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March 2011 PADGETT BUSINESS

SMALLBIZBUILDERTHE B BTaxable or Non-Taxable Income?

There are situations when certain types of income areonly partially taxed or not taxed at all. Some examplesof non-taxable Income are:

1. Adoption expense reimbursements forqualifying expenses,

2. Child support payments,

3. Gifts, bequests and inheritances,

4. Non cash employer gifts (holiday turkey),

5. Workers' compensation benefits,

6. Meals and lodging for the convenience of youremployer,

7. Compensatory damages awarded for physicalinjury or physical sickness,

8. Welfare benefits,

9. Economic recovery payments, and

10. Cash rebates from a dealer or manufacturer

Some income may be taxable under certaincircumstances, but not taxable in other situations.Examples of items that may or may not be included inyour taxable income are:

1. Life Insurance If you surrender a life insurancepolicy for cash, you must include in income anyproceeds that are more than the cost of the lifeinsurance policy. Life insurance proceeds whichwere paid to you because of the insured personsdeath are not taxable unless the policy was turnedover to you for a price.

2. Scholarship or Fellowship Grant If you are acandidate for a degree, you can exclude amountsyou receive as a qualified scholarship orfellowship. Amounts used for room and board donot qualify.

3. Non-cash Income Taxable income may be in aform other than cash. One example of this isbartering, which is an exchange of property orservices. The fair market value of goods andservices exchanged is fully taxable and must beincluded as income on Form 1040 of both parties.

Employees vs. IndependentContractorsIt's crucial to know whether your

workers are employees or independ-

ent contractors. Big dollars may beat stake in the form of federal andstate assessed penalties resultingfrom misclassification. The validityof your company's pension plan mayalso be at stake.

A periodic review of the statusof your workers to see if they areproperly classified is critical, but theprocess isn't easy due to thecomplexity of the issue. Todetermine whether there is anemployer employee relationship ora business relationship, there aresome factors to consider: thebehavioral and financial control overthe worker, ownership of the tools,the permanency of the relationship(is there a contract?), work locationand work hours. There is no litmustest for exactly how many factorsmust be satisfied, nor are the factorsuniformly applied.

If you'd like to discuss thesecomplex rules with us and see howthey apply to your business in orderto make sure that none of yourworkers are misclassified, please callour office to arrange for anappointment.

Employees vs. Independent Contractors

Taxable or Non-Taxable Income?

Name Change as a Result of Marriage orDivorce

Title Matters: Who Owns the Car?

Write-off for Heavy SUVs UsedEntirely for Business

Padgett Business Services - Silicon Valley West Inc.

301N Santa Cruz Ave. Ste. A Los Gatos CA 95030

(408) 402 - 3725 (P) (408) 402-3726 (F)

p_levine@smallbizpros.com www.siliconvalleywest.com

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March 2011 PADGETT BUSINESS

PADGETT BUSINESS SERVICES is dedicated to meeting the tax, government compliance, profit & financialreporting and payroll needs of businesses with fewer than 20 employees in the retail and service sector ofthe economy. This publication suggests general business planning concepts that may be appropriate incertain situations. It is designed to provide complete and accurate information to the reader. However,because of the complexities of the tax law and the necessity of determining whether the material discussedherein is appropriate to your business, it is important you seek advice from your Padgett office beforeimplementing any of the concepts suggested in this newsletter.

PENALTY NOTICE: As required by U.S. Treasury regulations, you are advised that any written tax advicecontained herein was not written or intended to be used (and cannot be used) by any taxpayer for the

purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

PADGETT BUS INESS SERV ICESWHERE YOUR SUCCESS TAKES ROOT

Title Matters: Who Owns the Car?If your company is paying for a car, make sure

you title it in the company's name. If thecompany writes the check but you put the titlein your own name, the IRS is almost surelygoing to deny the business a depreciationdeduction. (This doesn't apply to soleproprietors as you and your business arentseparate entities.) Your company may also losedeductions for insurance, gas, maintenance,etc. Of course, even if the car is in the

company's name, you still have to keep recordsof the business usage. But if you don't take thefirst step, you'll have an uphill battle. By theway, the same will likely be true for otherbusiness assets.

Write-off for Heavy SUVs UsedEntirely for BusinessUnder the 2010 Tax Relief Act, the bonus first

-year depreciation percentage is 100% (insteadof 50%) for bonus-depreciation eligiblequalified property that is generally (1) placed

in service after Sept. 8, 2010 and before Jan. 1,2012, and (2) acquired by the taxpayer afterSept. 8, 2010 and before Jan. 1, 2012.Qualified property includes autos and truckswhich are 5-year MACRS property and thusqualify for bonus depreciation. For example, ataxpayer buys and places into service a new$50,000 heavy SUV on October 1, 2010 anduses it 100% for business, may write off itsentire cost of $50,000 on his 2010 tax return.

Name Change as a Result ofMarriage or DivorceIf you changed

your name as aresult of marriage

or divorce youllwant to take thenecessary steps toensure the nameon your tax returnmatches the nameregistered with theSocial SecurityAdmin i s t r a t i on(SSA). A mismatchbetween them cancause problems inthe processing ofyour return. Complete Form SS-5, Applica-tion for a Social Security Cardat your localSSA office and provide proof of your legalname change if any of the following apply:

1. You took your spouses last name or ifboth spouses hyphenate their lastnames.

2. If you were recently divorced andchanged back to your previous lastname.

If you adopted your spouses children aftergetting married, youll want to make sure thechildren have a Social Security Number (SSN).Taxpayers must provide an SSN for eachdependent claimed on a tax return. Foradopted children without SSNs, the parentscan apply for an Adoption TaxpayerIdentification Number (ATIN) by filing FormW-7A, Application for TaxpayerIdentification Number for Pending U.S.Adoptions with the IRS.