Auctions are always popular fundraisers with non-profits, and arts organizations are no different in their affinity for this important tool.  However, you should be aware of special deductibility rules when it comes to the donation of rental rights.

Alice owns a vacation beach house which she sometimes rents to the public.  Approached by her favorite arts non-profit, she agrees to donate to their upcoming silent auction the rental of her beach house for one week.  From recent past rentals Alice knows that the fair market value of her donation is $1,200.  Later, at the auction, Bob wins the week in Alice’s beach house with his high bid of $1,500.

Should Alice claim a charitable donation of $1,200 or of $1,500?

Neither, because you cannot deduct a charitable contribution of less than your entire interest in a property.  When you donate the right to use a property for only a specified period of time, you’re donating what’s called a “partial interest” in that property and not the ownership of the property itself.  The Tax Code prohibits claiming a deduction for donations of partial interests in property.  Unfortunately, Alice won’t receive any tax break from her donation.

What about Bob?  Can he claim a charitable donation of $1,500 for his winning bid?

No, he can deduct only $300 of his bid.  As discussed in a previous post, contributions where the donor receives something of value in return for their donation aren’t deductible.  In this case, Bob received the right to use the beach house for a week, a right that is clearly valued at $1,200.  Only to the extent his donation exceeds the fair market value of the benefit he receives can he deduct the excess.  In this case, that excess is $300.

IRS Publication 526 gives plain-language guidance on charitable contributions including which organizations qualify as charitable, which contributions are deductible and which aren’t, important record keeping requirements, and more.

photo credit: luxomedia

If you don’t e-file, and any of the following describe your tax scenario, you must use Form 1040

* Your taxable income is $100,000 or more
* You claim itemized deductions
* You are reporting self-employment income
* You are reporting income from sale of property

Use the *1040EZ* if:

* Your taxable income is below $100,000
* Your filing status is Single or Married Filing Jointly
* You and your spouse – if married — are under age 65 and not blind
* You are not claiming any dependents
* Your interest income is $1,500 or less

Use the *1040A* if:

* Your taxable income is below $100,000
* You have capital gain distributions
* You claim certain tax credits
* You claim adjustments to income for IRA contributions and student loan interest

Estimated tax is a method used to pay tax on income that is not subject to withholding. You may need to pay estimated taxes during the year depending on what you do for a living and what type of income you receive.

These six tips from the IRS will provide you with a quick look at estimated taxes and how to pay them.

• If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax.
• As a general rule, you must pay estimated taxes in 2011 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and credits, and 2) You expect your withholding and credits to be less than the smaller of 90% of your 2011 taxes or 100% of the tax on your 2010 return. There are special rules for farmers, fishermen, certain household employers and certain higher income taxpayers.
• For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
• To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Use the worksheet in Form 1040ES, Estimated Tax for Individuals for this. You want to be as accurate as possible to avoid penalties. Also, consider changes in your situation and recent tax law changes.
• The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates generally are April 15, June 15, Sept. 15 and Jan. 15.
• Form 1040ES, Estimated Tax for Individuals, provides all you’ll need to pay estimated taxes. This includes instructions, worksheets, schedules and payment vouchers. The easiest way to pay estimated taxes, however, is electronically through the Electronic Federal Tax Payment System or EFTPS. You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

For more information on estimated taxes refer to Form 1040ES and its instructions,
as well as Publication 505, Tax Withholding and Estimated Tax. These forms and
publications are available at irs.gov or by calling 800-TAX-FORM (800-829-3676).

*Links:*

* Form 1040ES [ http://www.irs.gov/pub/irs-pdf/f1040es.pdf ], Estimated Tax for Individuals
* Publication 505 [ http://www.irs.gov/pub/irs-pdf/p505.pdf ], Tax Withholding and Estimated Tax

Mistakes on tax returns mean they take longer to process, which in turn, may cause your refund to arrive later. The IRS cautions against these nine common errors so your refund is timely.

1. Incorrect or missing Social Security Numbers When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.
2. Incorrect or misspelling of dependent’s last name When entering a dependent’s last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.
3. Filing status errors Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.
4. Math errors When preparing paper returns, review all math for accuracy. Or file electronically; the software does the math for you!
5. Computation errors Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.
6. Incorrect bank account numbers for Direct Deposit If you are due a refund and requested direct deposit review the routing and account numbers for your financial institution.
7. Forgetting to sign and date the return An unsigned tax return is like an unsigned check – it is invalid. And, remember on joint returns both taxpayers must sign the return.
8. Incorrect Adjusted Gross Income information Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from their originally filed 2009 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS.
9. Claiming the Making Work Pay Tax Credit Taxpayers who file Form 1040 or 1040A will use Schedule M to figure the Making Work Pay Tax Credit. Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit. Taxpayers who file Form 1040-EZ should use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Credit.

Tax preparation shouldn’t be so stressful. The IRS has put together six tips to help make your tax filing experience a breeze this year.

1. Don’t Procrastinate Resist the temptation to put off your taxes until the very last minute. Rushing to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.
2. Visit the IRS Website In 2010, more than 304 million visits were made to http://www.irs.gov. Make 1040 Central your first stop to learn the latest news and find answers to your questions about tax filing.
3. Use Free File Let Free File do the hard work for you with brand-name tax software or online fillable forms. It’s available exclusively at http://www/irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $58,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If you made more or are comfortable preparing your own tax return, there’s Free File Fillable Forms, the electronic versions of IRS paper forms. Visit http://www.irs.gov/freefile to review your options.
4. Try IRS e-file After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. Last year, 70 percent of taxpayers – 99 million people – used IRS e-file. Starting in 2011, many tax preparers will be required to
   use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay later (by the tax deadline). Best of all, combine e-file with direct deposit and you can get your refund in as few as 10 days.
5. Don’t Panic if You Can’t Pay If you cannot pay the full amount of taxes you owe by the mid-April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You should also contact the IRS to discuss your payment options at 800-829-1040. The agency may be able to provide some relief such as an installment agreement.More than 75 percent of taxpayers eligible for an Installment Agreement can apply using the Web-based Online Payment Agreement application available on IRS.gov. To find out more about this simple and convenient process type “Online Payment Agreement” in the search box on the IRS.gov homepage.
6. Request an Extension of Time to File – But Pay on Time If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you
   more time to pay any taxes due. If you have not paid at least 90 percent of the total tax due by the April deadline you may also be subject to an Estimated Tax Penalty. To obtain an extension, just file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. The easiest way to file a Form 4868 is through Free File at http://www.irs.gov/freefile. Form 4868 is also available for downloading at http://www.irs.gov or you can call 800-TAX-FORM (800-829-3676) and have a paper form mailed to you.

When filing your federal income tax return, taxpayers can choose to either take the standard deduction or to itemize their deductions. The IRS has put together the following six facts to help you choose the method that gives you the lowest tax.

Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. Money paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions can reduce your taxes. If the total amount spent on those categories is more than your standard deduction, you can usually benefit by itemizing.

1. Standard deduction amounts are based on your filing status and are subject to inflation adjustments each year. For 2010, they are:
   • Single $5,700
   • Married Filing Jointly $11,400
   • Head of Household $8,400
   • Married Filing Separately $5,700
   • Qualifying Widow(er) $11,400
2. Some taxpayers have different standard deductions
   The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether an exemption can be claimed for you by another taxpayer. If any of these apply, you must use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.
   The standard deduction amount also depends on whether you plan to claim the additional standard deduction for a loss from a disaster declared a federal disaster or state or local sales or excise tax you paid in 2010 on a new vehicle you bought before 2010. You must file Schedule L, Standard Deduction for Certain Filers to claim these additional amounts.
3. Limited itemized deductions
   Your itemized deductions are no longer limited because of your adjusted gross income.
4. Married Filing Separately
   When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.
5. Some taxpayers are not eligible for the standard deduction
   They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.
6. Forms to use
   The standard deduction can be taken on Forms 1040, 1040A or 1040EZ. If you qualify for the higher standard deduction for new motor vehicle taxes or a net disaster loss, you must attach Schedule L. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

Bartering, one of the oldest forms of commerce, is the trading of one product or service for another.  Usually there is no exchange of cash. And it’s this “no cash needed” aspect that makes it so appealing to artists and small business owners alike.

I’ll spare you the gory economics explanation.  A typical barter sounds like this:

“Hey Doc, my gall bladder aches.”

“I can remove it for $399.”

“I’m short on cash this month.  How about I give you this painting instead?”

“It’s a deal!”

It may come as shock, but the fair market value of the goods and services exchanged must be reported as income by both parties.

Here are four facts about bartering that the IRS wants small business owners to be aware of:

• Barter Exchange – A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.
• Barter Income – Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter – barter for another’s products or services – you will have to report the fair market value of the products or services you received on your tax return.
• Taxes – Income from bartering is taxable in the year it is performed. Bartering may result in liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.
• Reporting – The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.

For more information see the Bartering Tax Center in the Business section at http://www.irs.gov .

Photo by nicoyogui

Virtual Small Business Tax Workshop

The IRS Virtual Small Business Tax Workshop is an interactive resource to help small
business owners learn about their federal tax rights and responsibilities. The
workshop contains nine stand-alone lessons that can be selected and viewed in any
sequence. The workshop is available online 24 hours a day, seven days a week from
any computer. It can also be ordered on CD.

Tax Calendar for Small Business Taxpayers

The Tax Calendar for Small Businesses and Self-Employed – Publication 1518 – is available online or as a printable PDF file. This 12-month calendar is filled with information on general business taxes, IRS and Social Security Administration customer assistance, electronic filing and paying options, retirement plans, business publications and forms, and common tax filing dates. Each page highlights different tax issues and tips that may be relevant to small-business owners, with
room on each month to add notes, state tax dates or business appointments. You can also download the tax events into your calendar or subscribe to the tax calendar events. The calendar provides the small business owner with a ready resource for meeting their tax obligations.

The first step to filing your federal income tax return is to determine which filing
status to use. Your filing status is used to determine your filing requirements,
standard deduction, eligibility for certain credits and deductions, and your correct
tax. There are five filing statuses: Single, Married Filing Jointly, Married Filing
Separately, Head of Household and Qualifying Widow(er) with Dependent Child.

Here are eight facts about the five filing status options the IRS wants you to know
so that you can choose the best option for your situation.

• Your marital status on the last day of the year determines your marital status
  for the entire year.
• If more than one filing status applies to you, choose the one that gives you the
  lowest tax obligation.
• Single filing status generally applies to anyone who is unmarried, divorced or
  legally separated according to state law.
• A married couple may file a joint return together. The couple’s filing status
  would be Married Filing Jointly.
• If your spouse died during the year and you did not remarry during 2010, usually
  you may still file a joint return with that spouse for the year of death.
• A married couple may elect to file their returns separately. Each person’s
  filing status would generally be Married Filing Separately.
• Head of Household generally applies to taxpayers who are unmarried. You must
  also have paid more than half the cost of maintaining a home for you and a
  qualifying person to qualify for this filing status.
• You may be able to choose Qualifying Widow(er) with Dependent Child as your
  filing status if your spouse died during 2008 or 2009, you have a dependent child
  and you meet certain other conditions.

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. The IRS uses three characteristics to determine the relationship between businesses and workers:
   • Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
   • Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
   • Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
2. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
3. If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
5. Workers can avoid higher tax bills and lost benefits if they know their proper status.
6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
7. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Links:

Publication 15-A, Employer’s Supplemental Tax Guide ( PDF )

Publication 1779, Independent Contractor or Employee ( PDF )

Publication 1976, Do You Qualify for Relief under Section 530? ( PDF )

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding ( PDF )

Source: IRS Summertime Tax Tip 2010-20