1, 2014.

Tax Preparation Costs
Many self-employed individuals hire professional tax preparers/accountants to prepare and file their taxes. Others prepare their own tax returns. Either way, there is a cost for this process in terms of time spent or professional fees paid.

So how much does it cost to hire an outside professional?

The National Society of Accountants (NSA) reports that the average cost for a professional to prepare a 2013 itemized Form 1040 with Schedule A and a state tax return is $261.

“The IRS says it takes an average of four hours just to complete and submit a Form 1040,” says NSA Executive Vice President John Ams. “Add at least another hour if you also have to complete a state return. You have to ask, ‘How much is your time worth?’”

Ams adds that tax preparers make it their business to keep up with tax law changes. “If a professional tax preparer can catch even one deduction or credit you may have missed, that can easily pay for the fee,” he notes.
Self-employed individuals also typically have somewhat complicated tax returns, which requires even more time 
and expertise. NSA has also identified the following average 
fees for other Internal Revenue Service (IRS) forms:

  • $218 for a Form 1040 Schedule C (business)
  • $590 for a Form 1065 (partnership)
  • $806 for a Form 1120 (corporation)
  • $761 for a Form 1120S (S corporation)
  • $497 for a Form 1041 (fiduciary)
  • $667 for a Form 990 (tax exempt)
  • $63 for a Form 940 (Federal unemployment)
  • $142 for Schedule D (gains and losses)
  • $165 for Schedule E (rental)
  • $196 for Schedule F (farm)

Fees vary by region, firm size, population, and economic strength of an area. The average tax preparation fee for an itemized Form 1040 with Schedule A and a state tax return in each U.S. census district are as follows:

  • New England (CT, ME, MA, NH, RI, VT) – $251
  • Middle Atlantic (NJ, NY, PA) – $274
  • South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV) – $270
  • East South Central (AL, KY, MS, TN) – $294
  • West South Central (AR, LA, OK, TX) – $242
  • East North Central (IL, IN, MI, OH, WI) – $238
  • West North Central (IA, KS, MN, MO, NE, ND, SD) – $208
  • Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) – $245
  • Pacific (AK, CA, HI, OR, WA) – $303

Fees for preparing other IRS forms also vary proportionally by region.
This fee information was collected in a survey of tax preparers conducted by NSA. The tax and accounting firms surveyed are largely owners, principals, and partners of local “Main Street” companies who have an average of more than 26 years of experience.

“Members of NSA are highly qualified tax professionals who typically hold multiple credentials that demonstrate their expertise,” Ams adds. “Taxpayers receive personal service from people who live and work in their community and fully understand local and state tax laws in addition to their deep knowledge of the federal tax code.”

Most of them hold widely respected credentials such as Enrolled Agent, Certified Public Accountant, Accredited Tax Preparer, Accredited Tax Advisor, and others (see sidebar).

Nearly 90 percent of accounting firms offer prospective clients a free consultation, which can be worth well over $100 based on the hourly fees of most tax preparers.
Sixty percent of accounting firms do not require payment until returns are completed and clients are satisfied. Others may require a portion of the fee upfront or payments throughout the tax return process.

All fees assume a business owner has gathered and organized all necessary information to efficiently prepare a tax return.

Tax Information You Need
Whether you prepare your own taxes or hire a professional, the following checklist of commonly required documents can help you prepare:

  • Self-employed business income and expenses (e-mail a report to your tax preparer from your Quickbooks or other accounting program if possible)
  • Detailed list of business inventory held on December 31 of the tax year
  • Wage statements/W2s
  • K-1 forms from partnerships, s-corporations, and estates
  • Mortgage interest statement (Form 1098)
  • 1099 Forms: 1099-MISC for Work Performed as an Independent Contractor, 1099-R for Pensions & Retirement Income, 1099-SSA for your Social Security Income, 1099G for your State Tax Refund
  • Estimated federal and state taxes paid, including a list of the check amounts and dates paid
  • Investment information: Year-End Statements for all investment accounts, such as brokerage accounts, retirement accounts (401k, 403b, IRA, ROTH, Annuities), etc. Remember your Form 1099-B for Sale of Stocks/Mutual Funds, if applicable, including your original purchase price for shares sold.
  • Investment-related expenses, including management fees charged by a financial advisor for non-retirement accounts, safety deposit box rental costs, etc.
  • Interest and dividend income statements
  • Medical and dental expenses, including medical insurance premiums
  • Insurance premium expenses for long term care, life insurance, etc.
  • Charitable contributions, including mileage and expenses incurred while volunteering
  • Home energy improvement receipts for energy-efficient heating and air conditioning equipment, windows, solar panels, etc.
  • Foreign bank account information, including foreign taxes paid
  • Sales tax records if you purchased a car, boat, RV, or mobile home in the tax year that may be tax deductible (depending upon whether Congress renews this tax benefit)
  • Lottery or gambling winnings/losses
  • Social Security/unemployment income
  • Income and expenses from rental properties
  • Alimony paid or received
  • Record of purchase or sale of residence, including closing statements
  • Real estate and personal property taxes paid
  • Job-related educational expenses
  • Educational expenses for children
  • Childcare expenses and provider information
  • Job-hunting expenses, including a mileage log to log in each trip related to job-hunting
  • Social security card/number
  • Driver’s license
  • Dependents’ Social Security numbers and dates of birth
  • Last year’s tax return
  • Tax preparation fees paid during the prior tax year

If you are meeting with a tax professional and are not sure what documents are needed, bring them anyway – it is better to have too much than have to go back and gather additional documents.

If you need to find a tax professional, visit the NASE Small Business Locator and click on Professional Services to find accounting professionals.

NSA also has an online search directory to identify tax professionals in your area. Visit www.nsacct.org and click on “Find a Professional” or call 800-966-6679.

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