Wednesday, 28 December 2011

TDS relevance for foreign commissions

The question is if the commission payment to a non-resident is chargeable to income tax in India.
Gangesh Exports Ltd is engaged in the manufacture of precision sorting machinery for agricultural products. It sells machinery to various countries, especially developing countries, through agents in the respective countries.
These overseas agents are paid commission for effecting sales abroad. No TDS was deducted by Gangesh Exports on these commission payments, in view of the fact that the payments were made outside India, and the overseas agents are non-residents.
However, during the assessment proceedings, the Assessing officer held that the payment is not only commission for effecting sales, but also qualifies as related services rendered for sales, and hence it should have been subjected to TDS.
The Assessing officer's contention is that the said commission amount be disallowed as expenditure, and be added as income under Section 40 (a) (i) in view of non-deduction of tax on such commission payment.
Circular 23 is explicit that if an overseas agent operates in his own country, the entire commission received by him from an Indian exporter isn't liable to tax in India. However, recent withdrawal of Circular 23 provided a perception for some tax officials that such a situation would warrant withholding of tax on commission payments to overseas agents.
Though few Tribunal rulings are clear that no withholding tax is required on mere sales commission, the Revenue seems to prefer the verdict of the court in such an instance.


For many of the exporters, especially of capital goods, payment of commission to overseas agents is inevitable, and the RBI has permitted payment of that without any prior approval.
The withholding provisions for foreign payments are governed by Section 195 of the Income Tax Act, which says that any person who makes payment to a non-resident has tax deduction obligations at specified rates, if the said payment is chargeable to income tax in India.
The next question that needs an answer is if the commission payment to a non-resident is chargeable to income tax in India. Taxable income of a non-resident includes all income, from whatever source derived, that is deemed to accrue or arise in India.
The income deemed to arise/accrue includes any income of any person who has business connections in India, as well as any fees received towards technical services. Also, if the overseas agent has any permanent establishment in India, it shall be included as income.
In the given situation, Gangesh exports has paid mere sales commission for effecting the sales, and there is no other activity involved in this transaction; hence, it doesn't necessitate deduction of TDS on sales commission.


However, the situation would have been different had that overseas agent carried out additional functions, such as demonstration of the machinery, imparting initial training to the buyers team etc, in which case, it would be fees for technical services.
Such situations not only warrant the Indian exporter to withhold tax, but also to examine if the Indian exporter would be deemed to have a Permanent Establishment (PE) in the respective country. A reverse situation would depict the picture clearly, wherein a German exporter of machinery, having an agent in India, who not only sells machinery but also imparts training, would be construed as a PE in India.
The major test is if the source of income stems outside India or in India, which is determined by the nature of activities taken up by the agent, though actual payment is made outside India. Therefore, care needs to be exercised while deciding on TDS applicability and evaluating the nature of activities rendered by the overseas sales agent, though the nomenclature may be “agent”.
The current scale of industrialisation and globalisation across the globe makes it impossible for countries to remain independent of each other as far as complex international financial transactions are concerned. Tax law changes in any country influence its trade and policy decisions. Tax structures also determine inflow and outflow of investment and capital, and can inhibit or promote growth.
It is a recommended practice to get the views of your professional tax consultant whenever or wherever a question of such demarcation arises.

Sunday, 18 December 2011

Business Line : Today's Paper / MENTOR : Non-profit entities and foreign donations

Business Line : Today's Paper / MENTOR : Non-profit entities and foreign donations

Perez Chandra, a philanthropist, decided to dedicate the rest of his life to helping the slum-dwelling children and educating them. He decided to set up a charitable trust with his contributions, as well as donations from friends and well-wishers. The trust not only started receiving money from different donors but also received the attention of non-residents, who wanted to donate money. We now look at the compliance aspects of running a non-profit organisation.
A non-profit organisation can be registered in India as a Society, a Trust or a Section 25 company in India, following registration with the Income Tax department.
While setting up the non-profit as a society or trust is a procedural activity, the subsequent permissions requires the discretion of the officials. The first such is Sec 12A registration with the Income Tax department, which entitles the trust to treat its income as tax-exempt. Previously, the I-T Department's commissioner would sanction this registration as soon as all documentary formalities were complete. However, the current procedure requires the trust to do certain initial activities to convince the Commissioner of Income Tax that the purpose is a charitable one, as per the Income Tax guidelines.
The 80G registration comes next and this entitles donors to the trust to claim a tax exemption for the amount donated to the said trust. Again, practically, getting this permission takes a few months after the 12A registration is granted, though the Income Tax Act doesn't prevent granting of 12A and 80G together. It would save substantial time for the tax officials, as well as for the trust, if the 80G could be considered as a corollary of the 12A registration. The premises on this are that once the Commissioner grants permission to the trust to exempt its income from tax, it goes without saying that the Income Tax department is convinced as to the goals and activities of the said trust.
The next permission required in this list is to receive donations from foreigners / non-residents. This is governed by a separate Act viz. the Foreign Contribution (Regulation) Act 1976 (aka FCRA). Under this Act, the trust must register with the Central Government, and designate the bank branches through which such foreign donations would be received. The act has a two-fold goal — one to prevent the use of such money for acts of terrorism or any other act which isn't in national interest, and two, to prevent / control religious conversion issues.
Registration is granted only to those units which have a proven record of functioning in the chosen field of work during the previous three years. After registration, such an organisation is free to receive foreign contribution from any foreign source for their activities. However, newly-established organisations may also receive foreign contribution for specific activities, for a specific purpose, and from a specific source after seeking project-based prior permission from the Ministry of Home Affairs.
In the case of foreign contributions, a way out of these procedural requirements would be to register the trust with a Foreign NGO or Non-Profit organisation and receive money through them. The donor would make a contribution to the foreign NGO / NPO and they would route the money to the specific project of the trust in India. This approach has a double advantage — it saves time and procedural delays for the trust on one hand and on the other, it enables the foreign donor to claim a tax exemption in his country for the contribution made.
The latter, of course, is based on the assumption that the foreign country allows a tax exemption for contributions. This is true of the US (a major contributory — more than Rs 1500 crore per annum) where many NGOs and Non-Profits are registered entities with the IRS (Internal Revenue Service), and any contribution made to them by US residents can be claimed by the taxpayer as a deduction on the return.
However, if the taxpayer were to make a direct contribution to the Indian trust, it isn't always possible to claim a deduction on the US return, as this trust wouldn't be a recognised entity as far as the IRS is concerned. Perez's goal in setting up a trust for the education and health needs of the slum-dwelling children is indeed praise-worthy. All the paper work and documentation required at the initial stages are an attempt to provide the necessary collaterals to all authorities concerned, that the trust being set up will work for stated goals.

Monday, 12 December 2011

Business Line : Features / Mentor : Eliminating Chinese competition in trade

Business Line : Features / Mentor : Eliminating Chinese competition in trade

While China's policy favours exports and lowers risk, it denies exporters gains from a good exchange rate.
Ilango is the Managing Director of a fully-integrated automobile component manufacturing unit that exports automobile components to various countries, with a major chunk of it going stateside. The business involves the import of raw materials (scrap as well as other material) for production of these components.
Ilango was involved in trading activities till a few years ago, when he realised the fact that the Indian economy was going to be more stable and steady as compared to Western economies.
The investment of Rs 100 crore in an integrated manufacturing facility was justified, considering the global business pattern.


Most of the transactions involved export and import, and thereby the company stood exposed to substantial Forex risk. While the Board Room discussions of a majority of the companies involving imports was regarding the depreciating rupee and appreciating dollar, Ilango has a different issue to handle.
A depreciating rupee, the appreciating dollar, the European debt crisis and overall recessionary patterns across the globe have made headlines almost everyday during the last few weeks. With some foresight and some luck as well, here is how Ilango converted this situation into an opportunity and an advantage. Before we go into how Ilango converted a seemingly bad outlook into an opportunity, let us also analyse what happens on the Chinese competitor's side.
China follows a policy of managed float — the Yuan is allowed to fluctuate against the USD in a very narrow band, predetermined by the Chinese central bank. While this makes Chinese exports favourable and keeps exchange risk at a minimum, it also means that where other currencies stand to reap huge gains, the opportunity of benefiting from a good exchange rate is denied to the Chinese exporter. And so, as far as Ilango's competitor is concerned, his revenue is fixed or nearly fixed, thanks to the exchange rate (assuming, of course, that the volume of export doesn't change). His ability to offer discounts or use some other promotion tools is also limited.


Ilango typically imports scrap and pays for it in USD — he began by hedging his import contract so he could pay at the predetermined exchange rate when payments became due.
On the revenue side, he decided to not hedge his exports — there was, of course, a risk involved, but given the steady appreciation seen in the dollar during the last quarter, Ilango didn't expect something drastic. All cues pointed to a further upward movement.
Ilango's net revenue improved nearly 15 per cent, major import costs were pegged because of the hedge, and he was able to offer a 5 per cent discount to his clientele in USA, thus upping the ante and increasing his volume share of supplies.
When importers here (most of whom didn't hedge the risk) are trying hard to minimise costs, Ilango is busy discussing with the windmill suppliers to invest his profits / surplus in windmills, to reduce tax on the additional profits.
One must, however, note that this isn't a typical situation — some smart hedging and shrewd assessments resulted in a higher margin of profits, but the situation also has the downside effects on two major situations. While raw material prices are set to increase and scrap, especially, is affected both by increasing base prices and exchange rate fluctuations, any expansion or increase in Capex will also become more expensive if it has any imported component.
The current scenario offers hope for uncompetitive firms by giving them an opportunity to re-establish themselves through additional cash flows and prudent management of costs and hedging of risk.
(The author is a Coimbatore-based chartered accountant & the Managing Director of GKM Inc.)

Tuesday, 6 December 2011

Quick Management Mantras!

CA G. Karthikeyan, Managing Director of GKM answers questions on '60 Seconds Chief' - The Hindu Business Line

Q: One teacher I remember and why?
 A: Mr. Devarajan, my maths teacher, who created a huge interest in studies.

Q: One most valuable work lesson, thus far.
 A: Never procrastinate what you can do today.

Q: One thing I look for the most in a new recruit
 A: ‘Can do’ attitude

Q: One thought from a book that I am currently reading
 A: The bandwidth of belief mostly determines your altitude of success.

Q: One tip for time management
 A: Honouring timelines is the first step to success.

Q: One key thing in my fitness routine
 A: Twenty minutes of personal time a day keeps you agile.

Q: One signal that tells me there is a problem
A: Undue silence.    

Q: One technique for handling anger
A: Remain silent.

Q: One essential ingredient in my investment portfolio
A: Land.

Q: One good thing about the new generation
A: Access to technology-based information.

Q: One worrying thing about the young
A: Too much of social media.

Q: One thing that clinches a deal
A: Perseverance.

Q: One definition of values
A: Loyalty and trust are two essential items of value definition.

Q: One way that I use for resolving conflicts
A: Deliberations.

Q: One favourite activity when traveling 
A: Introspection.

Q: One indicator of performance
A: Impact-based results.

Q: One macroeconomic variable I keenly watch
A: Income-tax rate of various countries vis-à-vis India.

Q: One dream I'd like to chase, later in life
A: Take a vacation, golf for one week.

Q: One good way to foster innovation
A: Nurture technology. Technology to be used as a slave.

Q: One clue that tells me I'm the leader
A: When people seek advice.

Business Line : Today's Paper / MENTOR : Looking a gift horse in the mouth

Business Line : Today's Paper / MENTOR : Looking a gift horse in the mouth

Sridhar, a leading advocate, brought an interesting tax situation to me, for his cousin Ms Nirmala. Before I get into the details of the issue involved, let me explain a little regarding the background. Nirmala left India almost 15 years ago with her husband and settled in the United States. She became a naturalised American Citizen, and is also a PIO cardholder by virtue of her Indian origins and connections. She received a house property at Bangalore from her mother as a gift in 2010, and wants to sell it.

Her mother inherited this property through the will, after the demise of her husband in 2009, and the property was originally constructed in 1980. The expected sale value of the gift was Rs 1.20 crore. She wanted to know what the legal and tax ramifications would be in India as well as USA, for sale as well as repatriation. Having received a gift for the US-living non-resident Indian is a bonanza, more so at a time when the US economy is reeling under recession. But wait, look at the challenges.


There is no doubt that the gift received in India from the mother is an exempt gift, as it falls under the definition of Sec 56(1) of the Indian Income-Tax Act. However, the profits on the sale of the property are subject to capital gains tax. As per section 49(1) of the Income-Tax Act, the period of holding the property dates to the time when her father started owning the property, since it was an inheritance by her mother, and subsequently a gift to Nirmala.

Therefore, the asset is a long-term capital asset (more than 36 months) and hence 20 per cent long-term capital gains tax has to be paid by her for the gains portion. The capital gains portion has to be computed by reducing the indexed cost of acquisition from the sale price. Now, while adopting the indexed cost of acquisition, the tax payer faces the anomaly. Contrary to the logical treatment of indexing the cost of acquisition, which should be capable of being imperatively inferred from the year of acquisition, i.e.1980-81, she would get indexation only from 2010-11, being the first year in which she held the asset.

This anomaly arises on account of the fact that the definition doesn't provide for indexing from the year in which the previous owner held the asset.

In other words, instead of having cost of indexation at 711 for the year 2010-11, she would get indexation as 100, which is for 1981-82. The tax liability is huge in India…Isn't it? Let us look at her tax implications in the US, it being her resident country. As a US citizen and resident, Nirmala needs to include her global income in the US and comply with the tax laws of America.


The said house sale in India is “real property held for investment” to use US tax jargon, and therefore any loss/gain is reportable and gain is taxable.

You need to know the price you sold it (or are planning to sell it for) and the cost you bought it for. Of course, we do remember you didn't buy this. So how do we arrive at the cost basis? Here comes the twist in the tale: To figure out what is your basis (cost) in the property received as a gift, you must know both the donor's basis, as well as the fair market value (FMV) of the property, at the time the gift was given to you.

If the FMV at the time of the gift is less than the donor's basis, your basis depends on whether you have a gain or loss on the actual sale. To state it simply, if you have gain on sale, your basis will be the same as the donor's basis, and if you have a loss, your basis is the FMV of the property at the time of gift. “Adjusted basis” is cost, plus any improvements or any reductions to value of property, during the time you hold it or the donor held it. You may take credit for the taxes paid in India while arriving at your tax liability in USA as per DTAA.

It doesn't stop with this. You need to file an information report in Form 3520 for having received the gift in India, failing which penalty proceedings would await. If you wish to repatriate the money to USA, you need to comply with the RBI formalities and transfer the funds. If you don't wish to repatriate the proceedings but prefer to keep it in India in a bank or mutual funds or shares, the reporting requirements in FBAR format have to be done before June 30 each year. The failure of complying this will result in $10000 per incident.

To figure out the basis cost for the property, you must have both the donor's basis, as well as the fair market value, at the time of gifting.

(This article was published in the Business Line print edition dated November 21, 2011)

Business Line : Features / Mentor : Practical hurdles to credit of foreign tax

Business Line : Features / Mentor : Practical hurdles to credit of foreign tax

The Online Tax Accounting System in India doesn't recognise the foreign taxes paid in a different country.
Ranjan Gupta had to file his India tax return that included his UK income after a short deputation to London on a company assignment. Ranjan stayed in UK for 4 months during the financial year, and the balance in India, thereby becoming a resident in India. He was paid salary in UK by the parent company during his deputation, and tax was accordingly deducted there.
As a resident, the global income must be offered to tax in India, though he is entitled to avail tax credit on the India return for the foreign income taxes paid in UK. This is perfectly in tune with the double taxation treaty between India and UK. So, what is the challenge now?


The Income Tax department, in recent years, started processing the tax returns through its integrated software for all the returns filed by the taxpayers. The way this software is designed, it accepts the total income of the taxpayer as declared on the tax return; however, it does not recognise the foreign taxes paid in a different country. The tax payer is given credit towards his tax payable only if it is reflected in the Online Tax Accounting System, to be approved by the Assessing officer. It has provisions only for advance tax, TDS or self-assessment tax. In view of this, the practical situation is that whenever such returns have been filed, including global income and taking a credit for foreign taxes against the tax payable, the tax payer ends up receiving a demand notice from the Tax department, as the software doesn't find a match for the foreign tax credit.
Subsequently, the tax payer has to undergo the rigorous process hassle of filing a rectification petition under Section 154 of the Income Tax Act, to validate the situation.
Ranjan Gupta's is not a unique case, but applicable to several software professionals who are deputed to various countries for a part of the year, and who are paid in foreign countries during their stay there.
Many employees are deputed under L-1 Visa or H 1 B Visa for a shorter duration, for a specific assignment to US destinations. The salary is paid by the parent or subsidiary company in the respective country, for which tax is withheld in the respective country for that particular portion of the salary.
These tax payers need to file the India tax return, including their global income if he or she stays more than 182 days in India, and claim credit for the foreign taxes paid.


The situation looks worse when a foreign national is deputed for longer assignments in India, and becomes a resident in India for a particular year. He needs to declare global income in India and avail the foreign tax credit for the foreign portion of withheld taxes.
The glitch makes it difficult to get the right credit for the taxes paid in total and also puts the tax payer through a convoluted procedure of filing a corrective reply to the IT department's initial demand notice, and explaining the details of the peculiar situation.
While the automation initiatives of the Income Tax department in India are laudable, anomalies of this kind leave a bad impression in the minds of global trotters, especially non-resident tax payers.
Though the paper return forms have a column for the claim of foreign tax credit, the tax software matches only the bank information available in terms of TDS / Advance tax / Self-assessment tax. A way must be found out of this impasse, since the credit for foreign taxes forms the backbone of the double taxation avoidance agreements that India has with various countries.
(The author is a Coimbatore-based chartered accountant & the Managing Director of GKM )

Business Line : Features / Mentor : Business and transfer pricing provisions

Business Line : Features / Mentor : Business and transfer pricing provisions

Transfer pricing provisions become applicable on international transactions between two or more associated enterprises — either one or both of whom are non-residents — that have a bearing on profits.
Anurag is a Person of Indian Origin (PIO), who surrendered his Indian citizenship a decade ago, after he decided to marry Roselin, an American citizen. Anurag continued to carry on his US business, with procurement of materials from India and China. However, over the last few years, Asian giants such as India and China started inviting investment from the West, in their manufacturing as well as service industries. Anurag was no exception to this invitation.


The obvious choice was to have broader connections in India as well as China. Initially, he set up an Indian operation with a liaison office in Chennai, after getting specific permission from the Reserve Bank of India. Considering the cost advantages, coupled with man power resource capabilities, he stepped up buying and exporting of goods to Canada and USA on a larger volume. Unaware of the provisions of the RBI, as well as tax matters such as transfer pricing provisions, the business continued to grow. We take a look today at the provisions of these, and the impact of the violations on Anurag's business.
Transfer pricing provisions become applicable on international transactions between two or more associated enterprises, either one or both of whom are non-residents, that have a bearing on the profits, losses or assets of such enterprises. International transactions include purchase, sale or lease of property, provision of services, or lending or borrowing of money, and any transaction having a bearing on profits, income, losses, or assets of such enterprise.
Associated Enterprise is intended to mean one enterprise participating in the management or control or capital of the other enterprise, directly or indirectly, or through one or more intermediaries, with specific benchmark levels for each criteria, and there are as many as 13 parameters in which two enterprises can be deemed to be associated enterprises. The purpose of the legislation is to control the ability of the associate enterprises, to allocate profits in different countries by controlling prices in intra-group transactions.


Anurag, then, participates in the control, management and capital of both the Indian company and his US company. So they fall under the net of Associated Enterprises, and any transactions of any nature between these two should be at an Arm's Length Price, which has been defined by the Income Tax as, “Where an enterprise enters into transactions with associated enterprises, in order to determine the Fair Profit of that enterprise, the profit of the transactions should be compared with those entered into by two independent enterprises under uncontrolled conditions and under similar circumstances.”
In other words, if Anurag was purchasing a product of service for his US firm from an independent, unrelated entity in India, what would be the price he would pay? The Transfer Pricing officer has the power to adjust the profits that have not been reflected at the market price. Anurag has the responsibility of maintaining the necessary documentation, to arrive at the most appropriate method of computing the Arms Length Price, since his turnover exceeds Rs 1 crore between these companies. In addition to the Transfer Pricing provisions, Anurag overlooked the provisions and notifications of the Reserve Bank of India on Liaison office. The permitted activities of Liaison office are: promoting export and import, technical and financial collaborations between group companies, and acting as communication channels between parent and Indian establishments. Thus Liaison office is clearly prohibited from carrying on buying and selling in its Indian form.
Admittedly, transfer pricing computation rules are complex, and require volumes of documentation, but the underlying logic is simple — you cannot reap the benefits of undercutting, price control and profit allocation. The way forward for Anurag is to implement transfer pricing at the organisational level, and to regularise the activities of the Liaison office with the RBI. Issues with setting up offices / branches must be avoided by thoroughly exploring the market / country one proposes to enter. Regulatory provisions must be studied and advice sought from the right authorities before setting up shop.
Most businesses avoid conduct of this due diligence and end up in situations akin to the one discussed above. It only leads to the additional cost of regularisation and unnecessary stress.
(The author is a Coimbatore-based chartered accountant & the Managing Director of GKM.)

Thursday, 1 December 2011

Good news for all CPAs, accountants and bookkeepers!

GKM Inc is focused on providing professional bookkeeping practices & tax preparation services to small businesses.  In addition, it also provides special services to CPAs, Accountants, and Bookkeepers.

If you have your own practice setup, a major worry would be ‘letting go of control’ over your client’s books. By associating with GKM, you get to draw on the experience and expertise of a professional team, promising a complete fleet of services. This will help manage your client’s cash flow, and ensure seamless payroll and tax reporting. In addition to the simplification of the task, you will always have on hand inclusive, precise and latest numbers to answer questions and make smart choices.

Why outsource bookkeeping and tax preparation with GKM?


A risk-free outsourcing experience - Guaranteed


·         A team of experienced and certified bookkeepers and tax preparers work under a CPA providing accurate and standardized results | This ensures seamless transition of your back-office operations, a reliable audit trail and hassle-free tax and payroll reporting means.
·         Best in class communication protocol, framework and regulatory compliance assured.
·         A dedicated team setup for your account ensures a fool-proof fallback mechanism in case of resignations or illness to team members.
·         Presence of strong checks and balances in monitoring your account ensuring every possible tax write-off is taken care of.
·         256-bit secure encrypted data servers for secure access & transactions
·         Best of all, you can focus on high margin services to further your bottom line and grow your client base.

How will it work?


A full team of professionals, including CPAs, MBAs, senior accountants, and bookkeepers, will handle your clients’ bookkeeping needs at GKM’s process center.
Your team leader will coordinate with you closely to help manage the requirements of your clients. The procedures are simplified and streamlined for your ease of use.
GKM’s process center provides quality work efficiently so you can grow your business.

Saturday, 19 November 2011

Budgeting for a small business

Budgeting might seem an overtly complex exercise for some business owners. However, there are no hidden demons in budgeting if a realistic estimate of spending is made possible and priorities clearly established.

A few common budgeting pitfalls to avoid are listed below for a better understanding and utilization of the budgeting process:

Underestimating the costs:

Almost all businesses have a set of supplementary or ancillary costs that often go unnoticed and do not always make it to the budget. For instance, every time you purchase a new software or equipment, although the cost of equipment might figure in your purchase, the associated costs such as training, time and maintenance costs involved in the process might have missed the bus, thus resulting in an underestimation of the actual costs involved.

No Budgeting:

The biggest mistake of all budgeting short sights is to go about your business with no idea about the profitability in the future with no quantified predictions. Bills come in, checks go out – yet, it is a monotonous process with no order to the exercise.

Non Prioritization / Non-objective planning:

The business will go to waste if there is no concrete business plan attached to it. Without clear goal setting, priorities cannot be set on your spending / purchasing. Setting goals and not tying your expenditures to them is an exercise with even lesser value.

Scrutinize all expenses, make the best choice:

As a small business owner, you can least afford to lose money. Budgeting is the best time to compare estimates to actual pay-outs, and adjust the figures accordingly. For instance, if a website maintenance service is costing you $1,000 a year, and a similar service is offered at $500, you can take time to scrutinize the individual service offerings, and decide to eliminate on the additional costs incurred.

Monitor your cash flow:

Keep a close watch on your inflows and outflows, and ensure your budgeting helps focus on projecting future cash flows too. A budget with emphasis only on expenses and ignorance towards revenues will fail miserably in projecting cash flows. Keep having periodic checks to ensure your revenues match your expenses – else, it is a disaster-in-waiting for your small business.

Focus on what really matters:

Ensure you do not spend similar amounts of time on each item on your budget. Rather, spend the maximum time on those items that drive your profitability and business viability.

Bring in a flexible approach:

A good business is one which is flexible. For instance, if the actual revenue is not as expected, be prepared to trim down on your expenses. Here, it is crucial to follow a strategy where you overstate your expenses and understate your expected revenues. While a no-frills-attached approach to expense planning is a good idea, also set aside income wherever possible. In most unimaginable ways, such money set aside can bail out your business in the future. It can also serve as a contingency fund to dip into in case of budget overruns. 

Use your budget as a limiting exercise, not as the LIMIT:

Sticking sincerely to your budget is fine, but do not it act as a constraint. It should act to restrain your spending, but do not get too stiffened up on it. An unplanned trip to a trade conference or a valuable seminar will fetch you precious contacts although the expenses may be unbudgeted. Be prepared to go beyond your budget when a valuable investment comes knocking.

Get in touch with us at GKM for discussions on setting up a budget for your business requirements. We are here to help you grow your business.

Friday, 18 November 2011

IRS tips for employers outsourcing payroll

Outsourcing payroll duties to third-party service providers can streamline business operations, but the IRS reminds employers that they are ultimately responsible for paying federal tax liabilities.
Recent prosecutions of individuals and companies who - acting under the guise of a payroll service provider - have stolen funds intended for payment of employment taxes makes it important that employers who outsource payroll are aware of the following three tips from the IRS:
  1. Employer Responsibility The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though you forward the tax payments to the third party to make the tax deposits, you - the employer - are the responsible party.

    If the third party fails to make the federal tax payments, the IRS may assess penalties and interest. The employer is liable for all taxes, penalties and interest due. The IRS can also hold you personally liable for certain unpaid federal taxes.
  2. Correspondence If there are any issues with an account, the IRS will send correspondence to the address of record. The IRS strongly suggests you do not change the address of record to that of the payroll service provider. That could limit your ability to stay informed of tax matters involving your business.
  3. EFTPS Choose a payroll service provider that uses the Electronic Federal Tax Payment System. You can register on the EFTPS system to get your own PIN to verify the payments.

Thursday, 17 November 2011

How to get through an IRS audit?

A majority of us manage to get through the tax season with only the refund check from the IRS. A few not-so-lucky ones end up getting audited – nothing is more alarming for taxpayers than a letter from the IRS asking for more information on their tax returns, asking for proof of income or deductions. In some cases, a meeting with an IRS agent is required, and most taxpayers just press the ‘panic’ button then.

What are the odds of you getting picked for a tax audit? Factors such as your earnings, your profession, the type of return filed, nature of transactions reported are a few specific triggers contributing to an audit. Here are a few reasons why the IRS will want to audit you:

  • Huge business expenses (Travel & Entertainment for instance)
  • High deductions for employee business expenses
  • Large deductions under charity
  • Erroneous representation while reporting on your tax forms
  • Covering up of cash receipts
  • Complex business / investment dealings
  • Prior history of tax issues / audits
  • Informants
  • Your relationship to a taxpayer who is under audit

What do you need to do incase you are singled out for a tax audit?

Have a long hard look at your return, understand all its contents, and then collate the records of items in question.

To stay afloat on tax matters, here are tips best cultivated into a year-long habit:

1. Collect and organize your records through at least three years – it will make tax return preparation easier, and will greatly reduce the probability of errors.

2. Maintain and sort out all your purchase receipts through the year.

3. Retain your checkbook stubs.

4. Organize all bills, and keep track of all reportable and deductible items on your tax return.

5. If you have invested in real estate, keep all documentation such as cost basis, settlement / sale statements handy.

  1. First and foremost, do not ignore the IRS letter – respond to it at the earliest, requesting for reasonable time to get back after collecting the necessary paperwork.
  2. Most times, the letter from the IRS simply requests for more information / clarity on an item on your return – say, it wants you to send in receipts for the entertainment expenses you deducted. Then, just mailing across the required receipts will suffice, there is no need for bringing in a professional, say your lawyer or your accountant.
  3. In case you are unable to locate the information asked for and a meeting with an IRS agent has been scheduled, you are best equipped with professional help at hand. Bringing in an expert to represent you does not necessarily mean you are guilty, rather, it will be mutually beneficial as the agent will prefer to deal with the organized and detached ways of an accountant than an emotionally charged individual.
  4. On most instances, the IRS will have very explicit questions for you to answer with necessary document back-up. So, the best approach would be to hand over all necessary forms / receipts as required, and use the opportunity to convince the agent that there is no case of understating income earned. The IRS has kind of decided on your case, and you need to satisfactorily explain why the decision to audit is off beam. Do not volunteer to share additional records / overshare – you will only be subjecting yourself to a fresh audit then. It will only go on to cost you. If the agent happens to question you on an off-the-record item, refuse in a firm but polite manner to answer until a formal request on the specific information is filed. Do not give the agent additional or lesser information than that is requested for.

  1. At the end of the meeting, the examiner will present a reassessment in case of underpayment of taxes. Then, you can either pay the additional tax or fight it out in a tax court in case you feel it is unjustified. However, bear in mind that the IRS will usually conduct a tax audit only if it is confident of invalid deductions / expenses thus resulting in a tax bill. 

Whether your tax return was self-prepared, or by a paid preparer, you are finally responsible for its contents as you sign on the dotted line. Hence, review the items on the tax return to your complete satisfaction and check out any unclear items with the preparer thoroughly before signing it.

Around 2% of filed tax returns are picked for IRS audits. In case yours is one, do not panic, de-stress and bear in mind that an organized tax portfolio and a clear, uncluttered communication protocol will get you through the audit with ease.