Tax and Business Alert - January 2002

401(k) Plans Improved

Last summer's tax bill made numerous favorable changes to the retirement plan rules.   Four of these, all effective this year, are particularly significant when it comes to 401(k) s.

Upcoming Tax Deadlines

January 15 -- Individual taxpayer's final 2001 estimated tax payment is due unless by January 31, 2002, the return (Form 1040) is filed and any tax due with the return is paid.

January 31 - -Mail Forms W-2 to employees and Forms I099-MISC to independent contractors. Other Form 1099 series information returns, such as for interest and dividend payments, also must be mailed to the payees by this date.

--And, finally, file the final 2001 Form 941, Employer's Quarterly Federal Tax Return, and annual Form 940, Federal Unemployment Tax Return, by today. (If all taxes were deposited when due, the filing of either form can be delayed until February 11.)

February 28 -- The government's copy of Forms W-2 and Form 1099 series returns (along with the appropriate transmittal form) should be sent in by today. However, if these forms will be filed electronically, the due date is extended to April 1.

March 15--This is the deadline for most accrual-basis calendar-year businesses to pay 2001 bonuses owed to nonowner employees and still claim a 2001 deduction.

--2001 income tax returns must be filed or extended for calendar-year corporations. If the return is not extended, this is also the last day for calendar-year corporations to make 2001 contributions to pension and profit-sharing plans.

Interesting Websites

Jobs for teenagers. Whether they're off at college or still in high school, if you're trying to help your teenager find a part-time job to help with some of their expenses, one place to look is snagajob.com Based on the zip code of where your teenager wants to work, the site offers free referrals to open positions with several, mostly national or regional chains.

All about education. The U.S. Department of Education's website at www.ed.gov is one of the 10 most visited government sites. That's no surprise given the wealth of information it offers. From guidance on finding financial aid and filling out the Free Application for Federal Student Aid (FAFSA) form, to providing teachers with lesson ideas and students (and their parents) with resources for getting a better education, the site aims to be a one-stop source for all things educational.

If by land. Zipping down one of our nation's interstate highways can be a fast way to travel by car from point A to point B, but road construction and bad weather can cause unexpected delays. To stay on top of what lies ahead, you might want to check out the website used by some of those who make their living on the road, www.truckerweather.com.

Inflation-Adjusted Numbers for 2002

FICA/Self-employment Tax Wage Base: $84,900 (up from $80,400 in 2001)

Social Security Earnings Ceiling (Below which benefits are not reduced):
Below age 65--$11,280 (up from $10,680 in 2001) Age 65 and up--no limit (however, if you turn 65 this year, a $30,000 annual limit applies to earnings in the months prior to your birthday)

Mileage Rates:
Business use: 36.5 cents/mile (up from 34.5 cents/mile in 2001)

Charitable use: 14 cents/mile (unchanged from 2001). Use related to seeking medical care or for a tax deductible move: 13 cents/mile (up from 12 cents/mile in 2001)

Retirement Plan Elective Deferral Limits: 401(k) and 403(b) plans: $11 ,000 (plus an extra $1,000 if at least age 50 by year end)
SIMPLE IRAs:  $7,000 (plus an extra $500 if at least age 50 by year end)

Estate and Gift Tax Exemption: $1,000,000 (up from $675,000 in 2001 because of a law change)


Starting Your Own Business?

A lot of people dream of being their own boss-especially in a difficult economy where sometimes the best way to find your next job is to create it.  Sure the hours can be long, the pay low in at least the early years, and the possibility of failure daunting, but there's something about growing your own business that can make the effort worthwhile in the long run. However, it's important to get off on the right foot to better your chances for success.

Here's a checklist of issues to consider if you're jumping into the land of the self-employed.

Choose the appropriate entity.   A lot of people start out with a sole proprietorship because it's the simplest and doesn't require the costs of forming a separate entity. However, a single-member LLC (if you're the only owner) is also a popular choice because it provides a measure of liability protection similar to a corporation without much of the complexity. If there will be multiple owners, your choices include a partnership, LLC, S corporation, or C corporation.

File the necessary legal documents.  Based on your choice of entity, work with your attorney to make sure all of the appropriate legal documents have been filed with the various government authorities.

Develop your financing plans.  For most start ups, this means your own funds and personal borrowing power, with perhaps a loan from friends or family members. A Small Business Administration (SBA) loan may also be a possibility (try www.sba.gov).

Select your tax year.  Most small businesses use the calendar year, but a fiscal year can sometimes be a better choice.

Pull together budgets--both for the business and for your family. Things are probably going to be tighter than you'd like for the foreseeable future, but it's better to know that in advance and plan accordingly than to be surprised by a cash flow problem.

Sketch out your business objectives and marketing plan.  In other words, you should develop a written plan that lays out what products or services you are going to offer and how you are going to convince people to buy them.

Check out any applicable laws or ordinances.  It is important to find out if there are any zoning, EPA, licensing, or permit requirements applicable to your type of business.

Identify any restrictions on the right to use your intended business name, trademarks, service marks, etc.  You don't want to grow and develop business goodwill and customer loyalty under one name, only to find out later someone already owns the rights to the name. If you have visions of expansion outside your own area, it's generally better to make sure the desired business name is available in all the locations where your business could potentially grow.

Determine your insurance needs.  This includes property and liability insurance and perhaps business interruption insurance as well.  If you don't have health insurance coverage through a working spouse, you also need to determine how you're going to provide coverage for yourself and any family members.

Obtain a federal (and, if necessary, state and local) ID number for the business.

Set up an appropriate accounting and record system--one that hopefully can grow with you. It generally costs at least twice as much to recreate records several months down the road as it does to set things up right to begin with.

And finally, if you'll have co-owners, make sure a buy/ sell agreement is in place.  If you neglect to do this and later have a problem, it generally will be too late at that point.

CONCLUSION

While this list isn't exhaustive, it's a good first step in successfully launching a business. Call us if you'd like additional guidance.


Use an Accountable Plan for Employee Expenses

Most employers reimburse their employees for legitimate business expenses, but for a variety of reasons, some employers provide only a partial or perhaps no reimbursement. However, because unreimbursed employee business expenses are almost never deductible by the employee due to the 2% of adjusted gross income limitation on miscellaneous itemized deductions, reimbursing the employee for those expenses, in lieu of additional compensation, is a win-win proposition.

The employer generally gets a deduction for the reimbursements (just like it would for the additional compensation), but incurs no payroll tax liability on the reimbursement. The employee's record keeping requirements are eased and the employee recognizes no income from the reimbursed expenses.

To obtain these benefits, the reimbursement plan must be an accountable plan. An accountable plan is one that meets the following requirements:

     There's a business reason for the expense reimbursement.

     The reimbursement is identified separately from any other payments included in the same check.

     The employee properly substantiates the expenses to the employer.

      Reimbursements in excess of substantiated expenses have to be returned to the    employer within a reasonable period of time. (If a reimbursement arrangement meets all of these tests except it does not require a repayment of excess amounts, the amounts paid that are not in excess of business expenses are treated as part of an accountable plan and anything over this amount is treated as compensation to the employee.)

Two safe harbor rules are provided for accountable plans. The first provides that the return of excess reimbursements is acceptable if the following occurs:

      an advance is made within 30 days of when an expense is paid or incurred,

     the expense is substantiated to the employer within 60 days after the expense is paid or incurred, and

     any excess is repaid to the employer within 120 days after the expense is paid or incurred.

The second safe harbor applies if the employer provides periodic statements to the employees no less often than quarterly, and the employer requires the employee to substantiate the expenses not yet substantiated or return any such amounts within 120 days of the statement.

Of course, in either case, the reimbursement plan should be in writing, and employees should understand the terms of the plan.

The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. Tax and Business Alert is a trademark used herein under license. © Copyright 2002.