Tax Law Update
This year has offered businesses a mixed bag of tax-related changes, with an across the board 10 percent tax rate decrease for individuals and businesses, coupled with some small tax-law tweaks and U.S. Internal Revenue Service (IRS) taxpayer support updates. With tight margins and large tax bills a common theme for many building service contractors, it would behoove owners and executives to look into the latest ways they may benefit from the IRS attempts at becoming a friendlier government agency.
Increased threshold for payroll deposits
All employers must make payroll deposits on a weekly, semi-weekly or monthly basis, then pay monthly payroll tax installment. For years, if those deposits accumulated a payroll tax of $500 or less then businesses could wait to pay that tax amount when filing their quarterly returns. The IRS increased that threshold to $1,000 not long ago, which still only affected the smallest of businesses. But now, the payroll tax threshold has risen to $25,000, which can help many more contractors.
But BSCs should be careful to determine ahead of time if they will indeed be under the new $25,000 threshold, warns Cindy Hockenbery, information coordinator for the National Association of Tax Professional (NATP). If a companys payroll taxes go over that limit, then they will be penalized for not paying their monthly deposit.
Know for sure or pay anyway, she advises.
Equipment purchase expensing
One change just for 2001 is a new allowance for writing off equipment purchases. This new rule stems from a concern that many businesses will hold off purchasing equipment due to the current economic downturn or any fallout from the Sept. 11 terrorist attacks.
Typically, if a company purchases equipment and uses it in the final quarter of the year, they will pay a mid-quarter convention to cover depreciation. The IRS has lifted that requirement, allowing companies to expense up to $24,000 for any equipment purchased late in the year.
This means a contractor who purchased and began using a floor burnisher in November or December can completely write off the cost of the machine under Section 179 deductions filed with Form 4562, says Hockenbery.
New employee perk
Previous tax codes allows employers to provide tax-free parking reimbursements up to $180 per month only at the companys premises. Now, a change in the law allows BSCs to compensate cleaners for parking up to that amount at customer locations where the workers are assigned.
The stipulation is that the employees travel to that worksite must completely consist of nondeductible commuting. Contractors can deduct this cost for any reimbursements given to their employees in 2001.
If contractors already cover employee travel expenses such as subway or bus passes, that deductible limit is up to $65 per month.
Other ways to trim taxes with employee benefits is to offer as many flexible spending accounts as possible. This allows employees to set aside pay for specific uses prior to taxation. Typical uses are for medical and dependent care, medical reimbursement plans, retirement plans and group life insurance, according to Sydney Kess, CPA, a national tax law trainer and author.
A Court of Appeals ruling helped clarify this year that advance or reimbursement checks for employees who must fly to and from a remote region for work, should not receive income or Social Security taxation.
Even when such travel expenses are taxable, they are not wages as defined by income or Social Security tax rules, according to the ruling.
Fleet maintenance deduction
Another court decision this year determined that the cost for regular maintenance on company fleets vans, trucks, boats, etc. can be deducted as a business expense.
The IRS originally disputed one companys $100,000 maintenance deduction, saying it lengthened the useful life of the engines and thus should be capitalized. But the Tax Court decided that such work doesnt increase the value of fleet engines, and only lengthens their lifespan in the sense that lack of care would shorter it. Thus, the repairs are normal and deductible maintenance costs.
Making independent contractor disputes less costly
A touchy subject for the contract cleaning industry is independent contractor status. The Small Case Division of Tax Court now will handle tax-related stipulates over the classification of employees or subcontractors involving as much at $50,000 a year. Previously the law only allowed the court division to handle cases up to $10,000.
In the past, companies were to pay a disputed employment tax and then sue for a refund if they felt they were unfairly misclassified. With this change of venue, companies can wait until after the case is decided to pay taxes if the decision warrants such action It also avoids the lengthy court trials that used to be required to settle such disputes.
Previously, the up-front cost made it less palatable for companies to contest this common employment issue.
Small business reclassification
Businesses with assets of between $5 million and $10 million now will fall under the jurisdiction of the Small Business/Self-Employed IRS operating division, which could affect which forms a company fills out and who it will work with when dealing with the IRS.
This is part of an administration reorganization meant to streamline tax processes and better fit the needs of these businesses, which previously were categorized with large to mid-size businesses.
To determine the full extent to which this change affects your business, call 304-263-8700.
Contractors should consult with their accountants before taking advantage of any of these situations.