Sales Tax Items And Sales Tax Codes In QuickBooks - How They Work

Are you confused about Sales Tax Items and Sales Tax Codes in QuickBooks? I was too! It took me forever to finally figure out what they actually did, how to get the sales tax liability report to look right, and where they showed up on that report. After reading the QuickBooks help, and reading tons of articles online, I still had no clear answer. But I finally figured out how to set things up in a way that makes sense to me - I hope it makes sense to you too.

We're going to discuss the proper setup of sales tax items and codes; proper setup of customers for sales tax reporting; the difference between sales tax items and sales tax codes; using sales tax codes; and running sales tax reports in QuickBooks.

Proper Setup of Sales Tax Items and Sales Tax Codes

These guidelines assume that you have no Sales Tax Items or Sales Tax Codes set up yet in QuickBooks. However, many of you reading this already do. If this is the case, just go through your lists and see if your items and codes are set up like these. IMPORTANT: I strongly suggest that you do not change anything in your QuickBooks file until you read this entire article and understand it!

First, determine how many sales tax agencies and rates you need to report. You will need to set up your Sales Tax Items depending on this information. If you are unsure, contact a local accountant.

Here's how to set up the Items and Codes:

From the Items List, press Control-N. Select Sales Tax Item. Enter a name for the sales tax - something simple is fine, something that makes sense to you. Enter a more detailed description on the next line. Enter the tax rate, and choose the state reporting agency where the tax will be remitted.

Then, set up a non-taxable Sales Tax Item. From the Items List, press Control-N. Select Sales Tax Item. Item name should be Non-Taxable Sales. Enter a brief description, and 0.00% for the rate. Even though this is non-taxable, select the main tax agency you use.

Next, setup your sales tax codes. It will be helpful to have your sales tax return in front of you to do this. For example, for California, on BOE-401-A page two, there is a list of all of the reasons sales may be non-taxable. Here are some of them:

Resale

Food

Labor

Sales to the U.S. government

Out of state sales

From the Lists menu, select Sales Tax Code list. Then press Control-N. Enter a three-character code and description for each. For example, for non-taxable labor, you can use a three-character code of LBR, and a description of, "Labor Sales - non-taxable." Do this for all of the reasons that sales are non-taxable. Make sure the Non-taxable circle is selected.

For taxable sales, set up a Sales Tax Code called TAX. Write a brief description. Make sure the Taxable circle is selected.

Proper Setup of Customers for Sales Tax Reporting

It's important that the customers are set up correctly, because when invoices are generated, they will default to the setup you use here.

Go to the customer list, pick a customer you want to examine, right click, and select Edit Customer:Job. Click the Additional Info tab. In the bottom left area you will see Sales Tax Information.

First, select the Tax Item box. If this customer lives out of state or is otherwise non-taxable, select the Non Taxable sales tax item you established above. If the customer lives in-state or is otherwise taxable, select the Taxable sales tax item you established above.

Next, select the Tax Code box. If the customer is out of state and non-taxable, select the code, "OOS." If the customer is the U.S. government, select the tax code you established for these types of sales. If the customer is in state, select the code, "TAX." Generally, you will only need to use these codes in these screens for all customers.

Any time you generate an invoice for your customers, QuickBooks will default to the sales tax items and codes you established in the Edit Customer:Job screen.

Understand the Difference Between Sales Tax Items and Sales Tax Codes

The Sales Tax Item tells QuickBooks how much sales tax to computer for a given sale. On invoices, they are located just above and to the left of the Total. Sales Tax Items are pretty straightforward to understand and use.

The Sales Tax code tells QuickBooks why the customer or sale was taxable or non taxable. They are located along the right side of the invoice screen. Also in the invoice screen, in the grey area above the Memo line, you will also see a box that says Customer Tax Code. This defaults to the Tax Code you established above for each customer.

Sales Tax Codes are important, because the California sales tax return BOE-401-A requires that non-taxable sales be itemized. If the codes are setup and used correctly in QuickBooks, the reports will show this itemization.

Using Sales Tax Codes

As a general rule, anytime you have an out-of-state customer, you will use the Non Taxable Sales Tax Item, and the OOS Sales Tax Code. My recommendation is that even if there is non taxable labor or non taxable shipping on the invoice, do not change the codes, still use OOS.

For taxable customers, use the Taxable Sales Tax Item on their invoices. However, you may need to use different Sales Tax Codes on different lines. For example, you may sell some products to a customer, but on the same invoice you may have non-taxable shipping or labor. You will need to make sure the SHP or LBR codes show up correctly, and that the TAX code shows correctly along the right side of the invoice. This will compute sales tax only for your products, and not for your shipping and/or labor.

Running Sales Tax Reports in QuickBooks

If you've taken the time to get everything set up correctly, you efforts will pay off when it's time to run sales tax reports!

From the Vendors menu, select Sales Tax, then Sales Tax Liability. Make certain of the date range, that it matches the date range of your sales tax return.

You will see several columns, most notably Total Sales, Non-Taxable Sales, and Taxable Sales. Notice that the Sales Tax Items are listed down the left side, underneath the state agency. Also notice that the Sales Tax Codes do not appear on this report.

In order to see the Sales Tax Codes (remember, these are the reasons why sales are taxable or non-taxable), go to the Non-Taxable Sales column, and find the amount that intersects with the Non Taxable sales row. Double click. This report will show all of the amounts used for the Sales Tax Codes for Non Taxable sales. Use this information to help you prepare your sales tax return (for California, this information should appear on BOE-401-A, page 2).

The Sales Tax Liability Report can be used to finish the rest of the sales tax return.

Final Thoughts

Sales tax collection and reporting is very complex, and varies considerably even from city to city in some cases. These guidelines are intended to be general in nature, giving a broad overview of the sales tax process in QuickBooks. If you need more help, please refer to a professional who can help you make sure everything is set up according to your unique location and needs. If you wish, you can experiment with the ideas here in a Sample Company File, which was loaded onto your computer when you loaded QuickBooks.

About the Author: Jennifer A. Thieme is a Registered Tax Preparer and a Certified QuickBooks ProAdvisor who enjoys writing about tax and accounting issues. She brings unique insight, clear instructions, and over ten years experience to all of her business articles. Owner of Solid Rock Accounting Services, Jennifer's clients enjoy these same benefits on a personal and regular basis. You can too - visit http://www.jenniferthieme.com and contact Jennifer today.

What Does Extending Your Taxes Mean to You?

Introduction

As the tax filing deadline is quickly approaching, many procrastinators and those who legitimately are just not ready to file their returns become stressed out and frantic, trying to meet what may virtually be an impossible deadline. Many would rather rush to get their returns prepared than file an extension. Common concerns include, but are not limited to, being flagged as a late filer, being assessed penalties, or being more likely to be audited. If you are one of these individuals, I hope that I can put your mind at ease and inform you of what it really means to extend your tax return and the benefits of doing so.

A few notes before getting started:

This article is written assuming a tax year that is the same as the calendar year, which is the case for most individual taxpayers.
If a tax deadline noted falls on a holiday or weekend, the deadline is actually the next business day.
The focus of this article is on the filing of federal individual extensions except where noted otherwise.
"Tax professional" as opposed to "tax preparer" is referred to in this article. My definition of "tax professional" is someone who has extensive knowledge, education, and experience in taxation and can provide tax consultation and planning services in addition to preparing returns. Two commonly recognized credentials held by tax professionals include CPA (Certified Public Accountant) and EA (Enrolled Agent). CPAs and EAs are by no means the only tax professionals out there and not all CPAs do tax-related work.

With those preliminary notes out of the way, I will now discuss what you should know about extensions.

What is an extension?

First and foremost, it is important to know that an extension is an extension of time to file an income tax return, not an extension of time to pay the tax due. Unfortunately, many taxpayers miss the part about it not being an extension of time to pay, perhaps due to wishful thinking.

There are two federal individual income tax extensions that can be filed. The first extension, which is "automatic," is due by the April 15th tax deadline and is a four month extension of time to file. Thus, if you file this first "automatic" extension, you will have until August 15th to file your income tax return. Your best estimate of the tax that will be due with the actual return is still due by April 15th.

As for the first extension being "automatic," that does not mean it just happens - you need to actually file the extension. There are various ways to do so which are convenient and are discussed later. The reason it is referred to as "automatic" is that you do not need to provide an explanation for why you need additional time to file.

The second extension is not "automatic" like the first one. If you cannot complete your returns by the August 15th first extension deadline, you can "apply" for an additional two months. The second extension is considered an "application" because you need to provide a good reason why you need the additional two months to file. You need to demonstrate that you made a reasonable effort to get your returns completed within the first four month extension period or that you had extenuating circumstances. If the reason is merely for your convenience, your request can be denied. If your application is denied, your return will be due immediately or within a 10-day grace period. If you did not timely file a first extension, a second extension will only be approved in cases of undue hardship.

Between the two extensions, that gives you up to six months additional time to file beyond the April 15th tax filing deadline. Six months is generally the maximum total time a return can be extended by law.

Why should I extend?

The Internal Revenue Service prefers that you file a complete and accurate return. A return you have to rush through, do not have all information for, or make estimates of figures for is unlikely to be complete and accurate. Thus, it is better to file an extension if you are approaching April 15th and you do not have all information needed or otherwise cannot file complete and accurate returns.

If you use a tax professional and you are getting your tax information to him or her just a few weeks or so before April 15th, do not be surprised if he or she indicates an extension will need to be filed. You are more likely to have a complete and accurate return if your tax professional is not trying to rush to make the April 15th deadline.

A few more comments for those of you who use tax professionals. If it is approaching the tax deadline and you have not yet contacted your tax professional, do not be surprised if he or she is unable to speak with you when you call his or her office. Also, do not assume that just because you used his or her services last year they will file an extension for you without you specifically requesting it. Tax professionals are very busy dealing with many clients and working long hours all of tax season and they get even busier as April 15th approaches. Moving forward, you should consider getting in contact with your tax professional's office well in advance of the tax deadline to determine what he or she needs to file an extension, if necessary, and prepare your taxes.

In addition to having a complete and accurate return, there are certain planning opportunities that can be taken advantage of if you or your tax professional is not forced to rush through your return. One example is funding certain retirement plans such as SEPs and Keogh Plans - these can be funded for the prior year through the extended deadline of the return that falls in the current year. Some plans, such as a SEP, can actually be established for the prior year up through the extended due date of the tax return. It is important to note that traditional and Roth IRAs need to be funded by April 15th to qualify as contributions for the prior year. For more information on such planning opportunities for the year just past as well as the current and future years, you should consult with your tax professional.

What are common concerns over extending?

As referenced earlier, many individuals are adverse to even the idea of extending due to concerns such as being "flagged" as a late filer, being assessed penalties, or being more likely to be audited. Filing an extension in and of itself is not going to raise any "red flags" or cause problems as long as your extension is timely filed and the tax due is paid by April 15th. As for being audited, you are more likely to be audited if your return is incomplete, includes estimated figures, or is inaccurate.

Another concern individuals have is that it will cost them more to file an extension. The IRS does not charge for filing an extension. Your tax professional may charge you for doing so, but the fees charged most likely will be far outweighed by the benefits of the return being complete and accurate. Incomplete and/or inaccurate returns can result in you being contacted by the IRS and generally require that an amended return be filed. Your tax professional will likely charge you for preparing an amended return. If additional tax is due, penalties and interest may be assessed. A complete and accurate return is much less likely to result in any correspondence from the IRS. Additionally, it includes an accurate tax liability, which means lower taxes or reduced penalties and interest as related to an understated tax liability. Like with many things in life, it is better to do something right the first time as there is more time, effort, and expense associated with having to correct something later.

Yet another reason that some individuals do not want to extend is because they are in the process of buying a new home or refinancing and their lender is requesting a copy of their tax return. Many lenders will accept a copy of an extension along with copies of documents substantiating income (W-2s, 1099s, K-1s, etc.) and copies of the prior year tax returns.

What information is needed to file an extension?

You will need your general taxpayer information, which includes your name, name of your spouse if married and filing a joint extension, your social security number, your spouse's social security number (if applicable), and your complete address. To avoid potential delays in the processing of your extension, special attention is required if any of the following apply: your name has changed due to marriage, divorce, etc.; your address has changed since you last filed a tax return; or you want to have correspondence related to your extension sent to your tax professional or otherwise. You should refer to the instructions for the extension form to properly address any of these items.

There is not much other information needed. The items needed for the tax year that the extension is for are an estimate of your total tax liability and the total tax paid. The estimate of the total tax liability is the more difficult of the two. You need to come up with your best estimate of what the tax liability is. The IRS instructions for the completion of Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return" clearly state: "Make your estimate as accurate as you can with the information you have. If we later find that the estimate was not reasonable, the extension will be null and void." If that were to be the case, your return would be considered late. A late filed return is subject to late filing and late payment penalties and interest.

How do I file an extension and, if applicable, pay the (estimated) tax due?

Either you or your tax professional can prepare and file your extension. The methods for filing it include e-file by phone, e-file by computer, or filing a completed paper Form 4868. Regardless of who is going to prepare and file your extension, the information discussed in the previous section will be needed. Thus, if you use a tax professional, you need to get in touch with him or her in advance of the tax deadline to ensure that he or she has that information.

E-file by phone is a very convenient option if you are going to file your own extension. The Form 4868 and its instructions can be easily downloaded from the IRS' website. After reviewing the instructions for the form, use Form 4868 as a worksheet and then call the toll free number in the instructions. You will be prompted for the information from the completed form and given a confirmation number at the conclusion of the call. In order to e-file by phone, you must have filed a federal return for the prior tax year.

As for paying the (estimated) amount due, you can do so via electronic funds withdrawal (EFT, from a checking or savings account), credit card, or check. The EFT option can be used if you e-file by phone or e-file by computer. You will need to enter additional information when filing the extension to include AGI (Adjusted Gross Income) from your prior year tax return and the routing and account numbers for your bank account. Payment by credit card can be done via one of several service providers, each of which charge a convenience fee based on the amount of the tax payment being made. Payment by check can be made if you e-file by phone, e-file by computer, or file a paper extension form. More detail about these payment options is included in the instructions for Form 4868.

It should be noted that if you are a taxpayer that makes or should be making estimated tax payments, you should compute and timely make those payments for the current year even if you filed an extension. The federal income tax system is a "pay as you go" system and if you are self-employed or otherwise have income that results in a tax liability that is not paid via withholding, you may be required to make estimated tax payments throughout the year. If you are not sure if this applies to you, it is recommended that you research this topic or consult with a tax professional.

For further information about filing a second extension, please refer to the instructions for Form 2688, "Application for Additional Extension of Time to File U.S. Individual Income Tax Return" which can be easily downloaded from the IRS website as http://www.irs.gov.

What about state, local, and other income tax returns?

Some states will accept the federal extension while others require that you file an extension document with them. Ohio accepts the federal extension and does not require that you send them a copy of it, though you do need to send in the tax due, if applicable, by the April 15th deadline. If you live in a state with municipal or other local income taxes, you may need to file an extension with the locality (or localities) that you have a filing responsibility with. Further discussion about state and municipal filing requirements are beyond the scope of this article as they vary from state to state. Check with the respective department(s) of taxation or your tax professional for more detail. Like with the federal extension, you generally need to pay any state or local tax due at the time the extension is filed.

In Conclusion

Whether you prepare your own taxes or work with a tax professional, I hope that you have a better understanding of what an extension is, when it should be considered, and what is involved in completing and filing one. If it is close to the April 15th filing deadline and you have not finished or even started preparing your returns, you should consider filing an extension. This will allow additional time to ensure that the returns are complete and accurate and, in turn, should reduce the stress associated with filing your taxes.

About the author:

Tiffany J. Morisue is both a Certified Public Accountant and a professional photographer who lives and works in the Columbus, Ohio area.

She can be reached via e-mail at morisue@hotmail.com.

Please visit her website at http://www.morisuephotography.com and her Facebook fan page at http://www.facebook.com/morisuephotography to view examples of her work and for more information about her photography services.

Advantages And Disadvantages Of Using Tax Software

Each year millions of Americans have their taxes prepared by a professional tax preparer. Having tax returned professionally prepared reduces the likelihood of errors being reported on a tax return; however, professional tax preparation is often expensive. For this reason there are a large number of individuals who are making the decision to file their own federal and state tax returns. While it is possible to file tax returns the traditional way with paper tax forms there are now many taxpayers who are relying on tax preparation software to quickly and accurately prepare and file their taxes. Tax software programs have increased in popularity over the past few years; however, like many other software programs tax software programs have advantages and disadvantages.

Before learning about the different advantages and disadvantages of tax software it is important that taxpayers learn the different types of software programs that are available. There are a number of popular tax software programs that include Turbo Tax, TaxCut, TaxAct, and more. Each of these tax software programs are likely to offer multiple tax software versions. Many tax software programs come in a standard version, a deluxe version, or a premium version. Each brand of a tax software program may include different features under each tax version; however, many of the tax software programs operate in the same way. Standard or basic versions are likely to only include federal income tax return forms. Deluxe and premium software versions are likely to include both federal and state income tax forms. Premium tax software versions are likely to include additional help in finding tax credits and deductions.

One of the main advantages of using a tax software program is that they are fairly easy and quick to use. Tax software programs are usually step-by-step; therefore, many individuals can complete a tax return faster than on traditional paper and in less than half of time. Many taxpayers who use tax software prefer the software versions that offer both state and federal tax forms. The majority of software programs will transfer the information from a federal return over to a state tax return. This not only saves time, but it also guarantees that the information found on a state tax return is accurate.

Another advantage to using a tax preparation software program is that is costs less than hiring the services of a tax professional. Tax preparation fees generally depend on where the taxes are being prepared at and how many tax forms need to be filled out and how complicated they are. The majority of individuals end up paying one hundred dollars or more to have their taxes professional prepared. The price of a tax preparation software program can range from free all the way up to sixty dollars or more.

In the past few years e-filing has become popular. E-filing allows a tax return to be received and processed quicker which often results in taxpayers getting their tax refunds sooner. Even though e-filing has dramatically increased in popularity there are still a number of individuals who do not feel comfortable e-fling their taxes. These taxpayers are often worried about their personal information being transmitted over the internet. All tax software programs give users the options of e-filing their federal and state tax forms or printing them out.

While e-filing tax returns may be convenient there are many tax software programs that charge an additional e-filing fee. Taxpayers are encouraged to fully read the box of a tax software program or read the description of the software program online. It is not uncommon for many taxpayers to not realize that they will be charged an additional fee for e-filing. There are some tax preparation software programs that only mention the e-filing fee in the fine print of their product description. Even with the additional fee it is still likely that the majority of tax software programs are cheaper than having a tax return professionally filed. In addition to e-filing fees, taxpayers are encouraged to be on the lookout for any other hidden fees because there are likely to be some with many tax software programs.

With many tax software programs guaranteeing their work it is evident that tax software programs are easy to use and accurate. With mathematical checks and easy print offs for personal records it is obvious that there are many advantages to using a tax software program. Taxpayers are encouraged to weigh the above mentioned advantages and disadvantages of tax software programs and then make an informed decision on how their tax returns should be prepared and filed.

About The Author
Gray Rollins is a featured writer for the http://TaxHelpDirectory.com. To learn more about tax software, visit http://www.taxhelpdirectory.com/taxsoftware/ and to learn more about accounting software, visit http://www.taxhelpdirectory.com/software/.

Corporate Tax Provison Software - Integrating FIN 48 Into the Tax Provision Process

FIN 48 is an interpretation that was meant to provide clarity around certain aspects of FAS109, specifically, the computation and disclosure of Uncertain Tax Positions ("UTPs"). As such, FIN 48 is an integral part of FAS 109 and needs to be considered within the tax provision work flow.

Under FIN 48, UTPs formerly computed under FAS 5 must now be reviewed under new standards for identification, probability, computation, and disclosure. Once this has been done, the results need to be fully integrated with the rest of the tax provision.

The integration of UTPs under FIN 48 applies to all of the schedules required to be disclosed in the tax footnote. For example, an increase in a UTP that has a significant impact on the tax rate might have to be seperately disclosed in the effective tax rate reconciliation. Likewise, the breakdown of the tax provision into federal, state, and foreign components need to reflect UTPs in each of those jurisdictions. If there are UTPs set up for temporary differences, this could impact the presentation of deferred tax balances.

Under FIN 48, UTPs formerly computed under FAS 5 must now be re-viewed using new stan-dards for identification, probability, computation, and disclosure.

Integration of UTPs with the current taxes payable account presents special challenges. Before FIN 48, tax reserves computed under FAS 5 were typically recorded in the current payable on the theory that the government could demand payment at any time. This meant that refunds and payments due with the filing of the return were co-mingled in the ending balances. Past FIN 48, these items are still included in the ending balances; however, the movement in the UTPs must be disclosed in a separate rollforward using the following prescribed categories: Beg Balance, PY Increase, PY Decrease, CY Increase, CY Decrease, Settlements Expiration.

In the past, companies often shifted reserves within the payable with little or no disclosure. The rollforward of UTPs now requires companies to clearly breakout increases and decreases due to changes in judgment and the expiration of statute of limitations, both of which are offset by charges to the current tax provision. In practice, this means that the current tax provision related to the tax return needs to be tracked separately from the current provision related to UTPs to allow for separate rollforwards. Likewise, payments and refunds related to the filing of the tax return will have to be separated from payments and refunds related to the settlement of UTPs in order to populate the Settlement column of the UTP rollforward. Where a UTP is relieved with an audit settlement, a "true up" may have to be recorded as a PY Increase or PY Decrease, offset by an adjustment to the current tax provision.

The rollforward of UTPs within the current taxes payable may give rise to a cumulative translation adjustment where activity is recorded in local currency and is translated into a different reporting currency. A cumulative translation adjustment arises because the beginning and ending balances are recorded at the beginning and ending spot rates, and the activity is recorded at the rates used in the income statement for the period. In their presentation of the UTP rollforward, companies will have to decide the best presentation of this item; i.e. should the cumulative translation be combined with the activity columns or should it be separately stated. For calendar year filers, this disclosure is not required until the 4th quarter of 2007.

The rollforward of UTPs now requires companies to clearly breakout increases and decreases due to changes in judgment and the expiration of statute of limitations, both of which are offset by charges to the current tax provision.

Changes in tax rates can also have a signifi-cant impact on the integration of UTPs into the tax provision.

Changes in tax rates can also have a significant impact on the integration of UTPs into the tax provision. UTPs will normally be recorded at the tax rates used to file the tax return for the year in which the issue arose. For example, a potential disallowance of an expense in a prior year must be measured at the tax rates in effect for that year. This could be different from the tax rates used to compute the tax provision in the current year. This means that UTPs must be tax effected and carried forward using a unique rate structure that is not dependent upon the rates used in the tax provision for the current year. As noted above, the UTPs must be integrated into all aspects of the tax footnote disclosure. The different tax rate structures make it difficult to simply add UTPs and tax return activity together on a pretax basis. Instead, it may be advisable to tax effect the UTPs separately and then add them to the standard tax provision computations.

Under FAS 109, de-ferred tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision.

Where a UTP is expected to increase a state tax liability, the federal benefit of the state deduction must be taken into account. If this computation is made within the FIN 48 exercise, care must be taken not to duplicate the federal benefit of state tax within the rest of the FAS 109 calculation. In practice, this can lead to a state tax procedure that is different for UTPs than it is for items reported on the tax return in the normal course.

If a company records UTPs that are temporary in nature, these items must be included in the deferred tax accounts. Under FAS 109, deferred tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision. Since temporary UTPs are recorded at the rate used to file the return (which is the rate that will be used by the government to assess the tax) future tax rate changes will also impact the ultimate relief when the disallowed tax deduction is claimed on a future return. In this sense, temporary UTPs operate in the same manner as regular return-driven temporary differences. There is, however, one notable exception.

In the case of an expense caused by a tax rate decrease which reduces the value of an uncertain deferred tax asset, there is general agreement that this expense should be recorded in the deferred tax provision along with similar adjustments to return-driven deferred tax assets. However, some practitioners have taken the view that benefits resulting from an increase in tax rates applied to uncertain deferred tax assets should not be immediately recognized, but rather, companies should wait until either: 1. the expense is in fact disallowed by the government, or 2. the deduction is claimed on a future return. In either case, the uncertain deferred tax asset is not adjusted in the normal course with other return driven temporary differences. Following this view, uncertain deferred tax assets will have to be tracked separately, so that they are not adjusted for future tax rate changes in the current period.

Interest and penalties on UTPs can be reported above the line (gross) or below the line within the tax provision (net of tax benefit). Here, too, tax rates can have a significant impact. If reported above the line, the accured interest which is typically not deductible until paid will give rise to a deferred tax asset, subject to the same impact of tax rates on uncertain UTPs noted above. Non-deductible penalties will create a permanent difference that will impact the tax rate. If reported below the line, interest (net of tax benefit), will not be recorded in the current tax payable account with an offset to deferred tax asset (net of tax benefit). When the interest is actually paid (gross), the deduction is claimed on the return, but not the books, and the deferred tax asset is relieved. In practice a decision to report interest and penalties below the line can lead to bookkeeping problems in matching up the gross cash payment against the net liability recorded in the current taxes payable account. The choice to present interest and penalties above or below the line will also impact the presentation of the effective tax rate reconciliation disclosed in the tax footnote. This is due to the fact that the tax provision is divided into two potentially different figures for pretax book income, one which is reduced by interest and penalties and another which is not. This creates two different starting points for the effective tax rate reconciliation, thereby creating alternate presentations.

Most companies have procedures in place to "true up" their tax provision to the actual results reported on the tax return. FIN 48 can be viewed as a final "true up" which takes into account the final settlement of the return on examination by the government. In order to make this final adjustment, it is necessary to keep records of the return as filed, stated on a FAS 109 basis, so that the final "true up" can be recorded. In practice, this means keeping detailed records of the current and deferred accounts for all open years.

FIN 48 can be viewed as a final "true up" which takes into account the final settlement of the return on examination by the government.

FIN 48 is a clarification of FAS 109 which extends the basic tax provision computations into the area of UTPs. The creation of UTPs under FIN 48 creates some new issues related to additional disclosure such as the UTP rollforward as well as some computational challenges in the area of tax rates and cumulative translation adjustments. Companies need to consider the ways in which FIN 48 will impact their existing tax accounting procedures under FAS 109.

Kevin Brady, General Manager and VP. is an original founder of TaxStream, now a part of Thomson Tax & Accounting, providing the domain expertise and strategic direction for the company. In addition to his executive roles, Kevin serves as a senior advisor on engagements and proposals. TaxStream has become the industry standard for FAS 109 and FIN 48 Software [http://www.taxstream.net]. To learn more about how we can help your company feel welcome to visit our website at [http://www.taxstream.net]

Local Property Taxes In New Jersey - A Primer

LESSON ONE

First Remember that:

THE LOCAL PROPERTY TAX in New Jersey is in fact a LOCAL TAX.

This means that the tax is assessed and collected at the local municipal level for the support of:

LOCAL SCHOOLS

MUNICIPAL GOVERNMENT

COUNTY GOVERNMENT

THE STATE RECEIVES NO PORTION OF THESE PROPERTY TAXES.

As a matter of fact the State pays out 48¢ of every State revenue dollar collected to counties, municipalities and schools in some form of State Aid. In 1961, some 44 years ago, the State paid out 43 cents of every State revenue dollar collected.

In FY 2005 the State budgeted approximately $12,465.6 million in State funding for property tax relief programs for the following purposes:

($Millions)

Schools Aid $8,657.3

Municipal Aid 1,757.0

Other Local Aid 716.0

Direct Taxpayer Relief 1,335.3

TOTAL $12,465.6

LESSON TWO

Next we must understand that:

THE LOCAL PROPERTY TAX in New Jersey is a RESIDUAL TAX.

A Residual Tax is one which is levied to raise the amount of money required over and above the total revenues available from other sources.

For example, in Jerry's Small Town, total budget requirements are:

For Local Schools $ 149,000

For Municipal Services 175,000

For County Services 75,000

Other Items 1,000

TOTAL BUDGET REQUIREMENTS $400,000

Available Revenues to offset these requirements:

State School Aid $ 75,000

Other Revenues 25,000

(Parking Meters, Licenses,

Court Fines, Etc.)

TOTAL AVAILABLE REVENUES $100,000

AMOUNT TO BE RAISED BY LOCAL PROPERTY TAXATION $300,000

This $300,000 is the RESIDUAL amount to be raised by Taxation after giving effect to all other sources of revenue.

LESSON THREE

Now we must also understand that:

THE LOCAL PROPERTY TAX in New Jersey is an AD VALOREM TAX.

Don't let that fancy name frighten you.

An AD VALOREM tax simply means that each taxpayer shares in the total tax burden of his town in the direct proportion as the value of his property bears to the total value of all the property in his town.

AD VALOREM means each taxpayer pays according to the value of the property he owns. The amount of property he owns is used as a yardstick in determining his ability to pay.

For Example:

Jerry owns a house and lot having a market value of $ 300,000

The total market value of all property in Jerry's towns is $60,000,000

ACCORDINGLY:

Jerry's share of the total Local Property Tax base is $300,000 / $60,000,000

$300,000 equals ½ of 1% of the total property tax base of $60,000,000.

Reducing this to a decimal, Jerry's share of the total Local Property Taxes in his community is ½ of 1%, or .005.

This percentage is usually shown as a Tax Rate charged for each $100 of Assessed Valuation. (See Lesson Four)

AD VALOREM means nothing more than PROPORTIONATE OR FAIR SHARE.

REVIEW

So far we have learned that the Local Property Tax is a -

LOCAL Tax

RESIDUAL Tax

AD VALOREM Tax

LOCAL TAX levied at the local municipal level for the support of local schools, municipal and county governments.

RESIDUAL TAX levied to make up the difference between available miscellaneous revenues and budget requirements.

AD VALOREM TAX, which means that each taxpayer pays his proportionate share based on the value of the property he owns.

LESSON FOUR

Now, we must learn the answer to the question:

WHAT IS THE MEANING OF TAX RATE?

TAX RATE is the number of dollars per $100 of Assessed Valuations which must be applied to the assessed valuation of all property in a taxing district in order to produce the amount of money required to support school, county and municipal budgets.

TAX RATE is another method used to arrive at the amount of each taxpayer's proportionate share of local taxes.

The TAX RATE is determined by a simple arithmetic calculation similar to the method illustrated in Lesson Three.

Total Amount to be Raised by Taxation - $300,000

Total Value of all property in Town - $60,000,000

$300,000/ $60,000,000 = .05

The Tax Rate is then 5¢ per $1 of Assessed Valuation

or

$5.00 per $100 of Assessed Valuations

EXAMPLE:

Jerry's house and lot have an Assessed Valuation of ------------------ $300,000

Tax Rate per $100 of Assessed Valuation ------------------------- X $5.00

Jerry's Tax Bill is --------------------------- $ 1,500.00

LESSON FIVE

What is the meaning of -

TRUE VALUE

ASSESSMENT RATIO

ASSESSED VALUATION

TRUE VALUE means market value - the amount a parcel of real property would sell for at a fair and bona fide sale.

ASSESSMENT RATIO is that percent of True Value used by the assessor in making up his assessment rolls as prescribed by his/her County Board of Taxation).

In New Jersey assessors use the statutory 100% ratio or Full True market value in making up their assessment rolls; assessors in others states use assessment ratios or percentages less than 100%.

ASSESSED VALUATION or ASSESSMENT is the value placed on each parcel of property by the assessor as indicated above; it is determined by the use of True Value or some percentage thereof.

REVIEW

In Lessons One and Two we learned that:

Total Budgets less available revenues result in the Residual Amount to be raised by taxation which is the total tax bill.

It follows then that the amount to be raised by taxation is a primary factor in determining the amount of each individual property owner's tax bill.

In Lesson Three we learned that:

Local Property Taxes are apportioned among property owners according to the value of each individual taxpayer's property in proportion to the value of the property of all taxpayers.

We learned that this method of taxation is called AD VALOREM taxation.

In Lesson Four we learned that:

Tax Rate is the dollar amount per $100 of assessed valuation which must be raised to support local budgets.

In Lesson Five we learned that:

Assessed Valuation is the true value or percentage of true value placed on each parcel of property by the assessor. This is the basic factor which implements the AD VALOREM principle of taxation.

LESSON SIX

What are the relationships among:

Total Amount to be Raised by Taxation

Tax Rate

Amount of the Individual Taxpayer's Bill

The relationship among these factors can best be illustrated by the following example. This example incorporates some of the lessons we have already learned.

In Jerry's Hometown:

The Total Amount to be Raised by Taxation is $300,000

The True Value of All Real Property is $60,000,000

The Assessor Uses an Assessment Ratio of X 100%

Thus the Total Assessed Valuation Taxable is $60,000,000

The Tax Rate then is ($300,000)/ - $5 per $100 of Assessed Valuation

$60,000,000)

Accordingly, if Jerry's House and Lot have a market value of $300,000

And the assessor uniformly applies an Assessment Ratio of 100% 100% (Note: All New Jersey County Boards Of Taxation Require 100% Ratio)

Jerry's house will be Assessed at: $300,000

By applying the Tax Rate in Jerry's Town X $5.00

JERRY'S TAX BILL WILL BE $ 1,500

LESSON SIX (Continued)

NOW, assuming 10 years have passed and property values have doubled in value due to property inflation, And, assuming that the Budgets remained the same:

And, the Total Amount to be Raised by Taxation is still. $300,000

And, with the Assessor assessing at 100% of true value. (NOTE: Reducing the ratio to 50% as happens in states, other than New Jersey, would mathematically just result in a doubling of the tax rate.)

And, property inflation has increased the town's total Assessed Valuation Taxable, so after a revaluation with a 100% ratio the town's total assessed valuation taxable is now. $120,000,000

The Tax Rate is then ($300,000) / - $2.50 per $100 of Assessed Valuation (120,000,000)

After the Revaluation the total tax base in the town doubled in value.

Since all assessments are at True Value,

Jerry's House after the revaluation will now be assessed at $ 600,000

By applying the Tax RATE of $2.50 per $100 of value X $2.50

JERRY'S TAX BILL WILL STILL BE $ 1,500

Thus, we learn that if the Amount to be Raised by Taxation remains the same:

Tax Rates are high when Assessment Ratios are low in some states other than New Jersey. Conversely, Tax Rates are low when Assessment Ratios are high in some states other than New Jersey.

The amount of a property owner's Tax Bill is not affected by Assessment Ratios or by Tax Rates.

The amount of an individual's tax bill is determined by The Amount to be Raised by Taxation, and by the proportionate value of his property as it bears to the total value of all property in his municipality.

LESSON SEVEN

What is meant by EQUALIZATION?

The term EQUALIZATION as commonly used has a twofold meaning:

INTER-DISTRICT EQUALIZATION, i.e., Equalization among taxing districts, has as its purpose the determination of the true wealth of every municipality to the end that each receives a fair amount of State School Aid and pays an equitable share of the costs of county government.

Inter-district equalization is substantially an accomplished fact in New Jersey.

The State School Aid Equalization Table, which is based on a continuing statewide sales-assessment ratio study, provides for the equitable apportionment of the costs of county government among the taxing districts within the several counties.

This Table is also used as the basis of apportioning certain costs of Joint, Consolidated and Regional School Districts.

INTRA-DISTRICT EQUALIZATION, i.e., Equalization within a municipality, means equitable tax treatment among property owners of the same class of property and equitable tax treatment among property owners of different classes of property.

This simply means that homeowners having homes of similar value are assessed alike - that is, Jerry's home and your home, having an equal value, are assessed at the same value. Similarly, Jerry's place of business, having the same value as other places of business, is assessed at the same value.

This is known as Intra-Municipal Equalization, and is the very core of the principle of Ad Valorem Taxation.

Intra-Municipal Equalization is generally attained by carrying out an overall professional Revaluation Program where all properties are re-evaluated as to their market value or 100% value.

LESSON EIGHT

What is meant by REVALUATION?

The REVALUATION of a taxing district is accomplished by having an appraisal made of every piece of real property within the taxing district by a competent professional revaluation firm.

CARRYING OUT A HIGH QUALITY REVALUATION PROGRAM involves the application of uniform standards and procedures in arriving at equitable appraised values for all parcels of property in the taxing district.

THE PURPOSE OF A REVALUATION PROGRAM is to secure the basis for attaining uniform and equitable assessments on all properties within the same classification and as among the several classifications of property in order to assure an equitable apportionment of the increasingly heavy local property tax burden among all the taxpayers within a taxing district.

PROFESSIONAL REVALUATION PROGRAMS are carried out in about 50 municipalities a year.

THE GOVERNING BODIES of those municipalities that have regularly revalued have faced up to their obligation to treat all property taxpayers uniformly and equitably.

: Gerald ?Jerry' Dowgin "The Property Tax Doctor" and the author of the Homeowner's Assessment Review Guide (http://www.propertytaxdoctor.com) a former tax assessor worked in the field of public finance at the State and local levels in New Jersey for more than three decades until his retirement in 2001. As a Supervising Tax Analyst in the Office of Research and Statistics in the Division of Taxation in the New Jersey Department of Treasury he worked principally on local property tax issues. Then he joined the Office of Legislative Services (OLS) in 1983 and served as the Secretary to the New Jersey Property Tax Assessment Study Commission for four years. While working in the OLS, Local Government Section he researched, drafted, and estimated the cost of the Senior Property Tax Freeze Bill which was signed onto law and worked on legislation that became law that virtually stopped the tax assessment practice of "Spot Assessments" in New Jersey that had treated many property taxpayers unfairly.

The Biggest Mistake With C Corporations and How to Save Taxes Using the C Corporation Double Tax

When used correctly, C Corporations are a great way to supercharge a tax strategy. I find that when my clients make the most of their C Corporations, they reduce their taxes by a minimum of $10,000 every year.

- The Biggest Mistake With C Corporations -

The key to saving $10,000 in taxes every year is knowing how to use a C Corporation correctly. When I meet with prospects and review their prior year tax returns, it's not unusual that I find a C Corporation that isn't being used correctly. In these cases, the C Corporation is not saving any taxes and in some cases it is actually creating more taxes! So what makes these C Corporations not work? These C Corporations do not save taxes because the wrong type of business is in the C Corporation.

Only certain types of businesses will generate tax savings by operating as a C Corporation. The type of business that does work is what I refer to as a support business or a secondary business. Now, you may be wondering, what is a support or a secondary business? Sometimes it's easier to define what it isn't.

The Types of Businesses That Don't Save Taxes in a C Corporation:

Primary Operating Business. This is a business that creates the main source of cash flow for the owner. The owner relies on this cash flow for living and other personal expenses. The primary operating business is how the owner makes a living. In this type of business, it is critical that the owner be able to get cash out of the company in a very tax efficient way. While it is possible to get cash out of a C Corporation, it becomes inefficient from a tax standpoint to do so with large amounts of cash. Bottom line: if you rely on the cash from your business to pay for your living expenses, that business is not ideal for a C Corporation.

Investment or Rental Real Estate Business. There are several reasons why this type of business doesn't work in a C Corporation. I'll share the top two reasons.

First, this type of business involves assets that appreciate. C Corporations do not have a "special" lower tax rate for capital gains (which are generated from appreciated assets). Individuals do have a special capital gains rate so that benefit is completely lost in a C Corporation.

Second, the income generated from these investments is often subject to a special (additional) tax in C Corporations called a personal holding company tax. This tax only applies to this type of income and only in a C Corporation. The tax effectively eliminates the lower tax rates that a C Corporation normally has. This tax was specifically put in place to keep taxpayers from putting investment assets in a C Corporation as a way to pay less tax on their investment income.

The Type of Business That DOES Save Taxes in a C Corporation:

Now that we have eliminated primary operating businesses and investment businesses from the types of businesses that do not save taxes in a C Corporation, what is left? What is left is secondary or support businesses. These are best defined as businesses that generate a modest amount of profit (no more than $75,000 annually) and the cash flow that is generated is not needed by the owner to pay for living or personal expenses.

By far the biggest objection I hear anytime I bring up a C Corporation is...

But What About the Double Tax? Sometimes just the mere thought of paying a double tax sends people running in fear. Fortunately, I'm not afraid of the double tax and I actually have a strategy where the double tax can work to reduce my clients' taxes.

What Is the Double Tax? The double tax is this:

First tax: A C Corporation pays its own tax on its net income. This is the first tax.

This is a great tax reduction strategy! Because a C Corporation pays its own tax, it has its own tax rules and you can legally use these rules to reduce your taxes.

Second tax: A C Corporation can use the cash it has after paying its own tax to pay dividends to its owners. When a C Corporation pays dividends to its owners, the owners pay tax on that dividend. This is the second tax.

At first glance, which is usually the only look most people (including CPAs) give a C Corporation, it seems that the double tax is the worst case scenario when it comes to tax planning. So many are surprised when I share this:

It Is Possible to Pay Less in Tax Even With a Double Tax!

Let's take a look at how the C Corporation double tax can play out:

First tax = 15% A C Corporation pays 15% tax if it has net income of $50,000 or less.

Second tax = 15% An individual pays 15% tax on dividends.

Total double tax = 30% (The double tax can end up being a little less than 30% but to keep things simple for this example, 30% will be used).

This means if an individual is in a 35% tax bracket, it is possible to pay less tax by incurring a double tax that totals 30%!

Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on these strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information please visit http://www.provisionwealth.com

Lower Your Taxes With International Tax Planning

International tax planning means development of the most fair tax regime for the taxpayer. Globalization brought new opportunities for both resident and non-resident individuals and legal entities. Based on our practical experience the following are useful tips for those who wants to save on taxes.

How to Lower Your Taxes

First of all there is a number of standard tax planning principles you should never neglect. All of them are quite applicable to national and international level of tax planning. The advices include:

Reduce your income to reduce tax amounts. One of the best-recommended ways is saving for retirement.
Be aware of the exempted categories of income, like life insurance, gifts-bequests and inheritance, health insurance, employer reimbursements, scholarship grants etc. However, remember it is the recipient who gets them income tax free.
Make the most of deductions. Those biggest ones are normally mortgage interest, state taxes, and gifts to charity.
Take advantage of tax credits - they don't reduce your taxable income, but reduce your actual tax liability.
Try to get a lower tax rate where possible.
Consider deferring paying taxes - this can be reasonable in many cases.
Shift income to other taxpayers, for example gift highly valued assets to children.

Aspects Determining Your Tax Liability

Apart from the above listed general rules analyze each and every of the below aspects that may finally require notable changes of your business structure.

Object of Taxation. Every tax relates to its own independent object of taxation. It can be real estate, goods, services, works and/or their realization as well as income, dividends, interests. Changing the taxable object may lead to a better tax regime. For example, sale of equipment is being often replaced by giving it into leasing.

Subject of Taxation or Taxpayer. It's an individual or legal entity liable to pay taxes with his/her/its own funds. By changing its legal form the business may get a more favorable tax regime. A classic example is a business originally set up in the form of a U.S. corporation transformed into a limited liability company (LLC) having a tax-flow regime and thus eliminating the federal level of corporate taxation.

Tax jurisdiction. You are free to choose your tax jurisdiction. Use benefits of offshore low tax centers same as beneficial features of tax regimes in countries with high taxes. A number of jurisdictions welcome non-resident investments in exchange for total exemption of taxes and reporting. Some countries favor particular types of activities attracting investments into specific industries.

Choosing between low tax centers, looking for an offshore jurisdiction favorable for trading and professional services check Dominica or Seychelles first, for financial holding companies and insurance business consider BVI, Cyprus, Panama, for ship management and maritime operations - Cyprus, Dominica, Nevis or Panama, for licensing and franchising - Cyprus, Gibraltar, Panama, and so on. It's very probable that you'll find a suitable option for you among the existing offer. But have in mind that some businesses are not really mobile in terms of changing jurisdictions.

Location of the company and of its management and administration. They also call it "mind & management" test. This may be the key factor to determine tax residency of the company. It totally depends on taxation policies of the countries involved, but the company may be obliged to pay taxes in the country where its "mind and management" is located.

Double Taxation

Potential double taxation happens when one country pretends to the right to tax the income on the basis of residence (or citizenship) of the taxpayer and the other country - on the basis of that income source. In certain occasions it happens because both countries claim the taxpayer to be their resident or the income originates from their sources.

Avoid double taxation by means of possible tax credit, tax deduction and tax exemption options. Most of the existing double tax treaties between countries normally follow the OECD model tax convention and cover taxes on income and capital in any form. The choice of jurisdiction as per paragraph "Tax jurisdiction" above may often depend on availability of the appropriate tax agreement between two countries.

Besides tax treaties a number of developed countries have in place special tax regulations allowing for credit of the foreign tax paid even without the according tax treaty in force between the involved countries.

Double taxation may also have place within the distribution processes of the company's revenue. It may be first taxed as profits of the company and later as dividends to the shareholders subject to withholding at distribution. Check the related local legislation to find a possible remedy for this case.

Practical Tips

It's more beneficial to avoid tax resident status in the country of the biggest profits trying to limit it to withholding tax.
It's better to defer withdrawal of funds from business and repatriation of profits. In certain occasions deferral equals tax exemption.
Transfer of assets is more preferable as movement of capital rather than movement of revenue or profits.
Comparing tax regimes of different jurisdictions pay attention to the process of formation of taxable income besides the tax rates figures.

Matters you are to settle at the conclusive stage of tax planning, such as tax expedient distribution of assets and profits, do not relate to tax calculation and settlement directly. However development of priorities in profits accommodation, capital repatriation and investment policy provides for additional tax benefits and some return of paid taxes.

The original version of the article: Lower Taxes with International Tax Planning.

Mary is a consultant and blogger at Offshore Advisor - free online consultancy on offshore services covering asset protection, offshore banking, second citizenship and more.