We surveyed hundreds of accountants about what they want their clients to know. Here are the most common responses.
We see many disastrous returns prepared by ill-trained preparers
When selecting a preparer, many people shop price and not experience. There are some companies that put their newly hired preparers through a six-week, evenings-only tax course, and then turn them loose to prepare returns with very little oversight. At the same time, just because someone is a CPA doesn’t necessarily mean they know taxes. Ask about their background, what kind of practice they have, and if they’re familiar with your state’s tax laws. Regulations require all paid preparers to have a PTIN. When I finish your return and I give you an e-File authorization form to sign, make sure my name, signature and Preparer Tax Identification Number (PTIN) are on it.
Want to avoid an audit? Don’t use round numbers
When you use round numbers the IRS may assume you’re guessing on expenditures. The government audits 1.2 million people at random annually so there’s no guarantee, but you can cut down on your chances by being precise.
If you do get audited, never go it alone
Hire an accountant, enrolled agent, or tax attorney who has experience dealing with the IRS. Sometimes it can be as simple as providing additional documents or filing an amended return, but it’s best to work with a professional who knows what they’re doing.
Don’t complain about our fees – don’t spend your money on a CPA if your return is simple – spend your money if your returns are complex
Please don’t complain about and/or negotiate our fees based on the fact that you or your business had a bad year – the time and effort that it takes to complete a tax return does not change in relation to your annual income or loss. You don’t need ta CPA if your return isn’t complex. By ‘isn’t complex’ I mean you receive a W-2, you receive a couple of investment 1099s, you don’t work in multiple states, you have no partnership income or other flow-through income. If you have complex returns, trying to save money doing the return yourself may cost you more in the long run, through missed deductions or dealing with subsequent IRS tax notices about missed income or misapplied deductions.
Set aside money if you are self-employed
For those of you who are self-employed, it’s critical to set money aside for taxes so you’re not slapped with a massive tax liability at the end of the year. We see it happen all the time. If you’re an independent contractor, you should be setting aside money for taxes equal to 35% to 45% of your gross pay, and you should be paying quarterly estimated tax payments for federal and state taxes. The self-employment tax is computed at 15.3% of your net income. Do yourself a favor and meet with a tax planner or CPA before you launch. Otherwise, don’t blame me when I deliver a big surprise come April—the news that you owe thousands of dollars.
Don’t always trust what you hear on TV
One of the most challenging issues we battle is the word of mouth shared by ‘experts.’ Just because they say it is deductible on TV or radio doesn’t make it so. Nearly every deduction or tax credit has limitations, exemptions, and exceptions. “Clients will come in and say ‘You know, I heard that I can deduct (insert here) from my taxes. I know this is true, because my brother’s barber’s sister’s husband owns a business, and he has deducted it for years,’” said Coomes. Quite often the information is flat out wrong.
File early even if that means filing an extension
Many accountants have a deadline and some report If you don’t have all your paperwork ready by April 1, they are going to file an extension for you. We do this because any number of unforeseen circumstances can happen the two weeks before April 15 and not being on extension can cost you dearly. If you properly file the extension, you will avoid being assessed ‘late filing penalties’ of 5 percent per month instead you will be assessed 1/2 percent per month which saves a lot of money. If you need to file an extension, we can do a estimate to for you to send in a payment for the taxes owed to reduce or eliminate penalties and interest. Filing an extension does not mean your return will not be ready by April 15, it just means we created a safety net and potential savings.
Keep a close record of all donations
Many taxpayers forget to track their non-cash donations. Those garbage bags of stuff you give to Goodwill can add up at tax time. Make sure you get a receipt and note exactly what you donated: “five pairs of women’s pants, three button-down men’s shirts, one child’s puzzle.” An excellent iPhone app, iDonatedIt (created by a CPA firm) can help you determine the value of your donated items.
Leasing a car for your business does not make it 100% deductible
Often, business owners’ personal cars double as their business cars. You deduct costs proportionate with the miles driven for business. However, personal travel, including commuting, can’t be written off on your business taxes. There are two methods for writing off leased car expenses: actual costs and standard mileage rate.
Actual cost method
As the name suggests, you’re deducting the actual costs of your leased car. Eligible expenses include your lease payment, gas, oil, tires, tune-ups, registration fees, and insurance. Keep track of those receipts.
If you drive the car for personal trips, you can’t deduct the entirety of your leased car’s costs. Of the total miles driven during the year, find the percentage of the total miles driven for work, excluding commuting.
For example, say your leased car costs you $8,000 per year in car payments, gas, and insurance. You drove the car 12,000 miles, one-quarter of which consisted of personal trips and commuting to work. The business deduction is three-quarters of your actual costs, or $6,000 ($8,000 × 0.75).
Standard mileage rate
More simply, you can take a flat-rate deduction for every business mile driven in your leased vehicle. Taxpayers often opt for the standard mileage rate method because it requires less number crunching.
The IRS mileage rate changes slightly every year. The rate for 2021 is 56 cents a mile.
Let’s continue with the previous example. A leased car driven 9,000 miles for business equates to a $5,040 deduction [(12,000 miles − 3,000 personal and commuting miles) × 0.56 IRS mileage rate].
In this example, method one will produce an additional deduction of almost $1,000 more. But when you factor in your tax rate, the tax savings would be somewhere between $120 and $500. You’ll need to decide how much your time is worth to save and add all receipts.
Sitting on your couch to work is not a home office
There are two popular myths surrounding business use of a home – One, never take the home office deduction, it will trigger an audit and 2) If you do any work out of your home, you can take a deduction. As with many things that are “common knowledge,” these two myths are almost true.
Let’s look at the first myth. The IRS does not publicize its audit selection criteria. However, there is no evidence to suggest that simply claiming a home office will increase the chance that you will be audited. Many taxpayers operate businesses out of home offices. The tax code specifically allows deductions for business use of a home, and the IRS provides instructions in Publication 535 Business Expenses and in Publication 587 Business Use of Your Home.
This leads us to myth number two. It is not true that simply working at home is sufficient to claim a home office deduction. To qualify to claim expenses for the business use of your home, you must meet both of the following tests.
- The business part of your home must be used exclusively and regularly for your trade or business.
- The business part of your home must be
- Your principal place of business; or
- A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or
- A separate structure (not attached to your home) used in connection with your trade or business.
Do you run your business from your kitchen table? Is your home office a desk in your guest room? If so, you may not be meeting the first criteria. The second test has three parts. The first two essentially say that this is where you do your work, and you have no other fixed location where you work. If you do work in other fixed locations, then you should determine your principal place of business based on the importance of the work done or time spent at each location.
Stay current on the latest tax and accounting news by inviting My Fiscal Office into your inbox with our free monthly newsletter. Click here to sign up – https://lp.constantcontactpages.com/su/dwxNQXj
My Fiscal Office LLC
77 Bleecker Street
New York, NY 10012