Insights – Page 2

The New Advantages of Married Filing Separately

Tax Returns Couples who have filed their tax returns jointly for their entire marriage may find that it is more beneficial to file separately in 2021. The COVID-19 stimulus bills passed by Congress in the past two years have introduced new factors such as Economic Impact Payments (EIP) and Recovery Rebate Credits (RRC), which may dramatically affect tax calculations. Married taxpayers in particular will want to evaluate how pandemic-related credits might change their tax situation this year. Filing separately could result in more money in these taxpayers’ pockets, but this route also comes with its own unique complications. To weigh the pros and cons, read on and consider contacting a Certified Tax Planner for expert advice.

CONSIDER INCOME THRESHOLDS

The American Rescue Plan Acts of 2021 (ARPA) authorized stimulus payments of $1,400 to US taxpayers and their dependents. These payments were subject to income thresholds depending on their filing status:

● Single and Married Filing Separately (MFS): $75,000 in adjusted gross income (AGI)

● Married Filing Jointly (MFJ): $150,000 in AGI

Taxpayers whose annual income comes in below those thresholds received the full payment, and above the threshold, that amount gradually phased out as income levels rose. Once a taxpayer’s AGI reached $80,000 for Single and MFS or $160,000 for MFJ, they would no longer be qualified for a stimulus check.

One tax planning opportunity arises when a couple has joint income over $160,000 but a disparity in their individual incomes. One person’s individual income may not qualify them for a stimulus payment, while the other’s income might if calculated individually. The IRS was required to send out advanced stimulus payments in 2021, but taxpayers who did not receive the advanced payment can claim a credit on their tax return as an RRC. This is one instance where it may make sense for a married couple to file their 2021 taxes separately.

FACTORING IN DEPENDENTS

When two parents living together file MFS returns, either parent may claim their child as a dependent. If multiple children live in the household, the decision of who will claim a dependent can be made on a per-child basis. This opens up additional tax planning opportunities. If one parent is over the AGI threshold and the other parent is not, the parent with the lower income can claim the children as dependents and receive the RRC.

OTHER CALCULATIONS TO MAKE

Electing the Married Filing Separately status also comes with limitations. In many scenarios, filing two MFS returns can result in a higher combined federal tax liability compared to filing jointly. Couples will need to calculate the two options in advance to determine if the RRC benefits outweigh the increase in total tax liability. This is where the assistance of a Certified Tax Planner can prove invaluable, to ensure you are accurately estimating potential taxation. Taxpayers also need to factor in any state-level taxes, if relevant, and the cost of double tax preparation. In some situations, withholdings may not be correctly distributed between a married couple, so when their tax returns are separated, one spouse will have a tax payment due, and the other spouse will receive a large refund. If this is the case, any potential underpayment penalties or—if the return is on an extension—interest and late payment penalties will need to be included in the calculations.

DRAWBACKS OF FILING SEPARATELY

While the opportunities mentioned above are certainly worth weighing, filing MFS can have significant disadvantages, including the loss of certain tax credits and deductions. These include the Earned Income Credit, Child and Dependent Care Credit, education credits, and student loan interest deductions. Taxpayers who select Married Filing Separately will no longer be eligible for these credits. An MFS status can also create complications around social security income, itemized deductions, and the ongoing Advanced Child Tax Credit payments. Furthermore, if the couple lives in a community property state, which requires equal distribution of assets acquired during a marriage, MFS tax returns can become particularly messy.

Taxpayers should also factor in the IRS processing issues that came up during the pandemic. In some cases, couples filing MFS in 2020 received notices from the IRS incorrectly “recalculating” their RRC benefits. Taxpayers then have to invest time and effort into contesting these recalculations—given the ongoing problems with an underfunded and overextended IRS, taxpayers may not want to spend energy making a case that they are eligible for additional tax credits.

SUMMARY

The pandemic-related stimulus benefits add a layer of complexity to filing decisions for couples. Married taxpayers need to be aware of all the factors that could impact their tax liability and eligibility for various tax credits in 2021. Due to the Recovery Rebate Credit, some couples may find they could end up with more money in their pockets if they file separately, in spite of the initial increase in combined taxes.

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Buying or Leasing a Business Vehicle – Which is Better?

Buying a vehicle for business use can come with sizable tax benefits—if you meet the
qualifications. Tax law treats vehicles differently than other business assets and expenses, so business owners need to understand current regulations to ensure they qualify for deductions. Below we will explore the possible tax benefits and limitations when you buy or lease a vehicle for business purposes.

THE TAX CUTS AND JOBS ACT: TAX BREAKS FOR BUSINESS VEHICLES

The Tax Cuts and Jobs Act (TCJA) of 2017 made a number of amendments to the federal tax code. Among its many changes, the Act allows businesses that purchase any qualifying business assets, including vehicles, to take a depreciation deduction in the first year after the purchase. This benefit is also known as bonus depreciation. Taxpayers can deduct 100% of the cost of the vehicle as long as the vehicle is new or new to the taxpayer and is acquired and put to use between September 28, 2017 and December 31, 2022.

The TCJA also permanently increased the limits for business expenses under Section 179 of the tax code. Starting in tax year 2018, the maximum deduction was set to $1 million, and the value of property purchased is set to $2.5 million. This threshold is adjusted annually for inflation, so the exact limit will vary (check the official IRS website for the 2020 and 2021 tax year limits).

PASSENGER VS. HEAVY VEHICLES

If the 100% bonus depreciation sounds too good to be true, you should note that several important restrictions do apply. The first has to do with the type of vehicle your business uses. Heavy SUVs, pickups, and vans are considered transportation equipment from a tax perspective and are the primary target for this tax break. The taxpayer can deduct the full price of the vehicle in the year of purchase.

THE 50 PERCENT RULE

The next restriction to keep in mind is that a taxpayer can only deduct the business-use portion of the vehicle. On top of that, the vehicle must be used for business purposes more than 50% of the time to qualify for bonus depreciation and Section 179 benefits. If your business use is 50% or less, you are only permitted to use the alternative depreciation system (ADS) on the vehicle, which calculates the year-by-year depreciation more minutely and typically results in smaller deductions over a longer span of time.

USING THE STANDARD MILEAGE RATE

If you are an individual business owner (not paying taxes as a partnership or corporation), instead of dealing with depreciation deductions and their limitations, you can instead calculate and claim your vehicle expense using the standard mileage rate. In 2021, this amounts to 56 cents per mile.

One caveat here is that you need to decide in Year 1 whether you want to use the standard mileage rate or claim depreciation plus operating expenses (gas, oil changes, etc). Once you make that claim, you’re locked into that methodology for future years for the same vehicle. If you do decide to switch from standard mileage to actual expenses in a future year, your methods for calculating depreciation will be restricted

LEASING BUSINESS VEHICLES

How do these tax rules apply if you are leasing the vehicle instead of buying it? Taxpayers are still allowed to deduct the yearly lease payment as an expense. Similar to the rules for buyers, this amount must be adjusted to reflect the percent of time the vehicle is used for business.

In lieu of the limitations set for depreciation deductions, lease holders must do a lease addback based on the market value of the vehicle. This rule essentially exists to create more equality between purchases and leases in terms of tax benefits. The IRS releases guidelines annually that list the amount taxpayers need to account for (see Revenue Procedure 2020-37 for the most recent chart).

SUMMARY: DECIDING TO BUY OR RENT

If your business is weighing the pros and cons of buying or leasing a vehicle, be sure to factor in the tax impact by considering:
● The type of vehicle (passenger or heavy)
● The percentage of time that vehicle will be used for business
● The potential lease addback
● The most recent IRS depreciation and lease inclusion charts (Revenue Procedure
2020-37)

In addition to the factors above, you also want to consider the immediate expenses. While buying a heavy vehicle might offer the most straightforward tax deduction, this option could set you back $60,000 for the cost of the vehicle alone. On the other hand, leasing may allow you more flexibility to match your payments to your cash flow, but you will encounter some limits to your tax benefits in addition to not owning the asset outright.

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Year End Issues to Consider

When we work with clients we have certain questions we ask. This year we used a more formal checklist to make sure we covered all our basis around:

Assets & Debt
Tax Planning Issues
Cash Flow
Insurance
Estate Planning

Here is a copy of the checklist – What-Issues-Should-I-Consider-Before-The-End-Of-The-Year-2022

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Some inherited assets are tax and are not.

In 2021, the federal estate tax doesn’t kick in unless an estate exceeds $11.7 million. The Biden administration has proposed lowering the exemption, but even that proposal wouldn’t affect estates valued at less than about $6 million. Some states have lower thresholds and also tax inheritances.

If you inherit an IRA from a parent, taxes on mandatory withdrawals could leave you with a smaller legacy than you expected. And as IRAs become an increasingly significant retirement savings tool—Americans held more than $13 trillion in IRAs in the second quarter of 2021—there’s a good chance you’ll inherit at least one account.

How the SECURE Act Changed Things

Before 2020, beneficiaries of inherited IRAs (or other tax-deferred accounts, such as 401(k) plans) could transfer the money into an account known as an inherited (or “stretch”) IRA and take withdrawals over their life expectancy. This enabled them to minimize withdrawals, which are taxed at ordinary income tax rates, and allow the untapped funds to grow.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 put an end to that tax-saving strategy. Now, most adult children and other non-spouse heirs who inherit an IRA on or after January 1, 2020, have just two options: Take a lump sum or transfer the money to an inherited IRA that must be depleted within 10 years after the death of the original owner.

The 10-year rule doesn’t apply to surviving spouses. They can roll the money into their own IRA and allow the account to grow, tax-deferred, until they must take required minimum distributions, which start at age 72. (If the IRA is a Roth, they don’t have to take RMDs.) Alternatively, spouses can transfer the money into an inherited IRA and take distributions based on their life expectancy. The SECURE Act also created exceptions for non-spouse beneficiaries who are minors, disabled or chronically ill, or less than 10 years younger than the original IRA owner.

But IRA beneficiaries who aren’t eligible for these exceptions could end up with a hefty tax bill, especially if the 10-year withdrawal period coincides with years in which they have a lot of other taxable income.

The 10-year rule also applies to inherited Roth IRAs, but with an important difference. While you must still deplete the account in 10 years, the distributions are tax-free, as long as the Roth was funded at least five years before the original owner died. If you don’t need the money, waiting to take distributions until you’re required to empty the account will provide you with up to 10 years of tax-free growth

Don’t Rush to Cash Out an Inherited IRA

Many heirs simply cash out their parents’ IRAs, but if you take a lump sum from a traditional IRA, you’ll owe taxes on the entire amount. Depending on the size of the account, that could kick you into a higher tax bracket.

Transferring the money to an inherited IRA will allow you to spread out the tax bill, albeit for a shorter period than the law previously allowed. Taking an annual distribution of one-tenth of the amount of the IRA, for example, would probably minimize the impact on your tax bill. But because the new rules don’t require annual distributions, you have some flexibility. If you’re planning to retire in a couple of years and expect your tax bracket to drop, for example, it may make sense to postpone taking withdrawals until you stop working. Still another option is to wait until year 10 to withdraw the money, which would give you a decade of tax-deferred growth. On the downside, withdrawing all of the money at once could trigger a bracket-breaking tax bill.

If you choose to transfer the money to an inherited IRA, make sure the funds are rolled directly into your account. If you take the money as a check, the entire amount will be treated as a taxable distribution. And however you divide up your withdrawals, make sure you empty your account by December 31 of the 10th year following the year of the original IRA owner’s death to avoid a draconian penalty of 50% of the amount you should have withdrawn.

How the Step-Up Basis Helps

Happily, most other inherited assets are much less burdensome, at least as far as the IRS is concerned. In fact, you could owe little or no tax on real estate, bank accounts and investments that aren’t held in tax-deferred accounts. That’s because the cost basis for these assets is “stepped up” to their value on the day of the original owner’s death.

Say your father paid $50 for a share of stock and it was worth $250 on the day he died; your basis would be $250. If you sell the stock immediately, you won’t owe any taxes, but if you hold on to it, you’ll only owe taxes (or be eligible to claim a loss) on the difference between $250 and the sale price. President Biden has proposed eliminating the step-up for gains of more than $1 million ($2 million for a married couple), but the outlook for that plan is unclear. Previous efforts to curb the step-up have been unsuccessful, in part because of the potential difficulties heirs would encounter in determining the basis for stocks and other assets that were purchased many years ago.

The step-up also applies to the value of your family home (and any other property you inherit), a big benefit at a time when many older homeowners have seen the value of their homes skyrocket.

If you decide to keep inherited investments or property, you will owe taxes on the difference between the value of the assets on the day of the original owner’s death and the day you sell. If an inherited stock or fund is appropriate for your long-term investment strategy, you may want to hold on to it. If not, you’re probably better off selling it and investing the proceeds in investments that suit your risk tolerance and portfolio allocation.

Figuring out what to do with an inherited home is more complicated. Unless you decide to keep the house – which may mean buying out other heirs – you’ll need to sell it, which could take months. In the interim, make sure to pay property taxes, insurance premiums and other costs associated with maintaining the home. This task typically falls to the executor.

How to Lower Taxes for Your Heirs

If you own a traditional IRA (or other tax-deferred account), there are steps you can take to lessen the tax burden on your heirs.

Consider your beneficiaries. The SECURE Act’s 10-year rule for inherited IRAs has several exceptions. In addition to spouses, other heirs can still stretch out withdrawals over their lifetime, including minor children, beneficiaries who are ill or chronically disabled, and heirs who are less than 10 years younger than you. You may want to name those individuals as beneficiaries of your IRA and leave other types of assets to heirs who would be subject to the 10-year rule.

If that’s not an option, consider the financial status of your beneficiaries. You may want to bequeath your IRA to an adult child who is in a low tax bracket, for instance, and give other assets to a child who earns a six-figure income.

Convert some funds in your traditional IRA to a Roth. Although Roths are also subject to the 10-year rule, distributions aren’t taxed. That’s a huge bonus for your heirs, but you must pay taxes on any funds you convert.

Before converting any funds, compare your tax rate with those of your heirs. If your tax rate is much lower, converting some of your IRA funds to a Roth could make sense. The math is less compelling if your heirs’ tax rate is lower than yours, particularly if a conversion could kick you into a higher tax bracket.

Be aware, too, that a large Roth conversion could trigger higher Medicare premiums and taxes on your Social Security benefits.

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The IRS Might Want a Cut of Your Credit Card Rewards

The only thing more satisfying than earning credit card rewards is spending those rewards on something special. If you understand your credit card rewards programs and spend wisely, you can maximize your rewards for more free flights, gift cards, and cash.

But will the IRS come knocking if you don’t report those rewards on your tax return?

Whether credit card rewards are taxable depends on how you earned the rewards. Here’s everything you need to know about the tax regulations surrounding credit card rewards, so you can spend less time worrying about the tax implications of your free vacation, and more time enjoying it.

Types of Credit Card Rewards

Rewards Points or Miles – Travel credit cards often earn points or miles which can be redeemed for travel. Some credit card issuers allow you to redeem these points for a variety of options, such as a statement credit, cash back, or booking travel. spend.
Cash Back – Cash back credit cards usually have a straightforward earnings rate and typically don’t offer a boosted value from your points on travel redemptions. These cards make sense for infrequent travelers or those who prefer an uncomplicated rewards system.
Sign-Up Bonuses – A sign up bonus is one of the incentives that credit card issuers have to get new customers for their credit cards. Typically, you’ll need to spend a certain amount of money within the specified timeframe to earn the bonus.

Are Credit Card Rewards Taxable?

Whether you need to pay taxes on your credit card rewards depends on the situation. However, the distinction lies in how the rewards are earned, not how they’re redeemed. Credit card rewards aren’t taxable as long as you spend something to earn them.

Non-Taxable Rewards – Points, miles, and cash back rewards that you earn from making purchases with your credit card are not taxable. The IRS considers these rewards to be a discount.
Taxable Rewards – Rewards are taxable if you received the incentive without having to spend anything. This is where it gets tricky. When you do accept a bonus or reward and you didn’t have to do anything to earn it, it’s qualified as a gift. The IRS considers certain types of gifts to be taxable.

Keep in mind that if you use a business credit card to make purchases that are tax-deductible, you must subtract the rewards from the total value of your business expenses before claiming the deduction. For example, if you used $100 in miles to pay for part of a $500 flight for a business trip, you can only claim a deduction for the $400 you paid out of pocket.

If the reward exceeded $600, you would receive a 1099-MISC from the credit card issuer to include with your tax return. However, even if you don’t receive a 1099 for it, that doesn’t mean that you don’t have to pay taxes. There’s a catch-all line for reporting other income on your tax return and it’s your responsibility to include any bonuses or rewards that you received without having to spend any money.

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Getting current on unfiled returns

We find that taxpayers do not file tax returns for one or more years for various reasons such as missing records, personal hardship or just simple neglect. This can overwhelming. Fortunately, there are ways to approach the problem of unfiled returns. Here are a few things you should know about getting current with your unfiled returns.

Gathering your information

If you don’t have your documents, you can get IRS transcripts that will show what has been reported to the IRS – this will be a comprehensive listing of the 1099s and W2s that were sent to you. This cross-checks against your own records, filling in for anything that is missing. The IRS transcripts are a checking point – if there is income you earned that is not on the transcripts, best efforts need to be taken to determine that income and include it on your return.
If you are self-employed, business income and expenses need to be determined. Income can be pieced together by several methods, including 1099 reporting to the IRS (supplemented by any income not reported), or your total bank deposits.

Paying What you owe

If most of your income is on a W2, you may be due refunds. The IRS only allows you to collect refunds from the last three years so getting up to date is important.
If you find that you owe money, you should still file the return.
The only way to settle a tax debt is to first have the IRS recognize it with a tax return.
An IRS Offer in Compromise allows you to negotiate with the IRS to come to an agreement on a reduced amount of the tax liability that will be paid over a period of twenty four months or less.
An Installment Agreement is where you negotiate a monthly payment that you can afford. Many times, you don’t end up paying the debt in full because the time the IRS has to collect the debt expires.

Substitute for Return

Sometimes, when you don’t file a return, the IRS files one for you. Most times, an IRS substitute for return gets it wrong, charging you for income that was reported on W2s and 1099s but not giving you any deductions or exemptions. You may already have a bill from the IRS from a Substitute for Return. These estimated returns can be corrected with perhaps a lower tax liability by filing an original return.

My Fiscal Office can get your unfiled returns completed and can help resolve your outstanding tax liabilities. If this is your year to your taxes in order, contact us at https://myfiscaloffice.com/connect/

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12 Steps for Closing an LLC Before Year End

If you’re thinking of closing your LLC before the year ends, you may be feeling overwhelmed. And you are probably wondering what you must do to exit the business without leaving any loose ends behind. Indeed, there is more to shutting down a business than merely ceasing to sell products and services. The exact actions a limited liability company’s members must take depend on where the business is registered, whether it has employees on its payroll, and other factors. It can be tricky to determine all the requirements, so LLC owners (a.k.a. members) should carefully research the things they must do. I also recommend getting guidance from an attorney, accountant, and tax advisor so that no legal and financial details aren’t overlooked.

Skipping any essential tasks when closing out an LLC could mean LLC members will remain responsible for various filings, fees, and other ongoing compliance tasks. States expect LLCs registered in their jurisdictions to comply with all legal requirements until the business is officially dissolved. Procedures for shutting down an LLC entity vary from state to state. Members should also review their LLC’s operating agreement, which should explain the company’s rules for handling the various aspects involved in closing. Below, I’ve listed some general steps that LLCs must complete when winding down their business.

1. Confirm the Company Is in Good Standing

Before dissolving an LLC from the states where it conducts business, the business entity must be in good standing in those areas. Have the LLC members kept up with ongoing business compliance tasks or has it fallen behind on filing reports and paying fees? If an LLC has fallen out of good standing, it will need to follow the state’s rules for restoring that status (possibly even filing for reinstatement) before its owners can proceed with dissolving the entity.

2. Hold a Vote to Dissolve the Business

Depending on the state’s laws and the rules outlined in the LLC operating agreement, it may require a majority vote or unanimous consent to approve the dissolution of the company. During the meeting to vote on this significant decision, the results must be captured in meeting minutes. Even if the company is a single-member LLC, holding a meeting and recording a vote (yes, with just that one member!) is advised and may be required.

3. File LLC Articles of Dissolution

Limited Liability Companies must file a form called Articles of Dissolution (which might instead be called Certificate of Dissolution or Certificate of Termination) with the state’s Secretary of State office (or other agency per the state’s rules). It’s critical to complete the form correctly to prevent processing delays that could result in unexpected costs and other issues.

If an LLC had requested foreign qualification to do business in states other than its home state, it must notify those states. Then, it can cancel any registrations, licenses, permits, business names, and anything else it may have applied for in those jurisdictions. Different states have different rules for what’s required to withdraw from doing business there. Typically, removing a foreign LLC involves filing a withdrawal application and paying a filing fee.

Dissolution of an LLC usually is considered effective on the date specified during the LLC member vote. The business may continue to wrap up its affairs (e.g., notify vendors, customers, creditors, liquidate and distribute its assets, etc.). In some states, businesses may specify an effective dissolution date up to 180 days in the future. However, backdating dissolution to an earlier date is not an option.

4. Notify the Company’s Stakeholders

Some states require that LLCs notify their creditors and vendors of their dissolution before filing Articles of Dissolution. Also, some states require that businesses publish notice of their dissolution in a newspaper or other publication within a certain period of time. These tasks help ensure that the general public – and anyone the LLC owes money – are aware that the company is going out of business.

5. Cancel Business Licenses and Permits

If an LLC had obtained licenses and permits to conduct business, members should inform the appropriate licensing agencies that the company is closing. Examples include:

Zoning permit
Professional licenses (e.g., attorney, registered nurse, accounting, psychologist)
Seller’s permit
Retail food license
Salon license

Failure to do so could mean being on the hook to renew licenses even though the company no longer conducts business activities.

6. File the LLC’s Final Payroll Taxes

If an LLC has employees, it must follow through on its payroll tax registration responsibilities. The company must submit its state payroll forms and pay its taxes (SUI and SIT) after paying its workers for the final time. Companies that don’t have funds to pay their employment taxes in full may be able to set up an installment plan or “offer in compromise” (approval to pay less than the total amount owed to settle the tax debt). Limited liability companies must also issue IRS Form W-2 (Wage and Tax Statement) to each employee for the calendar year when they had final wages and salaries. Similarly, they must issue IRS Form 1099-NEC (Nonemployee Compensation) to independent contractors to whom they’ve paid at least $600 in the year the LLC is closing.

7. Pay Final Sales Tax

An LLC that sells taxable products and services must submit its final state (and local, if applicable) sales tax forms and payments. After that’s done, it may close its sales tax accounts.

8. File Final Income Tax Returns

Business owners also have some ends to wrap up when closing an LLC with the IRS.

A multi-member LLC must file its final Form 1065 (Return of Partnership Income) for the year the business is closing. According to the IRS, owners should check the box that indicates it is a final return. Likewise, LLC members should check the “final return” box on their Schedule K-1 form (Partner’s Share of Income, Deductions, Credits, Etc.).

A single-member LLC’s owner must file their Form 1040’s Schedule C (Profit or Loss from Business) with their individual tax return for the year the business is closing.

If the business has any employees, it must pay its final federal tax deposits and report employment taxes (Form 941, Employer’s Quarterly Federal Tax Return or Form 944, Employers Annual Federal Tax Return).

The LLC must follow the jurisdictions’ procedures for reporting and paying final income tax at the state and local levels.

There may be various forms required at the federal, state, and local levels, depending on the circumstances. Because the rules and processes vary depending on the jurisdiction and type of business, it’s helpful for business owners to talk with a tax professional for guidance.

9. Sell Company’s Assets

Liquidating and selling an LLC’s assets and inventory can enable the company to generate cash before it closes. A business facing financial difficulty could find this especially beneficial if it otherwise wouldn’t have sufficient funds to cover outstanding debts and creditor claims. Business owners may find a qualified appraiser’s expertise helpful to determine the value of physical assets (like furniture, equipment, etc.). Also, intangible assets (such as trademarks, copyrights, customer lists, and patents) should not be overlooked as opportunities to generate income for the dissolving LLC. It can be helpful to discuss intangible assets (their value and the process for transferring them) with an intellectual property attorney.

10. Pay the LLC’s Business Debts

Before closing, an LLC should pay off what it owes to vendors, suppliers, and creditors. If the money isn’t there to pay what’s owed in full, it may be possible to negotiate the final payment amount. The expertise of an attorney can be helpful when navigating the state’s laws regarding claims settlements.

11. Distribute the Remaining Assets

If an LLC has multiple members, it may distribute the assets left after the business has paid its debts. The LLC operating agreement should provide details on how the company should divide its assets among its members.

12. Keep Business Records for Future Reference

For years after an LLC closes, its members might face questions or audits. Therefore, it’s crucial for members to retain the LLC’s (and their individual) records that pertain to the company’s activities, forms, and transactions in a safe place where they are readily available if needed. Among the critical documentation: tax returns and payment records, financials, payroll and worker employment records, and other business documentation.

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10 things accountants want clients to know.

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.

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When is a hobby actually a business?

During the pandemic, we’ve had a lot of clients pick up an income producing hobby. Having hobby income does impact your taxes. There is the issue with sales tax and that is a confusing mess of thousands of tax jurisdictions. But today, we are going to focus on income taxes and how your hobby (and related losses) may qualify to be treated as a business.

This is important as business losses are deductible, but hobby losses are not.

Three out of Five and Two out of Seven

Let’s get this out of the way quickly. If in an activity, you have income in excess of expenses for three or more taxable years in the period of five years that ends with the year under examination, there is a presumption the activity is engaged in for profit. A bit of trivia is that the rule is two out of seven in horse cases – the Senator who got that modification added in was from Kentucky. Here is the important takeaway from all this. Three out of five and two out of seven never show up in the case law. And taxpayers win cases when they have had a string of losses as long as 20 years.

The Factors

The regulations list nine factors to be considered in determining whether an activity is engaged in for profit. It cautions us that there might be other factors, but more than 300 decisions in nearly 50 years have not identified any. Here are the factors:

Manner the taxpayer carries on the activity;
The taxpayer’s expertise or his advisers’;
The time and effort the taxpayer expends in carrying on the activity;
Expectation that assets used in activity may appreciate in value;
The success in carrying on other similar or dissimilar activities;
The taxpayer’s history of income or losses with respect to the activity;
The amount of earned occasional profits, if any;
The financial status of the taxpayer;
Elements of personal pleasure or recreation.

In fact, in all decisions when the factors are enumerated, there is is one determinative factor –with one exception – the first factor – manner the taxpayer carries on the activity – is determinative. If the taxpayer wins on the first factor, they win. Otherwise, they lose.

One Factor to Rule Them All

As it turns out, though, if you win on the first factor, you win. And being business-like is something that is totally under your control and something we can help you with. There are five subfactors to consider. They are:

Complete and accurate books and records;
Carried on in a manner substantially similar to a profitable undertaking;
Change of operating methods, adoption of new techniques, abandonment of unprofitable activities;
Business plan;
Advertising.

Cases

One of the things that drew me to hobby loss cases is that I find them so amusing. And of course, the most amusing cases are usually taxpayer losses.

Consider Joshua Pingel who ran through $40,000 globetrotting purportedly to write a travel blog called “The World in My Nutshell.” Among the many problems he faced in arguing his case was that he did not talk to experts until after he blew through the travel money.

Maurice Dreicer lost twice in Tax Court. But it is his in-between win in the D.C. Circuit that is important. The ruling is that when a taxpayer has an actual and honest objective of profit, it does not matter that the prospect of achieving it “may seem dim.” If an agent raises the issue of it being improbable that your lavender farm will succeed, you need to hit them over the head (figuratively) with this decision.

Conclusion

It is fine to talk a physician client out of going into horse breeding or raising cattle, but if they are going to do it anyway, we don’t not try to talk them out of claiming the losses. Rather, we talk to them about what they need to do to beef up their chances of winning an audit of their cattle ranch. Your hobby may not be an expensive or expansive, but the same rules apply.

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Just in time for Halloween – Zombie Expenses

At My Fiscal Office we starting using the term zombie expenses to refer to those expenses our clients don’t realize they are paying month after month.

For example, one of our client’s Amazon Prime account was compromised and haunted by “zombie” accounts. Simply by unearthing and cancelling the “zombie” accounts, this client is now saving hundreds of dollars monthly.

Other-times the expenses are for services that can be found less expensive or negotiated. We had a service billing us $499 a month. When we spoke to them, we got them to downgrade the plan while keeping the needed services for $249 a month.

Zombie Expenses

If you are using Quickbooks Online – or most any other accounting systems – it is easy to link your business credit cards to pull in charges. This makes it is easy to run a report for one complete month for the expenses paid by your credit cards.

With this data in hand, review each line item to find recurring expenses related to items you don’t need, don’t use or may have a less expensive price. And you can expand your review to look at items such as meals and travel for additional potential savings.

Once you identified where you can save, do the work to reduce expenses. Getting your team involved in a review – monthly or quarterly – will help cultivate fiscal discipline as a core company value.

The next step is to be strategic about what you do with the savings:

The bottom line
Investments that will grow your business
Paying down any debt you incurred to start your business.

The temptation is to prioritize one of these three. A better plan is to use your savings to address these three critical use of funds.

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