Category: tax forms

Tax forms from the IRS

SR&ED and the Federal Budget

The Scientific Research and Experimental Development (SR&ED) program, introduced in the 1980s, is a federal tax incentive program administered by the Canadian Revenue Agency, which provided $3.6 billion in tax assistance for research and development in 2011. In the past year, the SR&ED or SRED program was reviewed by a panel led by OpenText’s Thomas Jenkins which led to a series of recommended changes to the program presented to the federal government. Despite dramatic speculations of program overhauls in anticipation of the budget, the SR&ED program continues to be one of the most lucrative R&D incentive programs in the industrial world, with the enhanced Investment Tax Credit (for smaller businesses) rate maintained at 35%.

Current eligible SR&ED expenditures are based on salary and wages, materials, overhead, contracts, and capital expenditures. The 2012 federal budget proposed four core adjustments to the program. The proposed changes are as follows: the Prescribed Proxy Amount (PPA) method of overhead calculation is to be reduced from 65 to 55 percent of direct labour costs by 2014; capital costs will no longer be eligible for the credit in 2014 and onward; eligible third-party contract payments will decrease from 100 to 80 percent in 2013; and the General Investment Tax Credit (for large corporations and foreign-owned companies) will see a five-percent reduction from 20 percent to 15 percent in 2014.

Capital-intensive industries will be affected through the first two recommended changes. SR&ED overhead costs are calculated by one of two approaches: a direct method approach, and an indirect approach using a percentage of labour (proxy) expenditures. The Prescribed Proxy Amount (PPA) is seeing a 10-percent reduction to 55 percent in a two-phase implementation; the PPA will be reduced to 60 percent in 2013, and 55 percent in 2012. The elimination of capital from the SR&ED expenditure base will have an impact on industries reliant on the purchase and upgrade of equipment and machinery.

Currently, 100 percent of eligible sub-contract payments can be claimed as SR&ED expenditures, which will be marginally reduced 20 percent effective 2013. The largest SR&ED program savings will accumulate from the reduction of the general rate investment tax credit, applying primarily to larger corporations and foreign-owned entities. The general ITC was reduced from 20 to 15 percent.  The recommendations will have limited effect on small- and medium-sized Canadian Controlled Private Corporations (CCPCs), as these companies will retain the enhanced 35-percent ITC rate on the first $3 million of expenditures. Overall, the changes to the SR&ED program will contribute to a simplified process, supported through additional funds allocated to improving the administration of the program.

This article was written by Mahrie Boyle, SR&ED and OIDMTC Team Specialist with NorthBridge Consultants.

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Paying for College: Student Loan Interest Deduction Explained

Interest on student loans can get overwhelming. Luckily, the IRS allows for the Student Loan Interest Deduction which can be taken by qualified filers. The deduction allows for any paid interest to be deducted from amount of income earned annually and provides a valuable tool to help balance finances for those in the throngs of repayment.

Eligibility

Any loan taken out for the sole intention of covering eligible expenses related to the pursuit of a higher eduction is considered a “qualified” student loan with deductible interest. The elegibility of expeneses includes those for which the Tuition and Fees deduction is applicable.

Those attempting to claim the deduction must be indepedent of caregivers and cannot be considered an dependent or exemption on any other tax return. The deduction also carries other conditions and must meet certain criteria related to annual income, a legal obligation to pay interest, and the amount of interest actually paid during the year one is filing.

Interest on student loans can get overwhelming. Luckily, the IRS allows for the Student Loan Interest Deduction which can be taken by qualified filers. The deduction allows for any paid interest to be deducted from amount of income earned annually and provides a valuable tool to help balance finances for those in the throngs of repayment.

Eligibility

Any loan taken out for the sole intention of covering eligible expenses related to the pursuit of a higher eduction is considered a “qualified” student loan with deductible interest. The elegibility of expeneses includes those for which the Tuition and Fees deduction is applicable.

Those attempting to claim the deduction must be indepedent of caregivers and cannot be considered an dependent or exemption on any other tax return. The deduction also carries other conditions and must meet criteria related to annual income, a legally-observed obligation to pay interest, and the amount of interest actually paid during the year in which one files.

Married couples can claim the interest deduction only when filing jointly. The IRS allows one to deduct up to $2,500 annually for any interest paid on student loans which meet federal requirements. Any amount of interest above the threshold of $2,500 doesn’t count, nor can any deduction exceed the actual amount of interest paid.

Interest generated via the various types of educational loans can qualify for the deduction, including: interest on the loan itself, interest on any consolidations, and interest accumulated via lines of credit. The most important qualifier for determining eligible interest involves the intention of money borrowed, any money was used for educational expenses is generally applicable.

Deductions Versus Credits

Tax deductions differ from credits. Credits reduce the total of tax owed whereas deductions reduce the amount of income which can be taxed. The Student Loan Interest Deduction can be taken for up to $2,500 of any interest actually paid in the previous tax year. Deductions lower one’s revenue by the amount of the deduction. Therefore, the actual amount of income tax is lowered along with the tax burden and total bill which one pays.

Forms

Appropriate filing procedures for the Student Loan Interest Deduction are claimed as an adjustment to income, and therefor do not need to be itemized. Filers cannot take such deductions on Form 1040EZ. However, the deduction can be taken on line 18 of Form 1040A or on line 33 of Form 1040, both of which can be submitted via the free IRS efile process.

The cost of college seems never-ending to someone in the doldrums of student loan debt. However, interest paid can often be replenished via a tax return for those who qualify, which helps ease the burden. As with most tax scenarios, understanding the proper filing procedures and following the correct protocol can contribute to a much larger tax reimbursement.

Citations:

Katei Cranford is a writer who shares her expertise of financial situations for students and graduates.

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End of Year Accounting Tips for Beginners

In 1752 the English New Year was moved from the end of March to the beginning of January.  Thankfully, the Georgian authorities saw fit to leave the Financial New Year where it was.  I love the 18th century Georgian authorities.  If it wasn’t for them I’d have to deal with the New Year Hangover and the Financial New Year Hangover at the same time.  Like many self-employed people, the end of the financial year, and tax return deadlines finds me in a bad mood, usually late at night with a large pot of coffee and tons of paperwork to spill it on.  When you’re self-employed the focus is on the day job – working to earn money and delight clients.  Paperwork can wait – but it can’t wait for ever.  There has to be an easier way and if, like me, you’re a persistent ‘deadline surfer’ the following might help.

Timing, Tools and Advice

  • Whether you like it or not, you have to make book-keeping a significant priority in your life.  The taxman demands up to date and accurate records and the fines for getting it wrong can be fatal.  So take note; get into a routine with your book keeping and accounting and stick to it.  Diary it into your schedule on a regular basis and stick to the diary.  Treat it as if it was work for a client.
  • There are several important dates in the financial year, make a note of them and keep an eye out for them as they come up.  If you don’t already fill in your tax returns online, register to do so now.  It’s going to become a requirement soon and the deadline for filling them in is currently a whole, delightful three months later than the paper deadline.
  • Accounting software or book keeping software is an investment that you won’t regret.  Double check with your accountant on systems they recommend and check that the cost falls under ‘allowable expenses’.  The accounting software available is usually simple to use and it takes nearly all of the hard work out of record keeping, allows you to keep centralized records, produce professional invoices and it will also cut the time your accountant needs to prepare accounts – saving you even more money.
  • Get help.  There are a vast number of free resources available to small businesses and the self-employed.  HMRC, for a start, are there to help and are more than willing to offer advice and support to new business.  Their role is to collect taxes not crush promising new enterprises who can generate those taxes.  In addition Business Link has specialist advisers and can offer access to courses or seminars to help in many different areas.

Accountancy tasks can be time consuming and for small businesses it’s a task that can take you or your staff away from the real business of making money.  Planning tasks carefully, knowing the key dates in the tax year, employing an accountant and making the most of accounting software will help to keep you feeling bright and fresh in the coming financial year.  You might even want to raise a glass to the memory of those enlightened authorities of the 18th century.

Neil blogs about small business and entrepreneurism, on everything from bookkeeping software to digital marketing.  When he’s not online he enjoys good food, cycling and painting.

 

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How long should you keep your tax documents?

Your tax documents are very important documents that you may need to refer to way after the time you actually file your return. More importantly, the IRS may need to refer to these documents at some point in the future and you therefore need to make sure that you do not dispose of your tax documentation once you have filed your returns thinking that you will never need the documents again.

Whilst most people are aware that they need to keep their tax documents for a certain amount of time many are not sure how long they should keep them for. Of course, it is impractical to hoard your tax documents forever, as otherwise you may find that you can no longer move in your office of home due to the amount of folders, paperwork and documentation that you have!

However, it is important to keep your documents for at least a set minimum number of years and if at all possible for as long as you can – something you could do if you have some sort of storage facility available to you such as an unused garage where you could store old tax folders (although you must ensure that the facility you use is secure due to the personal information that your tax documentation can contain).

One thing to bear in mind when deciding how long to hang on to tax documents is that tax offices in different states will hang on to your documents for varying amounts of time. For example, in some states the IRS is able to carry out an audit within three years of your tax returns being filed, which means that after that period they will most likely get rid of the documents. In other states they may have four years from the date of the return to carry out an audit should they decide to do so. You should make sure that you find out what the timescales are in your state and hang on to your records for at least the same amount of time as the IRS so that you have something to refer to in the event of an audit.

However, another thing to consider is that if you get rid of your tax documentation once the IRS also gets rid of it there will be nothing to refer to in the event that you need the information for other purposes in the future, which is why some people like to hang on to their tax documents for as long as they are able to.

Andrew writes frequently about personal finance as well as issues effecting both consumers and small businesses, covering everything from credit cards to mortgages to how to setup an umbrella company .

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The Pitfalls Of Doing Your Own Taxes

Doing your own taxes might seem like an easy enough thing to pull off. You just get your W-2 form, put in the numbers and you are good to go. However, there can be more to doing your taxes than just simple math, and even that can be hard to do for some people. While it might not be fun to have to pay someone to do your taxes, it can save you a lot of headaches down the line.

You Could Get The Numbers Wrong

Doing your own taxes means inputting your own information. If you have a W-2 and you are using software, this should be no problem. However, if you are self-employed, or are doing taxes by filling out a form by hand, it can get a little tricky. Instead of knowing that you have made 5,294 dollars during the year, you guess and just say 5,000 dollars. The IRS is not going to like that you have under reported income.

Even if you do get the numbers wrong, but correct it, you can still find yourself in trouble. The IRS tends to audit returns more if there are a lot of eraser marks, or if the numbers look fudged. If you have to do it yourself, at least use software to do so.

You Might Miss A Deduction

A taxpayer doing their own taxes might not realize that the new computer software used for marketing your business is actually a deduction, or that part of your home utility bills can be deducted if you run your business in your home. Not knowing all the deductions that are available to you can leave you owing more to the IRS and that can hurt even more in the down economy

Conversely, the taxpayer who is going it alone might give a deduction that is not legal. A new grandfather clock placed in your office isn’t necessarily a deduction. Driving to a convention in Miami with your family is only partially deductible. Knowing what is a deduction and what is not can get you into trouble come tax time.

Poor Record Keeping Can Kill Your Chances

Having someone do your taxes could salvage a decent return if you don’t do well keeping your own records. A tax professional can clue you in to good software that can organize all your invoices and bills that are relevant to your taxes. Also, a professional might know where to go to get another W-2 form, or how to get another copy of a 1099.

If you have a professional doing your taxes, that person can go through your records and pick out the relevant expenses and income that should go on your return. Getting an audit can be easier to deal with knowing that some professionals will have some sort of audit defense service where they will go in front of the IRS with you for a fee.

Doing your taxes on your own should be a relatively easy venture. However, making even a minor mistake can wind up with you getting an audit of some sort. Missing a deduction, or not claiming all of your income due to poor record keeping, or thinking you could pull one on the IRS, can be even worse. If in doubt, go to a professional for advice.

Miles Walker blogs about car insurance quotes over at CarInsuranceComparison.Org. He recently looked at Arizona car insurance.

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