Sidestep These Errors to Keep More of Your Tax Dollars

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Paper filing. Sloppy record keeping. Missing out on deductions. All these and more could mean you’re throwing money away. Here’s how to make your tax return as financially efficient as possible.

There are many ways for a tax return to be filed incorrectly. The IRS offers a list of the 9 most common errors which result in processing delays and hamper the chances of a quick refund. Those 9 can be classed as simple oversights; ones that are easy to overcome with some focus. This blog includes other potentially costly errors which take a little more thought to avoid.

Paper filing could be costing more than necessary

Tax filing is traditionally a chore. Today, going online to complete your returns digitally is not only a timesaver, it will also save you money.

More and more people are making this their go-to filing method. IRS figures show that 127,939,000 tax returns were e-filed for Tax Year 2018. Online filing may sidestep fees associated with having someone file your taxes for you and the cost of postage/a trip to the post office if you’ve been filing paper taxes yourself. It’s also a statistically safer option—costly tax form errors are around 21 percent more likely on paper compared to less than 1 percent on digital.

The IRS offers the Free File/Fillable Form program which allows taxpayers to prepare and file their federal individual income tax return for free using specially-created tax software. The Free File option applies to individuals whose personal income was under $66,000 for the tax year, while the Fillable Forms option is for those who made more than $66,000.

Using either of these systems could cut your expenses compared to paperwork. E-filing combined with Direct Deposit can make it easier and faster to claim and track any tax refunds. The Free File option also allows up to a six-month extension if taxpayers feel they won’t have their forms submitted in time.

That said, having a professional who knows the ins and outs of tax code will likely save you a lot more money than filing taxes on your own, however you do it.

Don’t forget to keep accurate financial records

Some commonsense steps in this area could save a lot of money later. Entrepreneurs risk steep misfiling fees and time-consuming audits if they don’t keep bank statements, invoices, payroll records, and receipts which will support any claims about income, expenses, credits, or deductions.

These records must be made easily available to the IRS and should be kept for at least three years (four in the case of employment records) after filing or payment, whichever is later. The IRS may audit you many years after a misfiling. In certain tax situations, they may have an indefinite period to call businesses and individuals to account.

Keep financial records and receipts in a digital format whenever possible This makes them harder to lose and easier to back up against damage. Watch this short IRS informational video for more information on proper record keeping.

Professionals could be entitled to deductions they’re not claiming

Have you been reluctant to claim a tax deduction for business expenses because you feared you’d be turned down or worse, audited?

This could mean you’re losing out on legitimate deductions which should be straightforward to claim if you’re keeping detailed financial records. Deductible business expenses can be anything the IRS deems ordinary (one commonly accepted in your line of work) and necessary (appropriate and helpful for your business).

Professionals who use a part of their home for business can claim a deduction, as can anyone using their vehicle for business travel as well as personal purposes. Publication 463 offers more information on how to make this deduction safely, as well as other expenses such as business meals.

Other types of deductible business expenses are:

  • Federal, state, local, and foreign taxes directly attributable to your trade or business
  • Employees’ pay
  • Rent paid for the use of property you don’t own.
  • Interest charged for the use of money you borrowed for business activities
  • The ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession

Don’t neglect the proper security steps

More taxpayers filing online also makes more businesses and individuals vulnerable to cybercriminals. It’s true that digital recordkeeping is more effective against thieves than a filing cabinet full of receipts, but failure to safeguard digital data can see it stolen or corrupted—which could mean trouble with the IRS and losing out on refunds.

The information businesses retain and send to the IRS contains the sensitive data of themselves and their employees including social security numbers, home addresses, and bank details. Data thieves can use this data to commit tax-related identity theft and even steal refunds which rightfully belong to their victims.

There are several steps to take which help minimize digital tax risks. Installing personal firewalls and antimalware software can block cybercriminals, as can staying current with any updates or patches in your operating system.

Multi-factor authentication or encryption should be used to safeguard any place data is stored. At the very least, taxpayers should make all passwords related to sensitive data both unique and difficult to guess—and routinely change them.

The IRS recommends learning to recognize and avoid phishing emails, threatening calls, and texts from thieves posing as legitimate organizations such as your bank, credit card company, and even the IRS itself. Do not click on links or download attachments from unknown or suspicious emails. Professionals can learn more to keep their taxes safe here and by reviewing these further IRS guidelines.

These are just a few of the pitfalls which can cause you a headache at tax time. Provident CPA & Business Advisors are here to give our clients the complete picture on how to maximize tax efficiency and minimize risk.

Provident CPA & Business Advisors offer a wide range of services in tax, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.

How the 2018 Tax Cuts and Jobs Act May Impact Your 2020

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Even though it began in 2018, the TCJA’s effects are only now in full swing. How will it impact you in the next year?

Changes in the Tax Cuts and Jobs Act (TCJA), which first went into effect in 2018, have really only been felt now that we’re well into 2019, and 2018 taxes have been filed. You may be aware of some of the bigger changes, like adjusted income tax brackets, but the TCJA actually brought updates to quite a few areas. And some changes didn’t go into effect until 2019 and will thus be new for 2020 tax filing.

As the U.S. Department of Treasury website indicates, the TCJA is the “most comprehensive tax legislation passed in more than 30 years.” While you may not feel the impact of each and every change, it’s important to be aware of how updates could affect you moving forward.

Here is a guide to some of the ways the 2018 TCJA may impact your 2020.

An overview of select changes

Income tax brackets: The TCJA made changes to the income-tax brackets, mostly lowering the rates—for instance, the tax rate for a single taxpayer with a salary of $50,000 went from 25 percent in 2017 to 22 percent in 2018. The last bracket was changed from a 39.6 percent tax rate for income over $418,400 in 2017 to a 37 percent rate for income over $500,000 in 2018. The bracket for income between $0 and just over $9,000 remained at 10 percent.

Health insurance: The Affordable Care Act (ACA) is still in effect, but the TCJA removed the requirement to have health insurance coverage. This means that there’s no longer a penalty for those that don’t have it. This is pretty significant for many people, since the penalty had been almost $700.

Estate tax: The federal estate tax will be $11.4 million for single filers and $22.8 million for married couple beginning in 2019, meaning that the tax will impact even fewer people than it did before.

Standard deduction: In 2017, the standard deduction was $6,350 for single filers, and that almost doubled under the TCJA to $12,000 in 2018.

College savings: Under the TCJA, parents can distribute up to $10,000 per year, per student, from a 529 savings account (college) for tuition and other expenses.

Child tax credit: Another increase came to the child tax credit, which is now doubled to $2,000 per child. Because this credit only applies to children under 17, another $500 credit has been created for dependents who are over 17.

Personal exemption: The personal exemption, which allowed you to deduct a certain amount for each eligible member of your household, is no longer an option. In 2017, this amount was $4,050 for yourself, in addition to $4,050 for your spouse and each of your children or dependents. This was expected to increase to $4,150 in 2018, but it’s now $0 because of the TCJA.

The TCJA for businesses

Deduction changes: The TCJA added a new deduction, the qualified business income (QBI) deduction, that gives certain businesses a 20 percent deduction if they are an S corporation, partnership, sole proprietorship, or sometimes, a trust or estate.

The deduction for expenses that relate to activities including entertainment, amusement, or recreation was eliminated. But the IRS says that taxpayers may still deduct 50 percent of business meals if the items aren’t considered “lavish or extravagant.”

Another significant deduction change is a limitation on the business interest deduction for some businesses. Those with less than $25 million in average annual gross receipts have an interest expense limit of business interest income plus 30 percent of the adjusted taxable income and floor-plan financing interest.

Changes for businesses with employees: Some changes only apply specifically to businesses that have employees. One such change is that employers can now deduct reimbursements for bicycle commuting as a business expense, and employers have to include 100 percent of these reimbursements in the applicable employee’s wages. Moving-expense reimbursements must also be included in employee wages.

The TCJA also introduced a tax credit for employers who give paid family and medical leave to employees. However, this credit only applies after December 31, 2017, and before January 1, 2020.

Looking into 2020

So how will the TCJA changes impact your tax experience in 2020, when you file your 2019 taxes?

  • Be aware that income tax brackets have increased a bit again in 2019 due to inflation.
  • The elimination of the personal exemption, while seemingly a big loss, was meant to be counteracted by an increase in the standard deduction and child tax credit.
  • The standard deduction got another increase: up to $12,200 for single taxpayers and $24,400 for married couples.
  • If you don’t have health insurance, you will no longer receive a penalty because of the TCJA. This didn’t go into effect until 2019.

Remember that all of the changes brought by the TCJA aren’t permanent—many are set to expire on December 31, 2025, and lots could change in the political environment before then.

If you have any questions about tax reform and how it will impact you, get in touch with the professionals at Provident CPA & Business Advisors.

How Start-Ups and Established Businesses Can Make the Most of Taxes

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Entrepreneurs want to save every cent they can. Here are 5 pieces of advice, whether you’re an established operator or just starting out.

Tax-time doesn’t always need to be a big bite out of your bottom line. There are a variety of methods available to entrepreneurs which can represent significant savings, either immediately or over time. Take a look at five of them:

Capitalize on start-up benefits

Expenses quickly mount for start-up businesses. Even researching how to get an enterprise off the ground can take time and money. Federal law supports entrepreneurs by providing research and development deductions when that research results in the successful opening of a business. This benefit does not apply if the research does not result in a business being launched.

Research and development deductions allow entrepreneurs to deduct up to $5,000 of start-up expenses during their first year in business. The remainder of the start-up costs can be deducted over a period of years in equal installments. Expenses which qualify for this deduction are:

  • Salaries/Wages/Employee training
  • Investigating possible sites for a business
  • Consultancy fees
  • Product or market research
  • Ordering supplies

Claiming on wear and tear and depreciation

The Modified Accelerated Cost Recovery System is how the IRS calculates the depreciation of business assets. Except for land, the IRS deems most tangible property as depreciable.

Wear and tear on buildings (providing they are owned by the taxpayer and used for an income-producing activity for longer than a year), furniture, equipment, vehicles, and machinery all qualify, as do some intangible properties like computer software, patents, and copyrights. Depreciation can be claimed overtime or taken in a lump sum.

The Tax Cuts and Jobs Act made some amendments in 2018 to depreciation claims made on business premises, automobiles, and personal-use items. These changes were particularly valuable to small business owners, as they allowed them to expand their scope of expenses. Entrepreneurs can catch up on all changes via the IRS website.

Claim deductibles on hospitality and travel

Entrepreneurs can deduct 50 percent of dining and entertainment costs, provided they are incurred when entertaining business guests. Always record the names of the individuals present and the business discussed to provide the IRS with complete records. Retaining all receipts will accurately record the time, place, and cost of the entertainment/meal.

Travel expenses are fully tax-deductible and apply to a wide range of related expenses. Entrepreneurs operating their own vehicle can claim for fuel, repair, and insurance expenses as well as a number of miles traveled in that year.

Claiming by the mile uses the standard mileage rate released annually by the IRS. Entrepreneurs selecting this method must use it for the first year, after which they may switch to the actual expense method. This considers operating costs for the vehicle multiplied by the percentage of business use.

It’s essential to keep receipts for all travel expenses including hotel/lodging costs like room rates, meals, and telephone calls. Entrepreneurs can use an app which accurately tracks miles traveled to provide proof to the IRS.

Claim on your home office

If you’re regularly and exclusively using part of your home as an office, you could qualify for this deduction. It must be your principal place of business; entrepreneurs generally can’t have another office elsewhere on business property, but some exceptions do occur. Alternatively, space must be used to meet with clients. This deduction also applies to extended and free-standing parts of your property such as garages, studios, and barns.

How much you’ll be able to deduct depends on two things: the size of the space and whether you apply a simplified calculation or a regular one. The simplified option allows for deductions on home office space up to 300 square feet at $5 per square foot. The regular method requires determining the expenses of the home office such as mortgage interest, utilities, or repairs.

The regular method is typically based on the percentage of the home being used for business, so it’s necessary to know that number when applying for a deduction. This is achieved by dividing the square feet of the office by that of the entire home.

A 2,000 square foot home with an office of 200 square feet equals 10 percent of the home used for business, equating to a 10 percent tax deduction toward maintaining your home.

Get advice from the professionals

Staying current on tax deductibles can be a full-time job for entrepreneurs. Around 80 percent of all Americans missed an important change when filing 2018 taxes, meaning they could lose out on a refund. It can be even more costly when a business makes a mistake.

The IRS also adds a late payment penalty on the outstanding amount if a tax return error results in owing more tax than you filed. The penalty rate is 0.5 percent a month up to 25 percent of the total amount owed. Businesses will also be charged daily interest until the total is paid.

We don’t recommend going it alone on your taxes to cut down on expenses. Working with Provident CPAs is an investment that could save you a great deal of money and time in the future. Our collective experience lowers taxes legally and ethically, helping our clients take control of their finances and get closer to prosperity.

Provident CPA and Business Advisors offer a wide range of services in tax, accounting and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.

How Understanding Tax Rules Can Maximize Profits from a Business Sale

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A record number of American business owners are selling up. It pays to know what this means for your next tax return if you’re ready to close a deal.

More people than ever are looking to become their own boss in 2019, so if you’re ready to sell your business, you may find no shortage of takers. New sales records were set in 2016–2017 and these were again broken in 2018. But achieving a truly successful sale means navigating the best ways to avoid taking a hit on taxes. Here are some key things to consider before closing a deal.

The money from your business sale is subject to income tax

This is the first thing to consider in order to minimize losses to the IRS. Selling your business doesn’t mean it’s no longer a source of income because it will make you money when it changes hands.

The type of business being sold—LLC, sole proprietorship, S Corp, or partnership, etc.—affects how much tax you pay, as does selling your business as assets or as stock certificates. In any case, business owners must declare the full amount gained from the sale on their next income tax return.

Consider closing the sale through installments or deferred payments

Business owners may be reluctant to accept anything less than the entire purchase price at closing. This is understandable and removes the risk that a buyer might default on installments, but it isn’t always possible, as many deals mandate a structured, incremental buyout. It’s also not necessarily the best tax move. Accepting all sales proceeds in a single year will land you in a higher tax bracket.

Agreeing to installments over several years can lower the tax liability of your business sale since you pay much of the tax over time as you get the payments. In such a competitive buyer’s market, offering installments could also make your business more attractive to buyers who won’t have to pay everything at once.

Installments also mean you remain part of the operation until closure. This keeps the original owner around to offer advice and ensure things are being run properly, which minimizes performance risk and lowers the likelihood of the buyer defaulting on installments.

Where you live could be a tax advantage (or a liability)

Your state of residency is a benefit or a burden when selling your business because state and local income tax can be applied on top of federal taxes.

Stock sales are generally more favorable than asset sales in this scenario. If your business makes an asset sale it will typically owe taxes in the state or states where it has assets, sales, or payroll, or has gained income in the past. Stocks, on the other hand, are usually taxed in the state of residence.

This means that a business owner living in the “right” state (and choosing an all-stock sale) could avoid a significant tax bite. Of all states, only nine are exempt from income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Business owners making an all-stock sale while living in any of those could avoid tax entirely, even if the company does business in another state. In addition, stocks are generally immune from the transfer, sales, and use taxes.

Your sale could qualify as totally tax-free

When one C or S corporation buys another, it’s possible to set the deal up as a capital gains tax-free merger. One way to do so is through a stock exchange or “corporate reorganization.”

The “buyer” and the “seller,” in this instance, can swap stocks in their respective companies until the buyer is in full possession of the other’s business. This can avoid income tax completely since a stocks-for-stocks exchange classifies as non-cash assets.

Sellers must receive a certain percent of the buyer’s stock (typically between 40 and 100 percent) for this kind of deal to go through. Two important notes here:

  • Even if sellers get off tax-free on a stock exchange, they’ll still be taxed later if they choose to sell the shares.
  • Federal law prohibits selling shares gained in this manner for a set period if the seller wants to hold on to that tax-free status.

For taxes filed in 2020, many taxpayers will pay 15 percent long-term capital gains tax if they’ve been holding new shares for over a year and decide to sell. The standard income tax rate will apply if they choose to sell new shares they’ve held for a shorter time.

The corporate reorganization process is complex and laid out in Section 368 (a) of the Internal Revenue Code. If your business wishes to go this route, it’s vital to speak to a qualified CPA who can guide you safely through it.

Each of the above suggestions are potential tax implications; everything has its own element of risk and there are frequently exceptions to rules. Connect with Provident CPAs to get the full picture on which sales solution will save your business the most come tax time.

Provident CPA and Business Advisors offer a wide range of services in taxes, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.