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Reminder: Fourth Quarter Estimated Taxes Due

1/8/2018

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Reminder: Fourth Quarter Estimated Taxes Due
If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The fourth-quarter due date is now here.

Normal due date: Tuesday, January 16, 2018

Remember, you are required to withhold at least 90 percent of your current tax obligation or 100 percent of last year’s federal tax obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:
  • Underpayment penalty. If you do not have proper tax withholdings, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. So a payment at the end of the year may not help avoid the underpayment penalty.
  • W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it were made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.
  • Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.
  • Don't forget state obligations. Except for a few states, you are often required to make estimated state tax payments when required to do so for your federal tax obligations. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well.

*If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty.
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Small Businesses: Be Alert to Identity Theft

1/3/2018

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Small Businesses: Be Alert to Identity Theft
​If you own a small business, be vigilant against a growing wave of identity theft against employers. Small business identity theft is a big business for identity thieves. Just like individuals, businesses may have their identities stolen and their sensitive information used to open credit card accounts or used to file fraudulent tax refunds for fake refunds.

In the past year, the IRS has noted a sharp increase in the number of fraudulent Forms 1120, 1120S, and 1041 as well as Schedule K-1. The fraudulent filings apply to partnerships as well as estate and trust forms.

Identity thieves are displaying a sophisticated knowledge of the tax code and industry filing practices as they attempt to obtain valuable data to help file fraudulent returns.

Identity thieves have long made use of stolen Employer Identification Numbers (EINs) to create fake Forms W-2 that they would file with fraudulent individual tax returns. Fraudsters also used EINs to open new lines of credit or obtain credit cards. Now, they are using company names and EINs to file fraudulent returns.

As with fraudulent individual returns, there are certain signs that may indicate identity theft.

Business, partnerships, and estate and trust filers should be alert to potential identity theft and contact the IRS if they experience any of these issues:
  • Extension to file requests are rejected because a return with the Employer Identification Number or Social Security number is already on file
  • An e-filed return is rejected because of a duplicate EIN/SSN is already on file with the IRS
  • An unexpected receipt of a tax transcript or IRS notice that doesn’t correspond to anything submitted by the filer
  • Failure to receive expected and routine correspondence from the IRS because the thief has changed the address
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2018 Mileage Rates: New Mileage Rates Announced by the IRS

12/22/2017

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2018 Mileage Rates: New Mileage Rates Announced by the IRS
​The IRS recently announced mileage rates to be used for travel in 2018. The business mileage rate increases by one cent. The medical and moving mileage rates are also raised by one cent. Charitable mileage rates are unchanged.

New Mileage Rates for 2018

Mileage
Rate/Mile
Business Travel
54.5​¢
Medical/Moving
18​¢
Charitable Work
14​¢
​Remember to properly document your mileage to receive full credit for your miles driven.
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IRS Interest Rates Remain the Same for the First Quarter of 2018

12/20/2017

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IRS Interest Rates Remain the Same for the First Quarter of 2018
The IRS recently announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2018. The rates will be:
​
  • four (4) percent for overpayments [three (3) percent in the case of a corporation]
  • 1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000
  • four (4) percent for underpayments
  • six (6) percent for large corporate underpayments
​
Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. For individual taxpayers, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
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Credit Card Transactions Could Pose Audit Risk: What Small Businesses Need to Know

12/15/2017

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Credit Card Transactions Could Pose Audit Risk: What Small Businesses Need to Know
​Small business owners beware: the IRS may more closely scrutinize reporting of credit card transactions after it was criticized for lax enforcement.

The IRS' overseer, the Treasury Inspector General for Tax Administration (TIGTA), recently said the IRS had been missing opportunities to audit tax returns that had large discrepancies between income and the card payments reported on Forms 1099-K.

This means small businesses that accept credit, debit, or gift card payments can expect to draw the attention of IRS auditors if there are material differences between what is reported on their tax returns and what is on their 1099-Ks.

​Tax Gap Concern Driving the Scrutiny

​TIGTA has estimated an underpayment of more than $450 billion in income taxes every year. In an effort to close this "tax gap," it recommended the IRS focus on some of the larger or more obvious sources of underpayment.

One area TIGTA identified was on Forms 1099-K, where more than 20,000 taxpayers who received them had discrepancies of more than $10,000 on their returns. Calculating from this small sample size, there was at least a $200 million underpayment.

​Who Is Impacted

​If you have a business that accepts payment cards like debit cards or credit cards, you will probably receive a Form 1099-K from your payment processor. The form is also required for anyone who has $20,000 in card payments and 200 transactions or more per year. Examples of those who would receive Forms 1099-K include users of PayPal, sellers on Ebay and Etsy, cab drivers and any small business that accepts card transactions as a form of payment.

​Here's How You Can Prepare

​Receiving a Form 1099-K and reporting it in such a way that the IRS is satisfied can be complicated. You could easily double-report your revenue from 1099-Ks out of an excess of caution. Or, you may not be disclosing your correct reporting of card income in a way that IRS audit programs are able to identify. It's often best to get professional guidance to ensure your return does not stick out when the IRS tries to comply with the TIGTA request for more oversight.
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How to Record and Report Business Expenses

10/30/2017

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How to Record and Report Business Expenses
Recording and reporting business expenses is a missed opportunity for many business owners and employees. Much of what you spend for business purposes is tax-deductible. ​Knowing whether you can or can't expense a purchase for business purposes can be difficult. Nevertheless, here are a few general guidelines to help.
​
​According to the IRS, business expenses must be ordinary and necessary to be deductible. That means they are normal and recognized in your business, as well as helpful and appropriate. You'll need to keep records (such as statements and ledgers) and supporting documents (receipts and invoices) to verify your deductions. Some expenses are subject to extra requirements, as described below.

Travel Expenses

​Travel expenses pertain to business trips and can include transportation to and from airports, your hotel and business meeting places. They also generally include lodging, meals, tips and other related incidentals.
  • Do Maintain trip logs describing your business expenses and the purpose of each. If your trip is mostly for business but includes personal components, separate them in your log. These nondeductible personal items could include extending your stay for a vacation or taking personal side trips.
  • ​​Do Deduct travel-related meal costs, but only up to the 50 percent limit allowed by the IRS.
  • Don't Rely on estimates to determine if an expense is business or personal.
  • Don't Deduct any of your travel expenses if your trip is primarily for personal purposes.
  • ​Don't Deduct any of your meal costs if they could be considered unreasonably extravagant.

Entertainment Expenses

​Entertainment expenses need to be either directly connected to or related to the conduct of your business. That means that business is the foremost purpose of the activities and it's very probable you'll get income or future business benefits as a result. Expenses from entertainment that aren't considered directly related may still be deductible if they are associated with your business and occur just before or after a significant business conversation.
  • Do Keep records of entertainment expenses, including who was present and clear descriptions of the nature, dates, and times of the relevant business discussions.
  • ​Do Deduct up to 50 percent of entertainment expenses, as allowed by the IRS.
  • ​Don't Claim the costs of pleasure boat outings or entertainment facilities (e.g., hunting lodges) that are not related to business activity.

Mileage

​Business use of your personal car is calculated according to your actual business-related expenses, or by multiplying your business mileage by the prescribed IRS rate (53.5 cents per mile in 2017).
  • ​Do Log odometer readings for each business trip and record your business purpose.
  • ​​Do Claim actual business deductions by applying the ratio of your business-miles-to-total mileage.
  • ​Don't Claim mileage or expenses pertaining to commuting to and from work.
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How Is Bartering Taxed?

8/24/2017

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How Is Bartering Taxed?
​The IRS is clear on their point of view. If you barter you must include the barter activity's fair market value as income on your tax return in the year the barter activity is performed. But is it really that simple? Here are some things to consider if you barter.

What is fair market value?

​The classic definition of "fair value" is the price someone is willing to pay and someone else is willing to receive for the exchange of goods or services. But we all know this requires a level of judgment. What if an item is on sale when the barter activity is performed? Are prices always the same for a similar item or service? Prior to establishing the value of a barter item, shop around and take the lowest defendable value possible for your bartered item.

Example: You barter dog grooming for accounting work. If you offer a range of prices from $20 to $60 for your grooming service and a dog owner can readily get the same service done for $15 somewhere else... what is the fair market value? If you can reasonably substantiate the $15, this lower amount could become your fair market value.

​What about your costs? 

The IRS barter documentation is so focused on capturing and taxing your barter income, it under informs taxpayers on the reasonable reporting of costs associated with that income.

Example: If two retailers exchange wholesale goods of equal value for resale, the cost of goods could logically eliminate much of the fair market value of the barter income. What if the fair market value of the goods received is worth less because you discover it is distressed? Then you could actually have a barter based loss on your books.

​Is the barter fair? 

​If you are bartering with another firm, look at the “tax value” of the barter. This is because a part of a barter of services may include your time. In the example below, one can expect there to be more hard costs for a painter (paint, brushes and other supplies) versus a lawyer. This can change the true tax value of a barter for two sole proprietors.
Example: A painter exchanges $3,000 house painting with a law firm for legal services.
Item
Painter
Law Firm
Barter Income
$3,000
$3,000
Less: Hard Costs
(1,000)
(250)
Net Barter Income
$2,000
$2,750
If both firms are sole proprietors, the salary of the owners is reflected in their net income. Self-employment taxes, sales taxes, and other taxes would also need to be applied to the net income number of each barter participant. In this case, the barter does not appear equal.

​Caution with Barter Exchanges

With barter exchanges you receive credits (vouchers) for your provided services prior to using those credits on another service. Since you are required to report income when your service is provided, you could potentially have barter income without receiving the benefits for your barter activity until later years.

Clear Reporting

If you use bartering in your business, you generally report the activity on 1099-B's each year, separate from other informational reporting.
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Turning Your Hobby into a Business

8/10/2017

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Turning Your Hobby into a Business
You’ve loved dogs all your life so you decide to start a dog breeding and training business. Turning your hobby into a business can provide tax benefits if you do it right. But it can create a big tax headache if you do it wrong.
​
One of the main benefits of turning your hobby into a business is that you can deduct all your qualified business expenses, even if it results in a loss. However, if you don’t properly transition your hobby into a business in the eyes of the IRS, you could be waving a red flag that reads, “Audit Me!” The agency uses several criteria to distinguish whether an activity is a hobby or a business. Check the chart below to see how your activity measures up.

​The Business-Versus-Hobby Test

BUSINESS
versus
HOBBY
You have a reasonable expectation of making a profit.
Profit Motive
You may sell occasionally, but making money is not your main goal.
You invest significant personal time and effort. You depend on the resulting income.
Effort and Income
It's something you do in your free time; you make the bulk of your money elsewhere.
Your expenses are ordinary and necessary to run your business.
Reasonable Expenses
Your expenses are driven by your personal preferences and are not strictly necessary.
You have a track record in this industry, and/or a history of making profits.
Background
You don't have professional training in the field and have rarely or never turned a profit.
You have multiple customers or professional clients.
Customers
You have a few customers, mainly relatives and friends.
You keep professional records, including a separate checkbook and balance sheet; you have business cards, stationary, and a branded business website.
Professionalism
You don't keep strict professional records of your activities; you don't have a formal business website or business cards.

Honest Assessment

If your dog breeding business (or any other activity) falls under any of the “hobby” categories on the right side of the chart, consider what you can do to meet the business-like criteria on the left side. The more your activity resembles the left side, the less likely you are to be challenged by the IRS.

On the other hand, if you determine that you’re really engaged in a hobby, there are still some tax benefits to be had. You can treat hobby expenses as a miscellaneous itemized deduction on a tax return, but generally not more than hobby income. They can be used to reduce taxable income if they and other miscellaneous expenses surpass two percent of your adjusted gross income.
​
If you need help to ensure you meet the IRS’s criteria for business-like activity, reach out to schedule an appointment.
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Buying or Selling a Business: Mistakes to Avoid

8/8/2017

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Buying or Selling a Business: Mistakes to Avoid
​It is said with every major purchase there's some kind of remorse either on the part of the buyer or the seller. This can be especially true when buying or selling a business. No matter which side of the negotiating table you sit on, there are some critical areas that could leave you with feelings of regret. Avoid these mistakes and you'll feel better about your deals after they're done.
SELLER MISTAKES
 
BUYER MISTAKES
  • Not researching the value of similar businesses within the industry
  • Overestimating the value of the company and losing a well-qualified buyer
  • Insisting on cash-only terms 
Selling Price
  • Overpaying based on emotion
  • Stretching personal resources too thin 
  • Maintaining sloppy financial records that potential buyers cannot trust
Accounting Records
  • Relying on company financials not prepared by a third-party accounting professional
  • Not requesting payroll returns and other tax filings in the financial review 
  • Agreeing to seller-financing without proper vetting of the buyer's creditworthiness  
Financing
  • Settling for a high-interest loan, or one with too short a maturity
  • Selling the assets of the business when it would have been more tax-efficient to sell the corporate shares instead
Assets
  • Purchasing less than all of the assets used in the business, overlooking items such as licenses, patents or important contractual arrangements
  • Making a stock-purchase transaction without understanding the benefits of an asset purchase
  • Neglecting to check the background of the buyer and assessing their ability to run a business
  • Failing to verify the buyer's liquid assets
Due Diligence
  • Not asking why the business is for sale
  • Conducting too little research into the competition or overall industry trends
  • Not searching for the existence of company loans and other liabilities
  • Signing a non-compete agreement that is too restrictive in scope or timeframe
Non-Compete
  • Failing to require a non-compete clause from the seller, especially in a service-industry business
  • Leaving too much of the sale price dependent on the ongoing success of the company
Transaction
  • Having unclear expectations for seller participation in the business after the sale  
  • Not positioning the business to sell well in advance of the first offer
  • Requesting professional help too late in the sales process
Expert Help
  • Not assembling a team of legal, tax, and insurance experts before agreeing to terms
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Top 5 Home Office Deduction Mistakes

7/18/2017

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5 Home Office Deduction Mistakes
If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.

It is a tricky area of the tax code that's full of pitfalls for the unwary. Here are some of the top mistakes people make:
  1. Not taking it. This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chance of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.
  2. Not exclusive or regular. Your home office must be used exclusively and regularly for your business. Exclusively: If you use a spare bedroom as a business office, it can't double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate your deduction. Regularly: Your office should be the primary place you conduct your regular business activities. That doesn't mean that you have to use it every day nor does it stop you from doing work outside the office, but it should be the primary place for business activities such as record keeping, billing, making appointments, ordering equipment, or storing supplies.
  3. Mixing use with other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer doesn't provide you with a local office. Unfortunately, this means if you run a side business out of your home office, you cannot also bring work home from your employer and do it in your home office. That could invalidate your use of the home office deduction.
  4. The recapture problem. If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. When you later sell your home you will need to account for this depreciation. The depreciation recapture rules create a possible tax liability for many unsuspecting home office users.
  5. Not getting help. There are special rules that apply to your use of the home office deduction if:
    • You are an employee of someone else.
    • You are running a daycare or assisted living facility out of your home.
    • You have a business renting out your primary residence or a vacation home.
​The home office deduction can be tricky, so ask for help, especially if you fall under one of these cases.

​Simplified Home Office Deduction

​​There's a simple "safe harbor" home office deduction. You take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 deduction under the simplified option. However, your savings could be much greater than $1,500, so it's often worth getting help to calculate your full deduction using the standard rules.
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