Monthly Newsletter for January 2013

by in Newsletter on Dec. 26, 2012

During January


All Employers:  Give your employees their copies of Form W-2 for 2012 by January 31, 2013. 

All Businesses:  Give annual information statements to recipients of certain payments you made during 2012.  You can use the appropriate version of Form 1099 or other information return.  Payments that may be covered include the following:

Cash Payments for fish or other aquatic life purchased from anyone engaged in the trade or business of catching fish.

Compensation for workers who are not considered employees.

Dividends and other corporate distributions.

Interest, Rent, and Royalties.

Payments of Indian gaming profits to tribal members.

Profit-sharing distributions, Retirements plan distributions, Original issue discount, prizes and awards.

Medical and health care payments.

Debt cancellation (treated as payment to debtor).

Cash payments over $10,000.



Choosing a Business Structure


Of all the choices you make when staring a business, one of the most important is the type of legal organization you select.  This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money.  Common business structures are:


Sole proprietor – an individual who owns an unincorporated business by themselves.


Partnership – a relationship where two or more persons join together to carry on a trade or business.  Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.


Corporation – a relationship where prospective shareholders exchange money, property, or both, for the corporation’s capital stock.  Profits are taxed to the corporation when earned and then taxed to the shareholders when distributed as dividends.


S corporation – a corporation, meeting certain criteria, that elects to be treated as an S corporation.  Generally an S corporation is exempt from income tax; the shareholders report the S corporation’s income, decuctions, losses and credits on their individual tax returns.


Limited Liability Corporation (LLC) – an entity – statutorily authorized in certain states – that is characterized by limited liability for debts similar to that of a corporation, management by members or managers, and pass-through taxation similar to that of a partnership.


Choosing an Accounting Method


Every business taxpayer is required to have an accounting method to report income and expenses.  The two most commonly used methods are cash and accrual.  Once you choose your accounting method, you must follow it consistently.  Generally, you may not change your method of accounting unless you obtain permission from the IRS.


Cash Method – Due it its simplicity, the cash method is a popular choice for small businesses.  To determine gross income, add up the cash, checks, and fair market value of property and services you receive during the year.  If you receive a check on December 28, 2012, but decide not to cash or deposit it until 2013, you must still count the check as income in the year you received it.

Business expenses are usually deducted in the year they are paid.  For example, you order office supplies in October 2012 and they arrive in December 2012.  You send a check to pay for them in January 2-12.  Under the cash method, you should claim that business expense deduction on your 2013 tax return because that is the year you paid for the supplies.  Certain businesses cannot us the cash method.  In addition, special rules apply for the accounting of inventory.


Accrual Method – With the accrual method, income is reported in the year in which all events that fix the right to receive it have occurred, and the amount can be determined with reasonable accuracy, even if income was received in a different year.  For example, the accrual method calls for income to be reported when a service is performed.  It doesn’t matter that the customer doesn’t pay until the following year.  Similarly, you deduct business expenses in the year the liability arises, regardless of when they are actually paid.  Using the office supply example, under the accrual method, you may deduct the business expenses for supplies on your 2012 tax return, the year you ordered the supplies and they were delivered, even though you sent a check to pay for them in 2013.  You may deduct the expenses in 2012 because the is when you became liable for the expense.