Author: Leon Clinton

If you are married, you need to know three special rules that can benefit your Section 179 deductions:

1. The Section 179 business income limit includes W-2 income earned by both you and your spouse.
2. Section 179 expensing treats you and your spouse as one taxpayer.
3. If you and your spouse file separate returns, you need to make an overt election of how you are going to share your Section 179 deductions.

The W-2

For Section 179, among other purposes, employees are engaged in the active conduct of the trade or business of their employment. Thus, wages, salaries, tips, and other compensation derived by a taxpayer as an employee count as income for the business income limit on Section 179 expensing.

Example. You have business income of $10,000 and qualifying Section 179 expenses of $90,000. Your spouse has W-2 income of $50,000. Your husband-and-wife business income limit for Section 179 expensing is $60,000 ($10,000 plus $50,000).

If you elect to expense the entire $90,000, you deduct $60,000 this year and carry the $30,000 excess over to next year, where it again enters into a Section 179 computation. You may carry over the excesses to any number of years, without limit.

Husband and Wife Are One Taxpayer

If you file a joint return, tax law treats you and your spouse as one taxpayer for purposes of applying the Section 179 limits.

Separate Returns

If you and your spouse file separate returns, you must first treat yourselves as one person for Section 179 ceilings and limits. This is step 1.

Step 2 triggers the need for a decision. You and your spouse may elect how you want to handle the allocations in your tax returns. If you do not make a formal election, the law makes a 50/50 allocation for you and your spouse.

Example. You are married and place in service $65,000 of qualifying Section 179 property during the year. With elections on separately filed returns, you and your spouse may choose how to allocate the $65,000. You could take it all, give it all to your spouse, or take $55,000 and give $10,000 to your spouse. If you don’t choose, the law gives each of you $32,500 (half of $65,000).

Is you have Section 179 deductions that you would like to discuss, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 4, 2021

If you have employees in your business, this story should have your attention.

Timothy McCloskey, president and sole shareholder of Brosius, delegated financial responsibility to Kathleen Lawson, his bookkeeper and chief financial officer. 

Ms. Lawson embezzled more than $800,000 from Brosius and failed to remit employee withholding taxes to the IRS for 19 quarters (4.75 years). Once Mr. McCloskey became aware of the magnitude of Ms. Lawson’s embezzlement, he knew that he could not continue to keep Brosius in business. 

He discussed bankruptcy with his lawyer, but circumstances dictated winding down the affairs of the corporation as a better alternative. Mr. McCloskey began paying off creditors, other than the IRS.

He sold company inventory for $240,000 and used this money to pay off a loan to National City Bank, because he had personally guaranteed this debt. 

Mr. McCloskey, as president of Brosius, signed and mailed Form 941 returns for the 19 back quarters and paid the taxes and penalties for three of those back quarters. The remaining assessments against Brosius (and soon, against Mr. McCloskey, individually) for penalties, statutory additions, accrued interest, and costs totaled $325,695. 

If you own and are active in the business, you are personally responsible for making sure that the payroll taxes are paid. Neither the IRS nor the law allows excuses.

See if you can answer the following question: Are you absolutely, positively sure that your payroll tax money has been remitted to the IRS? Have you seen absolute, physical proof with your own eyes?

• You can’t ask someone and count on that answer. 
• You can’t see a report from your payroll service and believe that as absolute proof. 
• The fact that the payroll tax amounts were taken from your business bank account does not mean that money was remitted to the IRS. 

What, then, is the answer?

It’s simple, really. Examine your account with the IRS. You can see your payroll tax money sitting in your IRS payment account by just looking at your account. 

Here’s how this works: First, it’s simple, sure, and free. You register with the IRS’s Electronic Federal Tax Payment System (EFTPS). Once registered, you can see physical proof of your tax payments in the IRS register. The register holds the last 15 or 16 months of your payments. 

The EFTPS register is absolute proof. If you see the deposits in the register, you know that your in-house bookkeeper or outside payroll service properly sent the money to the IRS. If the money is missing, the register tells you so. 

To check out and register for the EFTPS, click here to get to the EFTPS home page.

If you would like to discuss your payroll, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 1, 2021

Three bad things happen when you file your tax return late.

What’s Late?

You can extend your tax return and file during the period of extension; that’s not a late-filed return.

The late-filed return is filed after the last extension expired. That’s what causes the three bad things to happen.

Bad Thing 1

The IRS notices that you filed late or not at all.

Of course, the “I didn’t file at all” people receive the IRS’s “come on down and bring your tax records” letter. In general, the meeting with the IRS about non-filed tax returns does not go well.

For the late filers, the big problem is exposure to an IRS audit. Say you’re in the group that the IRS audits about 3 percent of the time, but you file your tax return late. Your chances of an IRS audit increase significantly, perhaps to 50 percent or higher.

Simply stated, bad thing 1 is this: file late and increase your odds of saying: “Hello, IRS examiner.”

Bad Thing 2

When you file late, you trigger the big 5 percent a month, not to exceed 25 percent of the tax-due penalty.

Here, the bad news is 5 percent a month. The good news (if you want to call it that) is this penalty maxes out at 25 percent.

Bad Thing 3

Of course, if you owe the “failure to file” penalty, you likely also owe the penalty for “failure to pay.” The failure-to-pay penalty equals 0.5 percent a month, not to exceed 25 percent of the tax due.

The penalty for failure to pay offsets the penalty for failure to file such that the 5 percent is the maximum penalty during the first five months when both penalties apply. 

But once those five months are over, the penalty for failure to pay continues to apply. Thus, you can owe 47.5 percent of the tax due by not filing and not paying (25 percent plus 0.5 percent for the additional 45 months it takes to get to the maximum failure-to-pay penalty of 25 percent).

Don’t let the three bad things happen to you. If you want to discuss any of the bad things, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 26, 2021