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.  

Making the Most of C and S Corporations

Both types of corporations give certain tax benefits, including additional deductions. Learn how they differ and why using both may provide you the best of both worlds.

When you’re running a business, you have a few options for creating a business structure, including a sole proprietorship, partnership, corporation, or LLC. Each of these options has its own set of pros and cons related to taxes and liabilities, so factor in where you see the business going and your goals. 

Do you imagine the business scaling? Who is involved? What tax benefits are most important for your situation?

Going the corporation route is a smart option for many different organizations. Whether you choose to form an S corporation or a C corporation will depend on factors like tax advantages, the way you pay shareholders, and deductions. 

Let’s look at why you would form a corporation in the first place and the differences between S and C corporations.

Why choose a corporate business structure?

S and C corporations provide additional benefits from some other business structures. Incorporating is a good option if you:

  • Need to create more investor interest
  • Want additional liability protection
  • Want to establish more credibility
  • Want the business to have an unlimited life
  • Want to have a public company eventually

Corporations provide additional protection so that your business has a bit more authority in the market, and you can separate more of the corporation’s liability from your own. For example, in a sole proprietorship, the owner and the business are considered the same legal entity, so you’d be liable for business-related debts.

When you form a corporation, it will automatically be a C corporation unless or until you elect S corporation status. Here’s a deeper dive into the primary tax implications and other benefits of these two structures.

C corporation pros and cons

The biggest disadvantage of a C corporation is the potential double taxation factor. The corporation pays corporate income tax on income, and its shareholders must also pay personal income tax on dividends from the corporation. 

However, they can also offer fringe benefit deductions and allow you to avoid the alternative minimum tax (AMT). C corps have a full deduction of benefits like employees’ health insurance, life insurance, and long-term care premiums, and fringe benefits like vehicle costs and public transportation passes are deductible.

Additionally, C corporations can give you lower tax rates. For example, your first $50,000 in taxable income is taxed at 15% instead of the top marginal rate at which S corporations would be taxed (35%).

S corporation pros and cons

A significant benefit of an S corporation is pass-through taxation (as with a partnership), meaning the corporation doesn’t pay federal corporate taxes. Income is passed through to shareholders, who then report it on their personal tax returns and avoid double taxation seen with the C corporation. Shareholders also don’t have to pay self-employment tax on their share of S corporation profits.

Additionally, you could qualify for the pass-through business income deduction of 20% since an S corporation is a pass-through entity. But this only applies to allocations of S corporation profits that are pass-through income, not compensation that the S corporation pays to you. 

A disadvantage of an S corporation is that most fringe benefits the corporation gives to employee-shareholders owning more than 2% of the corporation are taxable as compensation

Why create both a C and S corporation?

When you’re unsure which corporation to form, you can actually take advantage of both. Many owners choose to get the best of both worlds by creating a C corporation and using a pass-through entity such as an S corporation. You just need to set up two entities for different aspects and functions of the business. 

For example, you can use the C corporation for administration or marketing and the S corporation for operational costs or non-deductible expenses like client entertainment. You can then take advantage of the additional tax deductions of a C corporation as well as the pass-through taxation benefits from the S corporation, and your assets will be protected. 

Working with tax professionals

If you’re weighing the pros and cons of C and S corporations and are unsure how to proceed, work with an experienced tax professional who can review your situation and guide you forward. The experts at Provident CPA and Business Advisors are ready to assist. We help you understand each business structure and its benefits and how you can pay the least amount of tax legally possible. 

Contact our team to learn more about how we can help your business succeed.

Examining the Delayed Tax Refunds of 2020

COVID-19 caused a delay in the tax return filing deadline, giving taxpayers extra time during this uncertain economic time. But the IRS still hadn’t processed millions of returns by October.

The IRS responded to the COVID-19 pandemic by extending the deadline for tax filing in 2020. Many welcomed the grace period in a year that caused huge shifts in the economy, including business closures, lay-offs, and an increase in the unemployment rate. However, one downside is that many people were still waiting to receive their tax refunds, even as we approached the end of the year.

So, what’s causing the delays, and what should you expect if you’re still waiting? The answers could also have implications for your 2021 taxes.

2020 IRS delays in refund processing

The IRS delayed the tax deadline in 2020 to July 15 to help American taxpayers struggling through the pandemic. Some taxpayers could have also extended that deadline further—until October 15—if they filed IRS Form 4868 by July 15.

In October, it was reported that the IRS still had not processed 2.5 million income tax returns that came in hard copy by the deadline. Considering that 70% of returns last year resulted in a refund, that’s a lot of taxpayers who still hadn’t received their checks.

Are you waiting on your refund? Taxpayers can check on their tax refund status, but only if they filed electronically. Those hard-copy tax returns that haven’t yet been processed can’t be tracked. However, e-filers also saw delays in receiving their tax refunds, so it’s wise to log onto the “Get Refund Status” tool from the IRS to see where you stand.

One reason for the backlog could be that the IRS is understaffed and underfunded. Even before the pandemic, the organization was struggling. The agency had also sent many late refunds in 2019, had poor customer service performance, and was trying to manage increased workloads with significant funding shortages. 

The IRS’s budget has been cut by around 20% since 2010, and the agency lost 22% of full-time employees. These are major challenges for any year but especially in 2020.

Other reasons for delayed refunds

There are common reasons for refund delays in any typical tax year, some of which taxpayers can help avoid themselves. These include the following:

  • Your tax return is incomplete or inaccurate
  • Tax fraud has occurred, meaning someone else filed in your name illegally in an attempt to get your refund
  • You submitted a return amendment
  • Bank account information for the deposit was inaccurate
  • Certain claimed tax credits have caused the IRS to take a closer look at the return
  • The refund is being used to pay debt

When these issues are compounded with a pandemic’s challenges, even more severe delays are sure to occur.

Tax refund interest

Another interesting development in 2020 that applies to 2019 tax returns is the IRS-paid interest on late tax refunds. Law requires the IRS to pay interest on individuals’ tax refunds who were impacted by a federally declared disaster and filed by July 15. In a typical year, the IRS pays interest when a refund is delayed for over 45 days. However, this rule doesn’t apply to individuals who qualify for disaster relief.

This means that if a taxpayer receives a 2019 tax refund after April 15, 2020, it will include interest. According to the IRS, the average interest payment is $18. The interest rate for the third quarter of 2020 was 3%, down from 5% in the second quarter.

Where to go when you have tax questions

There continue to be many uncertainties facing our country, including whether another round of stimulus will be distributed and whether 2021 will bring the same tax challenges. And it is reasonable to suspect many of the delays seen in 2020 will extend into next year’s returns.

The team at Provident CPA and Business Advisors is here to help you during these ambiguous times. Whether you are an individual taxpayer or running a business, we can help break down tax laws that apply to you. We also help you pay the least amount of tax legally possible by ensuring you claim all applicable deductions and credits

Contact Provident CPA and Business Advisors to learn more. 

Tips for Deducting Travel Costs and Meal Expenses on Your Taxes

Business owners can run into considerable costs when traveling for work, but some of these expenses can provide deductions come tax time.

Travel may have been curtailed during the pandemic, but it remains necessary for many self-employed individuals across the country. 

When you travel multiple times per year to meet with clients or negotiate contracts, the costs can quickly add up and begin to hinder your bottom line. Travel is about more than plane tickets and hotels; meals, ground transportation, and miscellaneous expenses add up.

The good news is that tax deductions are available for many business travel expenses, including transportation costs and meals. 

Here’s a look at the things you can write-off and the documentation you’ll need to keep the IRS happy.

Deducting meal expenses

You’re going to need to eat while on the road, and, luckily, you can deduct some of these expenses. 

According to the IRS, business owners can deduct 50% of their meal costs as long as they’re a legitimate business expense. If the meal is a primary part of your business function, a community event you’re sponsoring, or a charity dinner, you can often deduct 100% of the cost.

Keep in mind that you can’t deduct personal meals while on a business trip. For example, if you meet with a family member for dinner while traveling for business, you can’t write off the bill. 

You must ask for a receipt for meals you plan to deduct from your taxes. While you don’t have to include this receipt with your tax return, you might need to show it if the IRS audits you later. 

Transportation tax deductions

You can deduct transportation costs for business travel, no matter which method you use. 

According to the IRS, you can deduct 57.5 cents per mile when driving your personal vehicle in 2020, plus add the cost of tolls and parking onto the deduction. In theory, this tax-deductible business expense should offset the cost of gas and upkeep on the vehicle when using it for work.

If you choose to take a plane, bus, or train to your destination, you can deduct your ticket’s cost from your taxes. Taxi and other transportation modes between the airport or station and your hotel and your hotel and your work location also count. 

When renting a car in the city where you’re working, you can write-off the expense when using the car entirely for business. If you’re using the vehicle for personal reasons, too, only a portion of the cost is eligible.

Other deductible expenses

Other items are tax-deductible, as well, depending on the nature of your trip and what expenses you incur.

For example, you can write-off your hotel room if you’re unable to return home on the same day. Remember, however, that only essential expenses are eligible. You can’t deduct minibar charges or movie rentals. Make sure you ask for an itemized bill when checking out of your hotel room because the IRS will want to see it if they ever audit you.

There could be situations, like giving a presentation, where an equipment rental is necessary on a business trip. This expense is deductible, assuming that the rental is entirely for business reasons.

Other deductible expenses include conference fees, dry cleaning expenses, telephone and fax charges, and tips you provide to service staff while on a business trip.

Things you can’t deduct!

Before filing your taxes, be aware of specific items you can’t deduct. Failure to follow the rules could lead to an audit, which you surely want to avoid.

You can’t deduct most entertainment costs, for starters, including tickets to sporting events, country club memberships, fishing trips, and nights at a bar. Even if you’re conducting business in these settings, the activity is considered entertainment. 

You also can’t deduct lodging expenses within your home city. While you can write-off meal and vehicle mileage in your home city, the IRS won’t like it if you attempt to deduct a hotel room, even if you’re attending a conference nearby.

It’s perfectly acceptable to bring your family with you on a business trip, but don’t try to deduct their travel costs. The hotel room remains a business expense because you’d need it anyway, but your family’s plane tickets and meals are considered recreational.

Although it’s a somewhat vague term, you aren’t permitted to deduct “unreasonable” expenses on your taxes. The problem is that there is no official definition for these expenses, so don’t go overboard and stick to things that you know qualify to avoid an audit.

Keep a keen eye on your tax situation

If you still aren’t sure about what you can deduct and how to claim these items on your return, working with a professional can help. This assistance ensures that you make the maximum entitled deductions without running afoul of rules that will get you audited.

The team of experts at Provident CPA & Business Advisors is standing by to assist as you make tax deductions related to your travel and meal expenses. Get in touch to learn more.

Tax Planning for Locum Tenens Physicians

New to a locum tenens assignment? To optimize tax planning and maximize savings, here are important factors to consider.

Being a locum tenens physician gives you a great deal of flexibility, providing new opportunities during a career and a chance to gain further professional experiences and perspectives. You can potentially work in locations you wouldn’t otherwise, including different states and perhaps even countries. 

There’s plenty to consider when you’re taking on these roles, including moving costs, where you’ll live, your new employer, and plans for the future. And there are also unique tax implications from being a locum tenens physician since you will be most likely be working as an independent contractor during your assignment. 

Here’s what you need to know about tax planning for locum tenens positions:

1099s and paying estimated taxes

Up until now, you may have always been a W-2 employee, meaning taxes are taken out of your paycheck each month by your employer, and you simply have to file an annual return. When you start as a locum tenens doctor, you become an independent contractor—meaning you’ll receive a 1099 form from your employer instead of the W-2. This income is still reported to the IRS by a locum tenens employer.

As an independent contractor receiving one or more 1099s, you’ll probably have to pay estimated quarterly taxes. You’ll only receive the 1099 annually, so you have to keep track of your income and calculate how much you owe to the IRS each quarter. When it’s time to file the annual tax return, you’ll report your 1099 income on Schedule C (Form 1040 or 1040-SR).

Depending on the type of business structure, the rules on when and how much you pay will vary. But be prepared to set aside more for taxes, since you’ll be covering your employer’s share of FICA taxes as well as your own, unlike W-2 employees.

Writing off expenses

A benefit of being an independent contractor is that you can write off work-related expenses. If you have to move for your locum tenens assignment, for example, you can usually write off the costs of moving and travel. Other deductions apply to a home office (if applicable), retirement savings, and sometimes your car. Make sure you save all receipts and records and document your business expenses when they occur.

You may qualify for many other deductions, so walk through your expenses with a tax professional. It’s crucial to take advantage of all available tax credits since you’ll be covering more in taxes as an independent contractor.

Creating a tax entity

Some locum tenens physicians decide to create an LLC, PLLC, or corporation to gain more control over their taxes. Sometimes, it might make more sense for you to create one of these business structures if you are earning a lot in your temporary position or paying a significant amount in self-employment tax. However, don’t make the call without first talking through your situation with a CPA.

Filing in the right locations

Just because you’re temporarily working in another state doesn’t necessarily mean you don’t have to file taxes in your home state. You will likely have to file in both locations. And if you’re working in multiple states, you will have to pay taxes to all of them, though you won’t have to pay taxes on the same income more than once. 

If you’re taking on an international locum tenens position, you’ll still be taxed by the IRS on income earned outside the country, in most cases.

Finding the right tax help 

It’s incredibly beneficial to find a qualified tax professional to assist you if you are a locum tenens physician. The aforementioned tax considerations will vary based on your specific situation—where you’re practicing, for how long, the type of business entity you’ve created, and more. A tax professional will help you understand when to pay taxes, what you can deduct, and how much to pay quarterly, if applicable. 

Provident CPA & Business Advisors can provide the peace of mind that you’re filing correctly and taking advantage of each and every deduction available to you. Changing locations or job duties for a locum tenens assignment can already be chaotic, so allow us to help manage your tax burden. 

Contact Provident to learn more.

Paying Tax on Insurance Premiums and Benefits

Being aware of your tax situation and where you can avoid paying it could bring considerable savings to both individuals and businesses.

Insurance is a necessity because it protects you from uncertainty. Without this safety net in place, you could end up with out-of-pocket expenses that take you a lifetime to repay. With apologies to Benjamin Franklin, “death and taxes” are the only certainties in life.

But there is undoubtedly a way to minimize the latter part of that idiom. Specific tax considerations go hand-in-hand with insurance premiums and benefits, and you’ll want to learn where you can avoid paying tax and where it’s a requirement.

Tax savings are available to both individuals and businesses that depend on the type of insurance. So let’s look at the ways you might save on your next tax bill:

Tax savings for employees

On a personal level, learning how your taxes and insurance policies are connected can save you money now and in the future.

When it comes to employer-paid life insurance, the premiums paid on these policies count as taxable income, but only if the plan covers an individual for over $50,000. When a policy becomes larger than that number, the premiums are exposed to federal taxation for the excess.

If you have disability insurance, things are a little more complicated, and you’ll have to consider your options carefully. The gist is that self-employed individuals can deduct insurance premiums on policies that cover business overhead while sick or disabled, but not on policies that cover lost wages.

In addition, if you deduct your overhead-covering premiums from your taxes, the benefits you receive become taxable income. If you don’t deduct the premium, however, the benefits aren’t taxable. Carefully decide whether or not to deduct your insurance premiums based on your situation.

Disability benefits are also taxable if your employer pays for your disability insurance. Basically, if you get sick and receive disability benefits, you’ll pay income tax on them.

From a healthcare standpoint, employees who don’t have access to group health coverage can fund a healthcare savings account and receive tax savings. Through this account, you can put tax-deductible money away for medical expenses and then withdraw it, tax-free, when you need it. This policy is like investing in personal medical insurance, and you get tax benefits along with it.

There are many ways for individuals to use insurance for tax benefits, so make sure you’re up to date on the latest rules and regulations to maximize your savings.

Business insurance tax considerations

Things are a little more complicated when buying business insurance, and tax savings (and penalties) could come in various ways.

Multinational insurance

For starters, if you have a global presence, you’ll likely want a policy in every country where you have operations, so it’s consistent with local insurance regulations and tax law.

These insurance considerations are also essential for taxes because if you go with a U.S.-based insurance company that isn’t licensed to insure you in a foreign country, the IRS could view any reimbursement you see as taxable income. Depending on your organization’s configuration and the amount of your payout, you could be on the hook for paying up to 21% on this income.

You could also have to pay taxes or financial penalties in the country where the loss occurred, putting you even further in the hole.

As a rule, you should purchase an insurance policy in every country in which you’re operating to avoid these tax problems if you need to file a claim.

Loss of key personnel

You can protect all kinds of things with business insurance, including the loss of key personnel. The idea is that if an influential individual within the organization passes away or otherwise becomes incapable of working, your insurance will offset some of the financial casualties associated with that loss.

As far as taxes go, you cannot deduct your premiums as a business expense because your organization is a beneficiary of the payout. At the same time, the company isn’t responsible for paying federal income on the proceeds.

Property and liability insurance

Your business will undoubtedly have property and liability insurance because these policies protect the organization from significant losses, many of which will be outside your control.

You are permitted to deduct the premiums for this insurance from your taxes because they’re considered ordinary and necessary expenses for tax purposes. If the reimbursement you receive is less than your financial loss, the difference also becomes tax-deductible.

Life insurance for employees

We went over some life insurance considerations for employees, but it also has tax considerations for the organization.

If you’re offering to pay life insurance premiums for your employees, it could go a long way toward attracting high-quality talent. The more you provide for workers, the easier it gets to retain this talent for years to come, as well.

From a tax standpoint, C corporations can deduct these premiums from their taxes because they won’t benefit from the payout. As mentioned before, this rule only covers policies with payouts up to $50,000. After that, the excess costs count as taxable wages for your employees.

Split-dollar life insurance policies, where you and a worker share the insurance costs and payout benefit, are not eligible for deductions because the company stands to profit from the plan.

The assistance you need

When you’re unsure about your taxes and whether or not a premium is deductible, you’ll want an expert on your side. Provident CPA & Business Advisors is standing by to answer your tax questions and offer professional advice. Contact us to learn more about our tax strategy services.