What Are the Tax Implications of Working Remotely?

Many Americans who have been working remotely don’t know state-by-state tax laws, which could mean they’ll be hit with an unexpected bill. Here’s what you need to know.

Key takeaways

  • Americans working remotely might have to pay more taxes if they worked in more than one state
  • Other tax implications for some remote workers include work-from-home tax deductions, like the home office deduction

Over the last year, businesses of all sizes shifted to remote work environments, and more employees telecommuted than ever before. Many companies have realized that remote work has its own set of benefits, and the trend isn’t going to go away anytime soon.

Of the American workers whose jobs can be done remotely, 71% have worked from home over the last year. More than half of those remote workers say they want to continue working from home, even after pandemic restrictions are completely gone.

While working remotely has perks, there are a few tax implications to be aware of. It’s not always easy to understand whether you can take the home office deduction or work in other states without making changes to tax withholding or paying more.

Here are some important points to consider if you’ve been working remotely and are trying to prepare your taxes.

Remote work in a different state

First, let’s talk about what happens when you work remotely in a different state from where the company offices are located. Each state has laws about how remote work is handled. Unfortunately, almost half of remote workers (47%) surveyed by the Harris Poll for the AICPA said they aren’t aware that each state has its own remote-work laws.

There could be significant consequences if taxpayers don’t change the state withholding taxes from their paychecks to reflect where they actually worked. If taxpayers didn’t change their withholding by the end of 2020, they could have a more significant state income-tax liability this year.

For instance, because each state’s laws vary, people who have worked in several different states this year may face a variety of filing requirements or tax liabilities.

Each state outlines the period worked there to be liable for state income taxes, including from one day of work to 60 days. Many states also have rules for when you are considered a statutory resident of the state. If you have lived in a state for usually more than 183 days, the state will require that all of your income is taxable, so you could face dual taxation if you are found to have dual residency.

There was some government focus on these matters after the pandemic, with proposals for the Remote and Mobile Worker Relief Act being part of the Senate’s COVID-19 relief bill. This legislation would create a national standard for employees working in different states than business offices, including a 90-day grace period for working in a state before an employee is subject to its tax liability. However, this proposed bill has yet to gain much traction.

If you have worked remotely in a different state than where your company’s office is located, make sure you research state and local laws to ensure you don’t get hit with a surprise tax bill. Note that your federal taxes will likely not be impacted based on the state you worked in. 

Deductions for remote workers

Other significant tax implications for remote workers are related to the work-from-home deductions you can take. Let’s walk through a few of them:

1. Home-office deduction

You may think you’re able to claim the home office deduction if you use a space in your home for work. But it’s only available to some workers. If you are a regular W-2 employee, you can no longer take this deduction, as it was eliminated as part of the Tax Cuts and Jobs Act.

Self-employed individuals who use their home office exclusively for their business—and use it regularly—can take the home office deduction.

2. Business expenses

Independent contractors can also write off many of their business expenses for working from home, including:

  • Equipment or supplies used for business
  • Utilities costs (internet, electricity, cell phone)
  • Depreciation on assets
  • Health insurance premiums
  • Business meals
  • Travel costs for travel lasting longer than a workday and requiring that you stay somewhere to rest
  • Use of a vehicle for business (mileage, depreciation, insurance, gas, oil changes)
  • Business-related subscriptions
  • Business insurance
  • Rent expenses
  • Some retirement contributions
  • Advertising costs
  • Business startup costs

Again, these expenses may only be deducted by self-employed individuals, not most regular W-2 employees. However, some employers are assisting their remote workers with stipends related to these costs.

3. Qualified business income deduction

A significant deduction available for qualifying businesses in 2020 is the qualified business income (QBI) deduction. This benefit is for small business owners or self-employed individuals and is up to 20% of QBI. The income limit is $163,300 for single taxpayers and $326,600 for joint filers.

Sole proprietorships, partnerships, S corporations, and LLCs may be eligible to take this deduction. Qualified income includes your business’s net profit but excludes income earned outside the U.S., some guaranteed payments, dividends, capital gains or losses, and interest income.

Many small business owners and self-employed workers who are working remotely may qualify for this 20% deduction, so ask a tax professional for more details. 

Work with a tax expert from Provident CPA & Business Advisors

If you have shifted to a remote-work environment this year, make sure you know if there are tax consequences or if you qualify for work-from-home deductions. The tax professionals at Provident CPA & Business Advisors are ready to walk you through your potential obligations and credits. We help our clients pay the least amount of tax legally possible and clearly explain how changing laws and regulations apply to their situation.

Contact us to learn more about our tax planning services for business owners and individuals.

What Is the IRS Taxpayer Relief Initiative?

Millions of American taxpayers have tax-related debt. The IRS has introduced a new initiative to help these debtors find relief in the wake of COVID-19.

Key takeaways

  • Millions of Americans still owe billions in tax debt to the IRS
  • The Taxpayer Relief Initiative expands allowances and assistance to many taxpayers
  • More Americans may be eligible for an offer in compromise or installment agreement
  • Taxpayers may be able to benefit from collections delays, lower tax bills, and relief from penalties

Many American taxpayers are still struggling with the effects of the COVID-19 pandemic. Existing debt or financial troubles have worsened during the economic recession, and many individuals have difficulty managing what they owe. 

Over the last year, the IRS has delayed tax filing deadlines and other requirements. And there have also been delayed refunds and other challenges faced by the agency itself.

Over 11 million American taxpayers owe money to the IRS, whether in back taxes, penalties, or interest, and they owe an estimated $125 billion in tax-related debt. As the pandemic has caused record unemployment, business closures, and layoffs, many taxpayers are challenged to make ends meet, much less cover their tax debt bill.

The government is seeking to provide assistance with the recent Taxpayer Relief Initiative. Here’s what you need to know about this program and how it helps many taxpayers get through the recession.

What is the Taxpayer Relief Initiative?

In March 2020, the IRS introduced the People First Initiative, which provided relief to American taxpayers facing financial hardships. This program offered temporary relief, such as suspended payments and postponed debt-collection actions, but it ended in July 2020. 

In November, the IRS introduced the Taxpayer Relief Initiative to further help individuals struggling with the economic downturn caused by COVID-19. This initiative focused on helping people who owed taxes or related debt to the IRS, expanding upon current tools to help people pay off what they owe.

Benefits of the Taxpayer Relief Initiative

Qualifying taxpayers will receive the following benefits related to installment agreements and payment plans:

  • If a taxpayer qualified for a short-term payment plan, they now have a maximum of 180 days to resolve liabilities, up from the 120-day limit.
  • More flexibility is provided for taxpayers who can’t meet the terms of an offer in compromise.
  • For companies and individual business owners who have gone out of business because of the pandemic, new tax balances will be added to existing installment agreements.
  • Qualifying taxpayers who owe less than $250,000 to the IRS can set up installment agreements without a financial statement, as long as they propose a sufficient monthly payment proposal.
  • If a taxpayer only owes money for 2019 and owes less than $250,000 to the IRS, they may be able to set up an installment agreement without an IRS-filed notice of federal tax lien.
  • Those who already have an installment agreement may be able to use the Online Payment Agreement system to change monthly payment amounts and due dates.

In addition to these agreement-related relief initiatives, taxpayers also may be able to temporarily delay collections from the IRS, settle their bill at a lesser amount with an offer in compromise, or receive relief from penalties.

These benefits will help Americans find at least some relief as they manage other forms of debt, make mortgage or rent payments, or pay their other monthly expenses.

How to qualify for the Taxpayer Relief Initiative

Some taxpayers may be able to suspend collections by the IRS if they can exhibit a financial “hardship.” This means that if the taxpayer were to pay the IRS what is owed, they would not be able to cover other reasonable living expenses. If the proof is sufficient, the IRS would then classify the taxpayer’s account as CNC, or “currently not collectible.”

To qualify for an offer in compromise, taxpayers need to file an application that outlines their current financial situation. Whereas the IRS might usually cancel an offer in compromise if a taxpayer fails to make their payments, the agency may show much more flexibility.

The installment agreements also have requirements that must be met. Typically, individuals must owe less than $50,000 in taxes, penalties, and interest, or $25,000 for business taxpayers, to qualify for these agreements. 

But the Taxpayer Relief Initiative expanded this requirement so that taxpayers owning between $50,000 and $250,000 may be able to receive a non-streamlined installment agreement, which stipulates that debts must be paid within the 10-year statute of limitations. This is an option if a taxpayer’s case has yet to be assigned to an IRS officer.

This overview covers the basics of the Taxpayer Relief Initiative. But there are more aspects to this program, and a tax professional can help you understand how it could impact you. 

Assistance taking advantage of every new initiative

If you have questions about your tax debt or the IRS’s Taxpayer Relief Initiative, it’s beneficial to work with a tax expert who can walk you through all of the requirements and steps. The 2020 tax year is unlike any other, given government relief programs and often drastic changes to incomes because of the pandemic.

The team of experienced tax professionals at Provident CPA & Business Advisors can help. Contact us today to learn more. 

What Tax Provisions Expired in 2020?

The pandemic caused the introduction of new provisions to help taxpayers stay afloat. Which ones were extended and which expired at the end of 2020?

Key takeaways

  • FFCRA and employer paid leave
  • Qualified tuition deduction
  • Payment Protection Program changes
  • Standard deduction increases
  • Provisions extended under the COVID-19 relief bill

Each year can bring a new set of tax rules to learn and factor into your strategy. 2020 was monumental in many ways, and the government introduced many new tax provisions to help Americans get through the COVID-19 pandemic. Many of these items, however, were set to end on December 31, 2020.

Another COVID-19 relief package was passed in late December and extended many of the tax provisions, however. For instance, the 7.5% medical expense deduction was extended, as were energy-efficiency deductions and the New Markets Tax Credit (NMTC).

However, several provisions did expire on December 31. Others were kept but changed drastically. Here’s a look at these tax provisions and what they could mean for your returns.

FFCRA and employer paid leave

The Families First Coronavirus Response Act (FFCRA) stipulated that employers with under 500 employees must provide employees with paid sick leave or expanded family and medical leave if employees could not work because of quarantine restrictions or the need to care for an individual in quarantine. 

The FFCRA also stated that employers must offer an extra 10 weeks of paid family and medical leave at two-thirds of the worker’s regular pay rate when they need to care for a child because of the pandemic.

The FFCRA was not extended by Congress, and it expired at the end of 2020. However, Congress is still encouraging employers to provide this type of leave by extending the tax credit to those eligible until March 31, 2021.

Qualified tuition deduction

A deduction of up to $4,000 in tuition and higher-education costs was previously available to parents of college students. The tax break was repealed in the latest COVID relief act in an attempt to help taxpayers make the transition to the lifetime learning credit, which we’ll discuss later.

Payment Protection Program changes

The late-2020 relief bill also extended and expanded the Payment Protection Program (PPP), but there are a few significant changes for the new year. Let’s walk through the key revisions to be aware of if you are considering a PPP loan:

  • Forgiven PPP loans are not included in gross income.
  • The tax basis will not be reduced because of loan forgiveness.
  • Tax deductions are allowed for deductible expenses paid with forgiven PPP loan funds.

First-time PPP loans are now available for:

  • Businesses with 500 or fewer employees
  • Sole proprietors, independent contractors, and self-employed individuals
  • Not-for-profits
  • Accommodation and food services operations with fewer than 500 employees per location
  • Business leagues
  • Some news organizations

Second-time PPP loans are only available to borrowers with 300 or fewer employees who will use their full first PPP loan before the second loan is dispersed. And they must have experienced a reduction in revenue of 25% or more in all or part of 2020 compared to all or part of 2019.

Publicly traded companies are no longer eligible for PPP loans. This is a significant change from 2020, likely sparked after huge companies obtaining the loans caused public outrage.

Standard deduction increases

The standard deduction will increase for 2021 taxes, with an additional $150 for single filers, heads of household, and married filing separately, and an extra $300 for joint-married filers. The new rates will be as follows:

  • Single: $12,550
  • Married filing jointly: $25,100
  • Head of household: $18,800
  • Married filing separately: $12,550

These are fairly normal annual increases to the standard deduction—after it was increased significantly in 2018 by the Tax Cuts and Jobs Act (from $6,500 to $12,000 for individual filers, and $13,000 to $24,000 for joint filers).

Provisions extended under the latest COVID-19 relief bill

Many tax provisions set to expire at the end of 2020 were extended until 2025 or permanently with the second COVID-19 relief bill in late December. 

Here are a few credits and deductions to be aware of that were extended, plus any changes starting in 2021:

  • The 7.5% medical expense deduction: This deduction is now a permanent provision.
  • The lifetime learning credit is expanded and available to higher-income taxpayers and worth up to $2,000 per return to offset undergraduate, graduate, and professional degree programs.
  • The tax break for homeowners with a forgiven mortgage balance due to a foreclosure or short sale: The amount of forgiven debt that taxpayers can exclude from gross income was reduced (up to $750,000 for joint filers and $350,000 for single filers). It is in effect through 2025.
  • The private mortgage insurance premiums deduction: For taxpayers who itemize, this deduction is available through 2021. Deductions on mortgage and home equity loans or lines of credit may apply to up to $750,000 in total qualified loans.
  • Employer student loan payments: The CARES Act provided a tax incentive for employers to help employees with student loan debt. Employers could deduct up to $5,250 and have that amount excluded from workers’ taxable income. This provision has been extended through 2025.

It’s nothing new for tax provisions to change in a given year. But because 2020 was so unprecedented, make sure you keep a close eye on revisions that may still be introduced by new legislation and additional relief bills in 2021.

Work with tax experts to understand the new rules

If you still have questions about which tax credits or deductions you qualify for or how your 2021 taxes will be impacted by recent legislation, talk to the experts at Provident CPA and Business Advisors. Our team will review your situation and help you meet your goals. 

Contact Provident to learn more about our services.

What the Special $300 Charitable Deduction Means for 2020 Taxes

Here’s what you need to know about charitable deductions and the special CARES Act provision that allows anyone to deduct $300 in qualifying donations

Key takeaways

  • What is the $300 charitable deduction?
  • What charitable organizations qualify?
  • How does this interface with the standard deduction?

As you’re getting ready for tax season, it’s essential to tally all the deductions and credits you’re eligible for and figure out if you want to take the standard deduction or itemize. Tax laws change, and there may be new deductions or additional steps to take, especially in the wake of government relief and other changes wrought by the COVID-19 pandemic.

One area to consider is your contributions made to charitable organizations. Fortunately, a new provision from the IRS allows many taxpayers to deduct up to $300 in qualifying charitable donations whether or not they take the standard deduction.

Do your contributions qualify? Here’s an overview of what the new $300 charitable deduction entails and a look at which donations are considered charitable contributions. We’ll then briefly go over choosing the standard deduction versus itemizing.

What is the $300 charitable deduction?

Qualifying cash donations of up to $300 made before December 31, 2020, can be deducted by taxpayers this year. The provision was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in early 2020, and aimed to encourage Americans to support charities that may be struggling through the pandemic. One study showed that 91% of charitable organizations had experienced some negative impact from COVID-19. 

Other provisions included to help charities were higher contribution limits for corporations, individuals who itemize deductions, and businesses that donate food to charities.

One significant benefit of this new deduction is that taxpayers don’t have to itemize their deductions to claim it, as is usually the case. Instead, they can claim an “above-the-line” deduction, as the IRS terms it, of a maximum of $300 for charitable donations. This lowers the taxpayer’s adjusted gross income and taxable income.

Cash donations must have been made by check, credit card, or debit card. Excluded from eligible donations are securities, household items, and other property. You also cannot deduct time or services donated to an organization.

What are qualifying charitable organizations and donations?

Most donations made to charities will qualify, but there are some exceptions to be aware of. Note that contributions made to supporting organizations or donor-advised funds do not qualify for the $300 provision.

The IRS defines qualified charitable organizations as:

  • Community chests, corporations, trusts, funds, or foundations that operate solely for charitable, religious, scientific, literary, or educational purposes, or for the prevention of animal or child cruelty.
  • War veterans’ organizations.
  • Domestic fraternal societies, orders, and associations that operate under the lodge system.
  • Nonprofit cemetery companies or corporations.
  • Government bodies, whether federal, state, or local, if donations are used for charitable causes.

To qualify as a charity, an organization cannot give any of its earnings to private shareholders or individuals. Political contributions and homeowners’ association donations, for example, are not included. But those given to nonprofit schools, hospitals, and churches are eligible. Most donations to foreign organizations are excluded.

If you’re unsure whether an organization qualifies, you use the Tax Exempt Organization Search tool on the IRS website. It helps donors ensure that an entity is an IRS-registered 501(c)(3) organization and that a contribution qualifies for the deduction.

Remember to keep a record of the transaction when you donate. Most organizations provide a receipt or send an acknowledgment letter, so you have evidence of the amount you contributed.

How does it interface with the standard deduction?

Many taxpayers take the standard deduction, which means they don’t itemize each individual deduction for the year. Both options have their pros and cons and are appropriate for particular circumstances—you should itemize if your total deductions are more than the standard deduction. Itemized deductions break down into categories like medical costs, interest paid, charitable contributions, and more. 

For 2020, the standard deduction is $12,400 for single filers and $24,800 for married-filing-jointly taxpayers. For heads of household, the standard deduction is $18,650 for 2020 taxes. Everyone is entitled to the standard deduction, and it often saves taxpayers time when submitting their tax returns. But if you have many expenses to claim, the itemized route may help you pay less in tax. 

But remember, the special $300 charitable donation deduction helps taxpayers who take the standard deduction. They can now benefit from this 2020 contribution, in addition to those who already decide to itemize.

Working with the team at Provident CPA & Business Advisors

As the COVID-19 pandemic continues into 2021, there will likely be more special provisions to keep in mind when preparing your tax return. It’s always wise to talk to a tax professional to be sure you’re claiming everything you’re eligible for. 

When you’re ready to talk taxes, we’re ready to help. Our experts assist both individuals and businesses as they plan for the future, whether that’s long-term business growth or tax minimization. And we make sure you don’t leave money on the table when completing your return each year. 

If you’re ready to get started, contact Provident today.

Drive Down Your Taxes with These Vehicle Deductions

Car and truck expenses can be confusing on your tax return. What are considered eligible expenses? And what are the current limits and mileage rates?

Key takeaways:

  • An individual who owns a business or is self-employed can deduct vehicle expenses 
  • Automobile costs based on mileage or actual expenses are eligible
  • Mileage rates have changed between 2020 and 2021
  • Depreciation limits vary based on when the vehicle was purchased and put in service
  • Certain vehicles used at least 50% for business qualify for the Section 179 deduction

When you run your own business, ensuring you are claiming all applicable credits and deductions will lower your tax burden. And you can deduct qualifying business vehicle expenses, like gas and repair costs, when you use a car for your business. But there are specific eligibility requirements for these deductions, and not all employees who use their vehicle for work will be able to claim them.

So, what are the eligible car and truck expenses? What does the process look like for claiming them? Here’s an overview of how to leverage vehicle expenses to drive down your taxes:

Who can deduct vehicle expenses?

To be eligible for vehicle expense deductions, an individual must own a business or be self-employed. This means that a regular W-2 employee cannot deduct car expenses on their tax return, even if they use it to travel to and from work every day. Some employers may reimburse costs if workers are required to use their vehicles for work, but employers are not required to do so.

If you are eligible, but you use the vehicle both for personal and business purposes, you need to split your expenses when doing your taxes. The deduction will be based on the percentage of mileage that you use solely for your business. 

Next, let’s cover which expenses you can deduct.

What car and truck expenses are eligible?

It’s first important to note that there are two methods to calculate vehicle expenses:

  1. Standard mileage rate: If you choose this option, you must use this method in the first year you use the car and your business. And if you lease a vehicle, you must use it for the entire lease period.
  2. Actual expenses: Using this method requires you to figure out actual car expenses. The IRS includes the following as applicable expenses:
  • Depreciation (limits discussed in a later section)
  • Lease payments
  • Gas and oil
  • Tires
  • Repairs and tune-ups
  • Insurance
  • Registration fees

Now, let’s look at the current mileage rates for both 2020 and 2021 taxes, along with depreciation limits.

Mileage rates for 2020 and 2021

For 2020 tax returns, due in April 2021, the mileage rate is 57.5 cents per mile, and for 2021 tax returns, the rate is 56 cents per mile. If you decide to use the standard mileage rate option described above, these are the numbers you need to know when filing your taxes. 

Depreciation limits

If you outline your actual car expenses, you need to know the depreciation limits for cars and trucks used for business. 

For vehicles that are eligible for the bonus first-year bonus depreciation deduction that were purchased after September 27, 2017, and used for business during 2020, the depreciation limit is $18,100 for the first tax year, $16,100 for the second, $9,700 for the third, and $5,760 for each year thereafter.

If a vehicle was acquired before September 28, 2017, and placed in service after 2019, bonus depreciation is not allowed.

For vehicles first used in the business in 2020 but do not qualify for the first-year depreciation deduction, the limit is $10,100 for the first year, $16,100 for the second, $9,700 for the third, and $5,760 for each year thereafter.

The Section 179 deduction

Section 179 of the tax code provides guidelines for businesses to deduct certain necessary equipment. Qualifying work vehicles are generally only used for business purposes and include:

  • Vans or vehicles that seat nine or more passengers behind the driver’s seat
  • Classic cargo vans (vehicles that have an enclosed driver’s compartment or cargo area, have no seating behind the driver’s seat, and have no more than 30 inches of body in front of the windshield)
  • Heavy construction equipment
  • Some tractor trailers

For typical passenger vehicles that are used more than half of the time in qualified business use, the Section 179 deduction plus bonus depreciation has a limit of $11,160 for cars and $11,560 for trucks and vans.

Excluded from the limits are ambulances, hearses, taxis, transport vans, non-personal vehicles, heavy non-SUV vehicles, and trucks with at least six feet of interior cargo area, and others.

Some heavier vehicles, with a gross weight rating over 6,000 pounds but no more than 14,000 pounds, may qualify for $25,000 in deductions if the vehicle is acquired and placed in service before December 31.

Other Section 179 vehicle deduction notes:

  • The vehicle’s title must be in the company name, not the company owner’s name.
  • The vehicle must be financed with leases and loans that qualify.
  • Depreciation limits are reduced by the percent of personal use if the vehicle is used for business less than 100% of the time, but it must be used for business at least 50% of the time.
  • The Section 179 deduction can only be claimed in the tax year that the vehicle is placed in service.

These tax laws can get complicated fast. It’s always wise to work with a tax professional to get the help you need when preparing your tax returns and claiming expenses related to work vehicles.

Getting tax help for your business

When you’re unsure how to prepare your tax return or whether you qualify for business vehicle expense deductions, work with the team at Provident CPA & Business Advisors. We’ll make sure you’re claiming all credits and deductions for which you qualify. We also offer advice and guidance on other tax-minimization strategies and business planning for the future. 

Contact Provident to get started with one of our tax professionals.

Beware the “Dirty Dozen:” Common Tax Scams to Avoid

In 2020, the IRS released a “Dirty Dozen” of prevalent tax scams. Here’s what to watch out for!

The IRS regularly compiles a list of the “Dirty Dozen,” or the 12 most common scams that target taxpayers. This list is always changing and evolving, and some risks have been heightened because of the COVID-19 pandemic. It’s important to be aware of the latest threats to protect yourself from tax fraud or identity theft.

Here is the latest Dirty Dozen list from the IRS, followed by guidance on how you can avoid these schemes:

  1. Phishing
  2. Fake charities
  3. Threatening impersonator phone calls
  4. Social media scams
  5. Economic impact payments or refund theft
  6. Senior fraud
  7. Non-English-speaker scams
  8. Return preparers
  9. Offer-in-Compromise mills
  10. Fake payments with repayment demands
  11. Payroll/HR
  12. Ransomware

1. Phishing

Phishing is a tax scam that continues to be among the most common each year. Scammers send fake emails or create fake websites posing to be the IRS and asking for personal information. Remember that the IRS will never contact you over email about your taxes. And official government websites will always have a .gov address and be HTTPS secure.

2. Fake charities

Especially during a tumultuous year like 2020, scammers will often try to convince people that they’re a charity and ask for money. Be wary of any unsolicited communication you receive in an email, by phone or text, or on social media.

3. Threatening impersonator phone calls

Taxpayers may receive phone calls from criminals who claim to be from the IRS and emphasize the urgency of their request. They want to scare you into sending them your personal information or money. The IRS says that it will never make such demands or threats.

4. Social media scams

Unfortunately, social media platforms have involved a growing proportion of identity theft related to taxes or impersonation scams. Because attackers can see information about you on your profiles, like your friends’ and family members’ identities, they may try to impersonate your loved ones to trick you.

5. EIP or refund theft

Economic impact payments (EIPs) were distributed as part of the CARES Act in 2020, and criminals turned their attention to stealing these payments via identify theft or providing false addresses to the IRS. This scam is a way for attackers to take advantage of many already vulnerable or struggling individuals.

6. Senior fraud

Scammers have long targeted older Americans in their tax scams. Elder fraud is an ongoing issue where attackers take advantage of this population by getting them to respond to fake emails or phone calls with their personal information. In 2020, COVID-19-related scams were especially prevalent for seniors.

7. Non-English-speaker scams

Criminals regularly attack groups with limited English proficiency, and they often use demanding and threatening tactics to gain personal or financial information. Tactics may include threats of legal action if the taxpayer doesn’t return the phone call. These attacks are usually conducted over the phone and sometimes use a pre-recorded message.

8. Return preparers

Taxpayers may turn to a preparer to ensure their return is filed correctly. Unfortunately, there are some unscrupulous return preparers out there who gain access to sensitive data and exploit it. It’s vital that taxpayers always carefully vet the person or company they hire to ensure their legitimacy. 

9. Offer-in-Compromise mills

Watch out for Offers in Compromise, which are offers to taxpayers to reduce their tax bill or settle their tax debts. Some of these solicitations are legitimate, and the programs can help people. But dishonest companies will try to sell offers to individuals who don’t qualify in attempts to collect bigger fees from taxpayers who are already burdened by a lot of debt. The IRS says that in 2019, there were 54,000 Offers in Compromise submitted to the agency, but only 18,000 were accepted.

10. Fake payments with repayment demands

Another common scam happens when an attacker demands the repayment of a tax refund. Sometimes, the scammer will even file a fake tax return and have the refund deposited into the taxpayer’s bank account, only to call them posing as an IRS employee and demand that they return it.

11. Payroll and HR scams

Common HR scams are Business Email Compromise (BEC) or Business Email Spoofing (BES), where scammers steal tax information like Form W-2 data. These have been more common with COVID-19 work-from-home requirements. Criminals will often request wire transfers, use false IRS documents, or create fake invoices.

12. Ransomware

Ransomware is a form of malware (invasive software) that infiltrates a computer, network, or server. Ransomware will gather personal information or sensitive data once it’s inside the network. Companies and taxpayers can prevent this from happening by using a multi-factor authentication method on devices and networks as extra protection when logging in.

Working with a qualified tax expert can help you avoid scams

Tax scams happen all the time, and you need to be prepared. Always watch out for unsolicited messages and phone calls, and be wary anytime someone says they’re an IRS employee and they make any demands or threats. 

Working with a credible tax professional can help you avoid these scams. The team at Provident CPA & Business Advisors is ready to help you understand your taxes this year and help you safely file a return. Contact us to get started!

Is There a “Right” Tax-Advantaged Retirement Plan?

There’s no one perfect way to approach retirement that is the best for everyone. Choosing the right plan for you starts with understanding your options and the tax implications of each one.

There are several different approaches you can take to your retirement savings strategy. Each avenue has its own set of tax implications and benefits. And without a thorough look at what’s out there, you’ll never know whether you’re choosing the option that meets all your needs and sets you up for optimal tax minimization. 

Let’s dive deeper into:

  • The most common retirement plan options and their tax implications
  • How to make the right choice for your situation

Retirement plan options

Traditional 401(k) or 403(b)

These retirement accounts are very common and have benefits for both employees and employers. In many cases, an employer matches the employee’s monthly contributions and receives tax breaks on those contributions. 

The most significant difference between a 401(k) and a 403(b) is that nonprofit organizations use the latter. Otherwise, they generally have the same pros and cons. 

Some employers offer both Traditional and Roth 401(k) plans. A Traditional account provides tax savings now since contributions are made pre-tax. In contrast, the Roth allows investors to avoid taxes when they’re in retirement, as the contributions have already been taxed.

The contribution limit for a 401(k) is $19,500 annually, and $26,000 if you’re over 50.

Defined benefit plans

The aforementioned 401(k) plan is considered a defined contribution plan. Defined benefit plans, also known as pensions, are retirement accounts where only the employer makes contributions. 

Workers with a pension know in advance how to calculate the benefits they’ll receive in retirement, whereas defined contribution plans are dependent upon investment returns. Pensions don’t give the recipient any control, and they usually have to meet vesting requirements, but they are not responsible for making contributions. 

Solo 401(k)

A good option for a small business owner or self-employed worker with zero employees is the Solo 401(k) plan. You can contribute up to $57,000 or 100% of your income, whichever is less. Just like an employer-sponsored 401(k), contributions are made pre-tax, so you see the tax benefits now, rather than later.

Although you can’t have employees with a 401(k), you can hire your spouse for your business, and they can also contribute to the plan.

Traditional and Roth IRAs

A payroll-deduction IRA is often offered to employees when an employer doesn’t offer a retirement plan. Only employees make contributions to these accounts. But individuals can also set up IRAs either in addition to their employer plans or if self-employed. 

The two types of IRAs to know about are Traditional and Roth IRAs:

  • Traditional IRA: You contribute pre-tax dollars, so you pay taxes in retirement but defer them for now. These are best for individuals who expect to be in a similar or lower tax bracket in retirement.
  • Roth IRA: You pay tax now on contributions, so withdrawals are tax-free. This is a good option if you think you’ll be in a higher tax bracket when you start withdrawing, thus avoiding that higher tax rate.

Both of these types of IRAs have a maximum annual contribution limit of $6,000, or $7,000 if you’re over 50.

SEP IRA

A Simplified Employee Pension (SEP) plan is a good plan for small business owners, either with no employees or just a few. You can contribute $57,000 or up to 25% of compensation, whichever is less, and you can deduct contributions on your tax return. But as with a traditional IRA, income you receive in retirement is taxed.

SIMPLE IRA

These IRAs are best for owners of larger businesses with 100 or fewer employees. You can contribute up to $13,500, plus a catch-up contribution of $3,000 if you’re 50 or older. Total contributions for this plan and an employer plan, if applicable, have a limit of $19,500.

SIMPLE IRA contributions are tax-deductible, and account holders pay tax on the income in retirement. If an employer makes contributions to employee SIMPLE IRAs, those are deductible as a business expense.

Choosing the right option for you

Now that you know the basics about these common plans, how do you make the right choice? Here are a few pertinent questions to think about:

  • Are you likely to be in the same or lower tax bracket when you retire? Higher? A Roth retirement account allows you to pay taxes now, so if you’re in a lower bracket now and expect to be pushed to a higher one later, this may be a good option.
  • Are you self-employed? How big is your business? Do you have any employees or plan to?
  • How much do you want to save each year for retirement? Each has its own limits. 
  • Does your employer offer a retirement plan? This will determine how many options you have.

Identifying your priorities will help you weigh each retirement account’s pros and cons and find the plan that gives you the right balance of tax benefits and savings.

Working with tax professionals

When you need assistance selecting the right tax-advantaged strategy, work with the experts who can run the numbers for you. The team at Provident CPA & Business Advisors will help you plan for a more prosperous future and explain all tax implications of the different options available to you. 

Contact us today to get started.

How to Make the Most of Medical Benefits on Taxes

It’s always wise to optimize the tax efficiency of medical benefits. But it’s even more crucial during a pandemic. Here’s how to keep your returns as healthy as possible.

The year 2020 may mean that more people have high medical expenses, with millions of Americans having tested positive for the coronavirus. On top of those stresses, many individuals are grappling with reduced income and preparing for their tax burden in April 2021. 

It’s never been a better time to try to make the most of medical benefits to avoid overpaying. The IRS allows for certain deductions related to qualified medical expenses, including insurance premiums, in some cases. This article covers:

  • Deductible medical expenses
  • When you can deduct insurance premiums
  • How to know whether to take the standard deduction or itemize your deductions
  • Why you should work with a tax professional

Here’s a brief overview on making the most of medical benefits on your tax return.

What medical expenses are tax-deductible?

Medical expenses are only deductible when you pay out-of-pocket, including insurance premiums, in specific situations.

If you pay for a federal marketplace plan and don’t receive subsidies on your premiums, you can deduct the full payments on your federal return. If you receive subsidies, you can only write off the portion of the total you paid yourself.

However, premiums paid under an employer-sponsored health plan are not tax-deductible since the payments are already taken out from paychecks pre-tax. Health savings account and flexible spending account contributions, which are also paid pre-tax, are also not tax-deductible. These amounts are already exempt from federal taxes.

COBRA insurance, a plan that continues your employer-sponsored coverage after you leave a workplace, is paid entirely by the individual after-tax, so premiums are tax-deductible. Medicare premiums for Parts B, C, or D with Medigap are deductible. Part A isn’t if Social Security covers the premiums.

To deduct medical and dental expenses, you must itemize your deductions on your tax return. You can only count the total medical expenses that exceed 7.5% of your adjusted gross income (AGI), which was lowered from 10% at the end of 2019.

According to the IRS, deductible medical expenses include:

  • Physician and nontraditional medical practitioner fees
  • Inpatient hospital care or residential nursing home care costs
  • Acupuncture or addiction treatment costs
  • Prescription drug payments, including birth control
  • Costs of transportation to medical care
  • Dentures, eyeglasses, contacts, hearing aids, crutches, wheelchairs, and the like
  • Therapy expenses
  • Medical testing costs
  • Costs of long-term care
  • Other qualifying expenses

Items like burial costs, nonprescription drugs, toiletries, cosmetics, or cosmetic surgery are not deductible. Remember that you also can’t write off any bills that insurance covers—only out-of-pocket expenses.

Standard deduction or itemized deductions?

Now, you may be wondering whether you should take the standard deduction when filing your annual return or if your medical expenses make it smart to itemize instead.

The standard deduction for 2020 taxes is as follows:

  • $12,400 for single filers
  • $18,650 for heads of household
  • $24,800 for married, filing jointly

If your deductible medical expenses are lower than these numbers, it benefits you more to take the standard deduction. But if you have higher costs than the standard deduction, itemize to save some money. 

Taxpayers can use form Schedule A 1040 to calculate expenses. And keep in mind that your approach can change from year to year, so you can decide to itemize one year and take the standard deduction the next, depending on the medical expenses you incurred. 

Get expert help with your taxes

Tax laws sometimes change, and new regulations could have significant impacts. For example, a range of tax benefits were instituted to ease the burden of individuals and businesses during the pandemic. It’s helpful to work with a professional to be sure you’re calculating and reporting everything correctly and that you’re taking advantage of every credit and deduction for which you qualify. If you still have questions about your medical benefits and qualifying expenses—or any business expenses—get help when you start running the numbers. 

At Provident CPAs and Business Advisors, we offer tax and business services to help you minimize taxes and focus on your financial health. Whether you’re self-employed or are running a small- to mid-size business, we can step in to help you save now and plan for a successful future. 

Get in touch with our team of experts to learn more about our services.

Switch Your Structure, Transform Your Taxes

Are you forming a business? Thinking of switching your structure? There are pros and cons to each option, so understand which will help you meet your goals and pay less tax.

The structure of a business can make a big difference come tax time. How can you best shape your enterprise for optimum tax efficiency? In addition to taxes, there are crucial venture capital and operational considerations to take into account, too.

Let’s dive into the different business structures, how they impact your taxes, and other pros and cons of each one. Here’s what we’ll be covering:

  • Sole proprietorships
  • Partnerships
  • LLCs
  • Cooperatives
  • C Corporations
  • S Corporations

Sole proprietorship

If you run a business on your own, you are likely operating a sole proprietorship. This means that you and your business are one and the same, financially speaking. When you pay taxes each year, all of your business income is reported on your individual tax return. Keep in mind that this means you are responsible for business liabilities since you and the organization are the same entity.

To file taxes, you’ll use Schedule C and Form 1040. You’ll probably have to pay self-employment tax, which comprises the amounts of social security and Medicare taxes typically covered by an employer.

And a final, important note about sole proprietorships: estimated taxes. When you don’t receive a W-2 from an employer, you have to pay estimated taxes quarterly, in addition to the annual return.

Pros:

  • Low tax rate when compared to other business structures
  • Easy and inexpensive to form and run
  • Only file one tax return

Cons:

  • Personal liability
  • Estimated taxes

Partnership

A partnership is created when two or more people share ownership of the business. You can have a general partnership, where everything is divided equally, or a limited partnership or limited liability partnership.

The partnership itself is not a taxable entity. However, it still must file an annual return to report operations information, though it does not pay income tax. Instead, business income is reported as pass-through income to partners, and they are taxed on that income through their individual tax returns.

Pros:

  • Easier to get capital than with a sole proprietorship
  • Share the financial burden
  • A partnership doesn’t pay income taxes

Cons:

  • Partners are personally liable for other partners’ debt

Limited liability company

A limited liability company (LLC) is a common business structure because it’s somewhere between a partnership and a corporation. The business owner could be a single member, or it could have multiple members.

As with a partnership, members report their business income on their personal tax returns, but they may still have to pay self-employment taxes.

Pros:

  • Income is passed through
  • Some liability protection
  • More opportunities to raise capital
  • Income that’s considered surplus is not taxed

Cons:

  • Members may have to pay self-employment tax

Cooperative

Cooperatives, or co-ops, are legal entities that are operated by the people they serve. Members vote on business decisions by owning shares, and they all benefit from the profits. Even though co-ops are operationally similar to corporations, income is still passed through to the members, and they pay taxes on their personal returns.

Pros:

  • Surplus earnings are not taxed
  • May apply for government grants
  • Pass-through tax structure

Cons:

  • Owners may not see as much profit

C corporation

Many people decide to form a corporation to take advantage of the limited liability benefits, meaning that the entity protects the owners from both legal and monetary responsibility.

Unlike the other business structures, corporations have to pay income taxes on profits since they are taxable entities. This fact can lead to double taxation for owners in some instances—the corporation pays taxes on profit and then again when shareholders receive dividends.

Pros:

  • Liability protection
  • Easier to get funding
  • Corporate taxes can be lower than individual taxes

Cons:

  • Double taxation
  • Individuals don’t have as much control

S corporation

S corporations are separate legal entities, but they are treated like a partnership or LLC in that they are not taxable themselves. Income is passed through to owners who report the income on their personal returns.

Pros:

  • No double taxation
  • Liability protection
  • Owners are separate from the company

Cons:

  • Cannot have more than 100 shareholders
  • Not as attractive to investors as C corporations

Find the right fit with the help from a tax professional

There are numerous options when forming a business. You have to consider how you’ll generate capital and whether it’s essential if a structure will attract investors. And each possibility is treated differently when tax season rolls around, so it’s important to weigh the pros and cons.

If you’re unsure what’s right for you, work with the team at Provident CPA and Business Advisors. We’ll provide guidance on structuring a business in the most tax-efficient manner possible.

Contact our team of professionals to get started.

How to Avoid (or Survive) an Audit from the IRS

A tax audit can be the worst nightmare for many business owners. But there are proactive ways to prevent an audit and get through it if it does happen.

A tax audit may sound daunting and expensive. Many business owners fear the IRS and potential penalties and fees incurred if they do something wrong.

The good news is that audits are rare, and the IRS audit rate has even fallen in recent years. In 2019, the IRS audited just one individual taxpayer out of every 220; 10 years ago, the rate was 1 in 90.

Still, it’s important to know how you can avoid an audit from happening in the first place. And if you do end up getting audited, learn how to get through it without too much headache.

Preventing a tax audit

First, let’s talk about how you can avoid an audit altogether. The tax returns that the IRS audits are generally very complex, and audits usually occur to ensure that all income was reported and that you only took legal credits and deductions. 

Fortunately, there are a few specific steps you can take that will reduce your risk of experiencing. These include:

1. Be honest.

The number-one way you can prevent a tax audit is by telling the truth. Many taxpayers try to cheat the system, whether by leaving off income or stretching a deduction, but this only increases the chances of a lengthy audit that could end them in trouble or with significant fines. Be completely truthful about expenses and income, even if you don’t think you’re at risk for an audit.

2. e-File.

According to the IRS, paper returns have a 21% error rate, while e-filed returns have a 0.5% error rate. Thus, consider filing electronically for greater accuracy.

3. Be careful with credits and deductions.

This is an important one, especially for the self-employed. Deductions like luxury entertainment items that are ostensibly used for business purposes can turn into a red flag for the IRS. Whatever you claim as a business expense has to be used for business purposes. Be reasonable with claimed deductions—make sure you’re actually eligible, and all numbers are accurate.

4. Maintaining records.

Sometimes a tax return is inaccurate because a taxpayer has failed to maintain tight records. Keep all of your receipts for business expenses and ensure you’ve accounted for every channel of income. Track your purchases as well as assets. Store everything in one place, so it’s easier to complete your return when the time comes.

5. Get tax help from a professional.

The last tip for avoiding an audit will essentially help you with all the above steps. Work with a professional who understands tax laws. Your best bet in getting your taxes done right is to hire a qualified CPA who will walk you through best practices and deductions for which you are eligible.

Surviving an audit

If you’ve done everything you can and are still facing an IRS audit, there are ways to get through it. Here are some audit best practices to help you along the way. 

1. Look at your recordkeeping system.

Reevaluate your books. You need an efficient method for tracking business costs and expenses. Your accounting system should be tight and straightforward so that all transactions are accounted for. Everything should be organized so it can be presented well for the audit.

2. Respond quickly.

Most audits are conducted by mail but, in rare cases, they’re done at an IRS office or your home or business. When you receive a notice in the mail, it’s crucial that you respond immediately to avoid penalties. You will likely be asked to provide additional documentation to support the claims on your tax return. Deliver everything following the agency’s specific instructions.

3. Be prepared to advocate. 

The IRS may then start to ask additional questions, and they may not agree with something you provided on your return. Be prepared to present all the facts and advocate for your return if you know you have done everything correctly. 

Your best bet for getting through an audit is to follow all instructions closely, respond immediately, be as transparent as possible, and be willing to work with the IRS to get the matter resolved. The case will eventually be closed, either with the IRS proposing no changes to your return or specifying adjustments. If you disagree with the decision, you can appeal within 30 days of receiving their summary. 

Work with experienced tax professionals

Whether you’re trying to avoid an audit or facing one, work with a tax professional who will help you understand tax law and everything you’re eligible to claim. They will be there to support you during the audit to ensure you’re responding promptly and are working out all details to avoid penalties and further issues. And with the right advice, you’ll likely avoid this scrutiny altogether.

The team at Provident CPA and Business Advisors is ready to assist you with your tax or business questions. Contact us today to get started.