Small Business Taxes & Management

News On The Tax Front--The latest tax news.

In Brief:--Tax, business, and personal finance tips.

News On The Tax Front

Previously Reported In Daily Update

The IRS continues to attack small businesses, claiming they are hobbies and denying the losses. The IRS frequently wins these cases because most taxpayers don't keep the records or seek professional help in trying to improve the business. In Jeffrey Tamms (T.C. Memo. 2001-201) the taxpayer tried to build a photography business. Early efforts proved disappointing so he tried to improve his reputation by exhibiting photographs and setting up exhibits. He built his portfolio and won awards, gaining considerable recognition. However, he lost money over an 11-year period, turning a profit only in the years just before going to Court. The Court sided with the taxpayer, noting he operated the activity in a businesslike manner, kept good records, and tried various means to achieve profitability. The IRS tried to pull a fast one by claiming that he was actually engaging in 2 activities. The Court didn't allow that approach because the issue was brought up too late. And, while the IRS might not have won on this issue here, that ploy could work in other hobby loss situations. If the IRS succeeds in showing there are two activities, it could deny the losses of the unprofitable "activity" while taxing the net income of a profitable "activity" rather than allowing the two to offset each other. That would be the best of both worlds for the government.

If an employee uses a corporate aircraft for personal purposes, you can still deduct the cost of operating the plane if you impute income to the employee and report that on his W-2. How much income? The IRS has a formula that consists of a fixed terminal charge and a mileage charge. These amounts are updated twice a year. (We report these www.smbiz.com/sbrl005.html#s5) While the imputed amounts aren't insignificant, they're almost certainly much less than the actual operating cost of the plane. In National Bancorp of Alaska, Inc. (T.C. Memo. 2001-202) (and Sutherland Lumper-Southwest, Inc., and Midland Financial Co. and Subsidiaries) the IRS tried to claim that the company's deduction for the aircraft should be limited to the amount included in the employee's income. The Court did not agree. It held the taxpayer could deduct the full amount of operating costs.

If you make awards for back pay to an employee one or more years after the year in which your liability for the wages occurred, which year do you use for computing the FICA and FUTA bases? The Supreme Court has held (Cleveland Indians Baseball Co.) the payroll taxes should be computed using the wage base and rate for the year in which the wages were actually paid, not the year to which the payments relate. Now the District Court has followed that rule. (St. Louis Cardinals, L.P.; U.S. District Court, East. Dist. Mo., East. Div.)

If you're buying (or selling) a business, the purchase price includes any liabilities assumed by the purchaser. For example, you agree to pay $100,000 for the assets of Madison Inc. and to assume $125,000 in Madison's liabilities. Your purchase price (for computing gain or loss, depreciating or amortizing the assets purchased, etc.) is $225,000. Similarly, the seller's selling price for gain or loss purposes is $225,000. In Illinois Tool Works, Inc. & Subsidiaries (117 TC--, No. 4) the taxpayer purchased the assets of another corporation. The taxpayer agreed to assume a contingent liability for a patent infringement suit. The taxpayer thought that the suit would be settled for nominal amount. Instead, the settlement was for some $17 million. The taxpayer tried to deduct the bulk of that amount as a business expense. The IRS took issue. It said the entire amount had to be capitalized as part of the acquisition cost of the business. The Tax Court agreed with the IRS and denied the taxpayer a deduction. The Court noted that the taxpayer was aware of the contingent liability before purchasing the business and expressly assumed it as part of the purchase price. If you're acquiring a business, do your homework.

The IRS can disregard a corporation or other entity if it appears the corporate formalities weren't followed. In James P. and Marilyn S. Cashman (T.C. Memo. 2001-199) the taxpayers tried to use that argument so that they could bypass the corporation and deduct the expenses on their Schedule C. The taxpayer argued that the corporation wasn't in good standing with the state, never kept minutes or held the required meetings, etc. The Court sided with the IRS noting that the taxpayer entered agreements using the corporation and signed documents as its president, not in his own name.

In articles we've said that if you can't prove your basis in an asset the IRS can assume it's zero. That means that your gain could be equal to the entire amount of the selling price. That's exactly what happened in Tony L. Zidar and Kathleen I. Zidar (T.C. Memo. 2001-200). The taxpayers sold their entire interest in a business. Since the taxpayers couldn't establish their basis, the Court sided with the IRS, holding the amount received for the stock plus the cancellation of their debts owed to the business was taxable income.

The IRS and most states exchange tax information with each other. That's why it's important to file an amended return with your state should the IRS make a change in your taxable income. It works the other way too. In Mark Sunik and Tamara Sunik (T.C. Memo. 2001-195) the IRS assessed the taxpayers additional tax based on an upward adjustment in their income made by the state to which the taxpayers consented. The taxpayers argued that the deficiency notice was not valid. The Tax Court held that it was.

Based on the number of court cases, it appears the IRS has not been as aggressive in attacking excess compensation of shareholder/employees of C corporations as in the past. That doesn't mean it doesn't happen. In Damron Auto Parts, Inc. (T.C. Memo. 2001-197) the taxpayer paid its shareholder/president some $1.9 million in salary for the last year at issue. (Salaries for the other two years were $1,350,000 and $1,837,114.) The IRS claimed the salary was excessive, disallowed some of the amounts and recharacterized them as taxable dividends. The Tax Court sided with the taxpayer, noting that, even with the salaries paid, a shareholder would have an average annual return of 39% from the date the business was acquired in 1984 for $200,000 to the time it was sold in 1998 for some $12,500,000. The Court noted that was far in excess of the expected return of some 14% for a similar business. The Court dismissed the IRS argument that the corporation paid only one dividend of some $7,500 in all the years in operation. The Court noted the payment of dividends was just one factor to be considered. The Court also noted that there was nothing suspicious about the payment of the bonus at the end of the year since that was when the sales of the corporation (on which the bonus was based) were determined.

Who's liable for the taxes on a joint return? In Robert L. Beck (T.C. Memo. 2001-198) the Court found that both the husband and ex-wife were liable for the husband's profits from his Schedule C and E since the were community property under state law and the husband and wife were married at the time.

In Notice 2001-51 (IRB 2001-34) the IRS updated the list of transactions considered listed transactions that have a tax avoidance motive. Corporate taxpayers that participate in these transactions may need to disclose that.

Section 6205 allows employers that have paid less than the correct amount of employment taxes to make adjustments without interest, provided the error is reported and the taxes paid by the last day for filing the return for the quarter in which the error was ascertained. However, no interest-free adjustments are permitted pursuant to Sec. 6205 after receipt of notice and demand for payment based upon an assessment. The IRS has just issued (T.D. 8959, IRB 2001-34) final regulations relating to this section. The final regulations affect employers that are the subject of IRS examinations involving determinations by the IRS that workers are employees or that the employers are not entitled to relief from employment taxes under Sec. 530 of the Revenue Act of 1978.

Tax Court decisions aren't often overturned on appeal. However, in Edward Steinbrecher (2001-2 USTC 50,533; U.S. Court of Appeals, 9th Circuit) the Appeals Court did overturn a portion of the Tax Court's decision with respect to the taxpayer's horse breeding activities. The Court found that simply engaging in the activity to reduce their taxes wasn't determinative that that was the dominant motive. In order to do so the record had to reflect that the tax savings the taxpayer expected to gain as a result of his business activities could be greater than the real economic losses he might reasonably have expected to incur.

An ownership interest in a partnership or limited liability company (LLC) taxed as a partnership can consist of both a profits and capital interest, a capital interest alone or a profits interest alone. These interests are just what they sound like. A profits interest entitles the partner to only a share of the profits. The partner gets no share in any capital distributed (e.g., as in a liquidation). The IRS recognizes these interests for tax purposes. In Rev. Proc. 2001-43 (IRB 2001-34) the IRS clarified Rev. Proc. 93-27 by providing guidance on the treatment of the grant of a partnership profits interest that is substantially nonvested for the provision of services to or for the benefit of the partnership. In general, if a person receives a profits interest in exchange for providing services to the partnership in a partner capacity or in anticipation of being a partner, the IRS will not treat the receipt of the interest as a taxable event for the partner or the partnership. Thus, the partnership gets no deduction for the interest and the partner does not have taxable income. Taxpayers to which this revenue procedure applies need to file an election under Section 83(b).

Keep good records. We've said that before. In Edward C. Tietig (T.C. Memo. 2001-190) the taxpayer tried to deduct payments he made to his son for the use of securities he used for collateral for a loan. The payments might have been deductible because the collateral was used for a business loan, the taxpayer could not produce documentation that would prove the business purpose. In the same case, the taxpayer lost on another issue. The Court accepted the Service's determination of a zero basis in his stock for computing a capital loss. The IRS claimed that a distribution reduced his basis in the stock to zero. The taxpayer was unable to show that the accounting records were incorrect.

You may be able to deduct educational expenses if they are business related. However, you can't deduct them if they prepare you for a new line of business. What's a new line of business? An accountant is not considered the same as a CPA. They are different professions. In Richard Michael Managan (T.C. Memo. 2001-192) the taxpayer performed environmental audits. She took college courses and obtained a degree in chemistry. She then took a job in a chemistry laboratory. The Court held that the degree qualified her for a new profession and disallowed the deduction for educational expenses.

You can deduct your share of pro rata share of losses in an S corporation up to your basis in the stock and debt of the corporation. Your basis in the debt is equal to the amount of any loans you make to the corporation. In Christopher K. and Brenda M. Cox, et al. (T.C. Memo. 2001-196) the Court found that only one of the shareholders could claim a basis in the debt generated from the proceeds of a bank loan taken out by the shareholders and made to the corporation. The Court determined that only one shareholder had an actual "economic outlay" with respect to the loan. The Court found the other shareholders made no payments on the debt.

Under the disabled access credit you can claim a tax credit equal to 50% of the first $10,250 of expenditures that make a business accessible to disabled individuals. Expenditures such as a ramp in addition to stairs, special bathroom fixtures, etc. qualify for this credit. In Stephen T. Fan and Landa C. Fan (117 TC--, No. 3) the taxpayer, a dentist, claimed the credit on a special video camera system that allowed patients to view the doctor's work. The dentist claimed the system made disabled patients feel more at ease without having to explain a procedure to deaf patients. However, the Court found that the application of the system was not limited to disabled patients and the system did not allow the doctor to treat patients that he could not treat without the system. The Court denied the taxpayer a credit.

You can often avoid the negligence penalty if you can show that the understatement resulted from your accountant's actions. However, you have to have provided your accountant with all relevant information. In Paul A. Bilzerian (T.C. Memo. 2001-187) the taxpayer was unable to show that the error was solely the fault of his accountant. Moreover, the Court found that the taxpayer had a duty to review the return and that he did not do so. The Court also cited he fact that the taxpayer was educated and sophisticated and should have questioned the suspiciously low tax liability shown on the return.

If you can't use your entire net operating loss (NOL) in a tax year because the loss exceeds your current income, you can carry back (limit 2 years) and carry forward the loss to offset income in other years. Generally, claiming the loss is straightforward. However, in Paul E. and Jane Anne Gladden Emerson (T.C. Memo. 2001-186) the IRS challenged the loss. The taxpayers presented the return showing the net operating loss. However, they presented no evidence to support the loss on the return. The Court found that the taxpayer could not support a number of the expenses on the return generating the loss and, thus, disallowed the NOL.

You've got to do more than just support your expenses with a canceled check. You'll have to show the purpose of the deductions. In Paul E. and Jane Anne Gladden Emerson (T.C. Memo. 2001-186) the Court allowed some of the expenses as business related, but, in the absence of additional documentation, found that some of the other expenses appeared to be personal. The courts can allow a deduction even without adequate documentation under the Cohan rule. (This exception doesn't apply to travel and entertainment expenses.) In this same case the Court found that the taxpayers had enough documentation in the form of canceled checks and credit card statements related to their medical expenses that the Court had a basis for estimating an amount. Note. The Cohan rule requires some basis for estimation. If you have no receipts or supporting documentation, it's unlikely the court will try to help you.

The IRS can force you to produce documents by issuing a summons. However, you can challenge the summons in court. That's what the taxpayer did in Donna Gwinn, Treasurer of J.B. Hadden Industries, Inc. (2001-2 USTC 50,524; U.S. District Court, Mid. Dist. Fla., Tampa Div.). However, to do so successfully you've got to show that the summons was not issued for a legitimate purpose. The taxpayer was unable to do so and the Court upheld the validity of the summons. Note, the IRS has a right to such information and can enforce you to present it if the information is relative to the investigation, not already in the Service's possession and the IRS has complied with the administrative requirements.

In an earlier revenue ruling (Rev. Rul. 70-379) the IRS held that a U.S. corporation may elect to treat its wholly owned Mexican subsidiary as a domestic corporation for the purpose of filing consolidated returns because the subsidiary was organized under the laws of Mexico solely to comply with Mexican law as to title and operation of property in Mexico. Because of changes in Mexican law, the IRS has withdrawn and obsoleted this revenue ruling.

In a divorce, the receipt of a property settlement is generally nontaxable. On the other hand, the receipt of alimony is taxable. But you've got to watch the rules carefully. In Katherine A. Weir (T.C. Memo. 2001-184) the taxpayer received a percentage of her former husband's military pension as part of the monetary settlement in a divorce. The Court found the payments were fully taxable to her on receipt.

Sometimes it pays to appeal to a higher court. In Cerand & Company, Incorporated (2001-2 USTC 50,518; U.S. Court of Appeals, D.C.) the Tax Court found that the taxpayer's advances to a related corporation weren't loans as claimed, but really capital contributions. The related corporations made some repayments on the advances and treated some of the payments as interest which the parent reported as income. However, the Court of Appeals found that the Tax Court did not take this into account. While the treatment as income didn't affect the tax for those years because of net operating losses, it did affect the amount of the NOL carrybacks.

The IRS has started mailing approximately 5.7 million Annual Installment Agreement Statements to business taxpayers, individual taxpayers, their spouses and their representatives about installment agreements. The mailings began in early August and will be completed by September 1. The current statement, which is the first ever sent out by the Service, covers the period from June 5, 2000 to June 4, 2001. Taxpayers who receive the statement do not have to contact the IRS or take any action. The annual statement is a summary of all account activity, and shows the balance due, for all the tax periods covered by an taxpayer's installment agreement. An installment agreement is an arrangement between a business or individual taxpayer and the IRS to allow delinquent taxes to be paid on a specific schedule over a period of time. For more information see Internal Revenue News Release IR-2001-66.

Bankruptcy isn't as simple as it sounds. Your debts are discharged only if you follow certain rules. Debts that aren't disclosed aren't discharged. Likewise, outstanding tax liabilities are discharged only if you filed a bona fide return. In In re Donald J. Bonner, Debtor (2001-2 USTC 50,512; U.S. Court of Appeals, 9th Circuit) the Court sided with the IRS in finding that the taxpayer filed a fraudulent return. It noted the fact that the taxpayer failed to maintain adequate records and understated his income for several years. The Court found that his tax liability was not discharged in the bankruptcy proceeding.

There's a whole set of regulations associated with the filing of a consolidated tax return by a group of related corporations. Some of these are pretty arcane. One is designed to prevent a corporation from taking a duplicated loss on the sale of a subsidiary by a parent corporation. In Rite Aid Corporation, et al. (2001-2 USTC 50,516; U.S. Court of Appeals, Federal Circuit) the Court found the IRS regulations (1.1502-20) found the regulations invalid with respect to the disallowance of a loss on the sale of the subsidiary.

You may be able to recover litigation costs from the IRS, but only if you win the case and only if you cooperate with the IRS. In Gary Gealer (T.C. Memo. 2001-180) the taxpayer refused to turn over requested records to the IRS while under audit. The IRS issued summonses, which the taxpayer tried, without success, to quash because, by that time, the audit was over and the court could grant no relief. When the taxpayer went to Tax Court he offered those very documents to the IRS during discovery. The IRS conceded the case. The taxpayer requested some $238,000 for administrative expenses. The Court refused to grant the request. It noted that, had the taxpayer turned over the documents when originally requested, the IRS would not have issued a deficiency notice.

You have certain rights in dealing with the IRS. But, make no mistake about it, the IRS has rules it will adhere to. In Service Engineering Trust (T.C. Memo. 181) the IRS issued a lien and hearing notice to the taxpayers. The taxpayers requested a hearing, claiming there was no record of assessment. The IRS mailed them the assessments and set up a hearing. Neither the taxpayers nor their representative showed up for the hearing. The Court concluded that, since the taxpayers were given the opportunity for a hearing and failed to participate, there was no remedy.

Doing business through several entities can have business and sometimes tax advantages. If one business provides services or products for the other, there should be an intercompany charge. In Khalil Hamdan, Lana K. Hamdan (2001-2 USTC 50,511; U.S. Court of Appeals, 9th Circuit) the Court agreed with the Tax Court in finding that a "profit participation fee" charged to an S corporation by a related C corporation for legal, accounting, etc. fees was not deductible. There was no proof the charges were valid business expenses and no proof the services were performed. The Court saw the charges as a tax avoidance maneuver, the only purpose for which was to shift income. In addition, the Court upheld the negligence penalty for the unsubstantiated deductions.

A gain or loss on property you hold as a investment for more than a year is generally treated as long-term capital gain or loss. A gain or loss on property that's not held for investment but to produce ordinary income is generally treated as ordinary income or an ordinary loss. Getting capital gain treatment is good; so is getting ordinary loss treatment. In Pine Creek Farms, Ltd. (T.C. Memo. 2001-176) the taxpayer was a farming corporation that invested in hog futures. If a taxpayer enters into a futures transaction in order to hedge against price changes in a commodity, a gain is ordinary income; a loss an ordinary one. Here the taxpayer claimed an ordinary loss. However, the Court found that the activities of the business were not closely enough related to the investments to qualify as hedging transactions. The Court found the losses to be capital in nature.

In Christa Karin Mueller (T.C. Memo. 2001-178) the taxpayers embezzled part of a liquidating distribution from a corporation that belonged to another shareholder. The Court found that the embezzlement produced income taxable to the taxpayers which had gone unreported. The Court also sided with the IRS in finding that the taxpayers had unreported income from liquidating dividends from the corporation.

In Jesse Emmit and Marjorie A. Rupert (T.C. Memo. 2001-179) the taxpayers tried to deduct legal fees in connection with their daughter's divorce. The Tax Court sided with the IRS in disallowing the deduction, noting it was not in connection with a profit-seeking activity.

In Brief:

Previously Reported In Daily Update

Partnership conversion to LLC . . . One of the problems in changing the entity (partnership, corporation, etc.) you use to do business can have significant tax consequences. Changing from a sole proprietorship to a corporations is easy; going the other way can be very expensive from a tax standpoint. In a letter ruling (LR 200022016) a general partnership asked the IRS the tax consequences of becoming a limited liability company. The partnership was to convert to an LLC (limited liability company) by filing articles of organization. The new entity would continue to use the same accounting method and period and the partners' share of profits, losses, and capital and the respective liabilities of the partners was to remain the same. The IRS ruled that the partners would not recognize any gain or loss as a result of the conversion.

FREE! . . . Got you. Those four letters are almost a sure-fire way to generate sales, or at least interest. While they don't work on everyone, the success rate is so high they can't be ignored if you're doing a promotion, writing ad copy, etc. Just take a look at all that junk mail you get. You may not like the material cluttering your mailbox, but a lot of research goes into the envelope, copy, artwork, etc. They try to use "free" because it works. How you use it will depend on your product or service. For some businesses it's easy (e.g., buy one, get one free!), for others it can be more difficult. Sometimes you can even make it do double duty. That is, getting a customer to place an order and getting him to try a product he might otherwise not have. How much will it cost? Oftentimes you can control the cost (limit the dollar amount of the free item). Don't get too cheap or the customer will see through the offer. When you're computing the cost, keep in mind that some people may not take advantage of the free offer, but still place an order. That's a win-win situation.

Getting a divorce? . . . Not a happy thought, but it happens. The number of considerations depends on many factors, but who will get custody of the children, the amount of alimony, and the amount and type of property settlement are usually the prime ones. One area that's frequently overlooked or not given enough consideration is your soon to be ex-spouse's retirement benefits. There can be significant adverse tax consequences if not handled correctly. An spouse's rights to the other spouse's retirement benefits can be secured under a qualified domestic relations order (QDRO). You might still be able to get part of your partner's benefits without it, but if he or she cashes out of a retirement plan he or she could be subject to taxes on the distributions and possibly penalties for premature distributions. The QDRO avoids that problem. Not every divorce attorney is an expert on all the tax and financial implications of a divorce. You might need a specialist. The outlay should be well worth the money.

Sue your broker? . . . Well, you probably can't. When you signed the brokerage agreement you probably gave up your rights to sue. Your only remedy now is going to arbitration. If you've had substantial losses in the market and they're as a result of advice from your broker or your broker churned your account (encouraged excessive trading) or traded stocks without your permission, you may be able to win a settlement. Consult an attorney in the field.

Qualified small issue bonds . . . Local governments can issue tax exempt bonds to finance manufacturing facilities of private businesses. The bonds can provide inexpensive financing (interest rates are lower because the bondholder pays no taxes on the interest) that can lure businesses into a town. There are limits on such financing and the bonds must be used for manufacturing. In a recent technical advice memorandum (TAM 200122004) the IRS held that bonds issued to finance the construction of greenhouses and a storage building for growing plants did not qualify. The IRS found the facilities were not used for manufacturing nor was the grower a first-time farmer.

Have an older relative or friend? . . . Some disabilities creep up, some come on suddenly. If you have an older relative or friend, you might offer to start helping them with their finances, medical insurance claims, etc. That way you'll be familiar with their situation should they be unable to handle it themselves. Some bills are easy to take care of. You know they'll be an electric bill every month so you'll be looking for it. While there might be an additional charge, even if the bill is a month late it won't be a disaster. It's the bills you don't expect and particularly those that only come once a year that require special attention. For example, the house insurance. To adequately understand their finances, medical situation, etc. you've got to go through a one-year cycle. The check register can provide much information, but probably not a complete answer and there's a good chance that some (or all!) of the entries might be missing, you can't read them, etc. Be careful. Broaching this subject can be tricky. What if you're the one starting to have trouble? Ask a close relative or friend you trust for help. If there is no one, ask your CPA if he can help or recommend someone.

Read the fine print . . . That's what you have to do if you're analyzing credit card options. Getting a no annual fee card is possible, but you may have to give something up. One company is offering no annual fee and free airline miles. The catch? There's no grace period. That is, interest begins to run from the end of the billing cycle even if you don't carry a balance. What can you do? There are so many cards available that you should be able to pick one that fits your needs. Don't worry about a feature you won't use. For example, a card has a standard grace period, no fee, and gives free miles. The only disadvantage is that the interest rate on balances is 19%. But, if you never (or rarely) carry a balance, that's not a problem for you. On the other hand, if you normally carry a high balance, go for the lowest interest rate, forget the annual fee. If your average balance is $5,000, a 1% lower rate is equal to $50 a year. On a $1,000 balance $50 is equal to a 5% lower rate.

Old insurance policies, bank accounts . . . The days of looking up insurance policies, bank or brokerage accounts, etc. in a file cabinet are long gone. Almost every financial institution has your life insurance policy, bank account, etc. in a computer database. They should be able to uncover a policy by inputting a name (or even part of a name), social security number, etc. But don't expect them to volunteer that data should you be looking to cash in a policy, etc. for yourself or someone who died. Monies not claimed are supposed to be turned over to the state, but there are still advantages to the institution to keeping the assets as long as possible. Best advice? Keep a list of all policies with the name of the insurance company, the policy number, name of insured, beneficiary, and any other pertinent information. Note if the policy is in a married, maiden, or former name. It's not unusual for a person to have more than one policy, bank account, etc. with the same institution. If you find one, ask the company if there are any others. They'll almost always be able to locate them and will give you the particulars.

I didn't order that . . . While it's certainly unethical and probably illegal, there are firms delivering and charging you for items you may not have ordered. While it's more frequently done to individuals, businesses are not immune. The firms using the ploy are betting that the customer won't check their bills, monthly statement, etc. The odds are probably on their side, particularly if the monthly charge is relatively small. What to do? Check your bills carefully. Be on the lookout not only for separate charges on a credit card bill, but for add-ons to other invoices or statements. For example, an additional charge on your monthly mortgage or insurance bill. Small business owners should do the same thing for statements from vendors. If you don't understand a charge, call for an explanation. Special note. These ploys work especially well with the elderly, and these companies know it. Pass this on to your older relatives.

Selling, giving away, or trashing a computer? . . . Clean that hard drive before you do. Some companies downsizing or liquidating have been selling machines without doing so. While the data may have no value for the company or anyone else, there could be customer or client info on the machines that could result in a lawsuit if its made public. Ask a professional for the best way to remove the data or render it unreadable.

Alternatives to filing Form 941 on paper . . . You may be able to file Form 941 using a touch-tone phone and paying if their is a balance due. The IRS can figure your tax liability, overpayment, or balance due. If you have a balance due, you can pay it through electronic funds withdrawal from your checking or savings account. You'll be prompted to enter the Routing Transit Number and Account Number of the accounts. For more information, go to the IRS website and the 941TeleFile section at www.irs.gov/elec-svs/941fact.html. You may also be able to file on the web. However, this isn't done directly with the IRS. Instead, the IRS has partnered with a number of private companies. You can prepare your return directly or have a reporting agent do it for you. To find a provider go to IRS Approved e-file for Business Providers page (www.irs.gov/elec-svcs/abp.html).

You're in the army now . . . Which state is your state of residency if you're in the military? What do you do if you've lived in 3 states during the year? Federal law provides that your domicile generally doesn't change if you're in the service. That is, your domicile remains in the last state you resided in. For example, you're a Massachusetts resident and join the Air Force. You train in Illinois for 9 months and then are transferred to California where you remain for 2 years. During that time period, you're still considered a resident of Massachusetts. Can you change your residency? Yes, but, just like any other taxpayer you've got to show by the facts and circumstances that you intend to change your domicile. For example, registering to vote in the new state, cutting ties with your old state, etc.

Cut bottom 5% . . . Some companies review and rank their employees at least annually, cutting the bottom 5% or 10%. It can make sense. You'll get new blood and increase your standards for the workers that remain. Some companies allow employees in this category a certain amount of time to improve. And there may be extenuating circumstances. For example, the employee did poorly because he was placed in the wrong job out of necessity. This approach won't work for every business. And very small businesses will have a tough time cutting just 5% (or 10%) simply because that would mean cutting half a worker. But the idea has merit. It's been used by some very successful companies.