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Estimated tax payments for the small business owner: Who, What, When, Where…

Here are the 5 W’s, some H’s, and some pro tips related to estimated tax payments and penalties.

Why do I have to pay estimated taxes?

While you were swimming blissfully in predictable cash earnings and forty-hour work weeks (i.e. an employee for someone else’s company) most if not all of the income tax you were expected to owe for your wages was being withheld and paid to the Fed and State on your behalf (on time). Now that you are working twice as hard for half the pay and wearing too many hats already, Uncle Sam is making you responsible for paying these estimated taxes on your business earnings (quarterly) because he does not want to wait until April 15th to collect.

Who pays the tax?

Whether you are self-employed, a managing partner in a partnership, or an employee of your own corporation, if your business is making a profit (i.e not losing money) then there is a high likelihood that you should be making estimated tax payments on either self-employment income, ordinary income, or both.

PRO TIP - If you have a profit on your business then you might owe self-employment tax even if your taxable income is zero on your 1040.

To reach the largest audience and keep things simple, this article will focus on Single Member LLC owner / members and sole proprietors.

The tax from a single member LLC or a sole proprietorship (or any ‘flow-through’ entity) is assessed on a personal/individual level. This means that you as an active LLC member, business owner, or participating partner are responsible to make payments for your share of the company profit.

What is taxed? The profit that your business ‘flows through’ to you for any given tax period is subject to ordinary income tax and most often self-employment tax.

PRO TIP - Because you do not get a deduction for what you pay yourself, your tax will stay the same if you leave the cash in the business bank account or take it out to pay yourself with it.

To be noted, If you are a partner in a partnership or a shareholder in a corporation, there are differences in the way that distributions and dividends are taxed.

When are the due dates of the estimated payments?

April 15th for Q1 (Jan – Mar)

June 15th for Q2 – (Apr - May) ** only 2 months

September 15th for Q3 – (Jun – Aug)

January 15th of the following year for Q4 – (Sep – Dec) – Pay as much as you can before this date to minimize the failure to make estimated tax payments penalty!

Where can I pay the estimated taxes, online?

You can use www.EFTPS.gov and (for Mass residents) MassTax Connect to make online payments. You can also ask your tax accountant to prepare vouchers for you when he or she is preparing your taxes or get the vouchers online by searching for 1040-ES (make sure you get the right tax year) and your applicable state vouchers.

PRO TIP – Estimated payments from your sole proprietorship, LLC, Partnership, and S-corporation profits should be made from your personal bank account.

Why should I pay them?

You won’t go to jail if you don’t pay estimated taxes on time (or at all) but a few things can happen.

One thing that can happen is penalty; form 2210 calculates it but following this form can be tough. The easiest rule of thumb is 2.66% of your annual underpayment (this method applies if you made no estimated payments for the year).

Another thing, If you are in an installment agreement or involved with an offer in compromise with the IRS for past due taxes then a failure to make estimated payments can jeopardize these agreements or applications.

How can I estimate my tax liability?

There are many variables to the amount of tax due (think tax brackets and itemized deductions) that can create complexity when calculating estimated taxes. It gets more complicated the more money you make (like if you are maxing out Self-employment taxes) and there are often other factors (like W-2 wage over/under withholding or rental property income) to consider.

To get in the ballpark for estimated tax, you should know your income sources and estimated tax bracket. If you think that your business income is going to be in the 25% tax bracket (perhaps because of your spouse’s income) then it may be reasonable to stash away 40% for Federal and State taxes.

How much is the minimum that will keep me out of penalty and How do I know if I need a tax professional?

If you are going to make more money than last year then you can pay 100% of what you had to pay last year or 90% of what you think that you are going to owe this year, divided by 4, on the due dates of the estimated payments. This will get you into a “safe harbor” to avoid penalty. It follows that you should have some liquid cash for the additional tax you will need to pay on April 15th.

If you feel like your taxes are going to be significantly less and you have better things to do with your cash then earn 0% interest from the government (like grow), then talking to a tax professional would be a good choice.

Lyle Phipps, CPA

for Prepared Accounting PC

Using Traditional and Roth IRAs - Tax timing for small business owners

We know you should be saving for retirement and you know that there are (way too many) options. Your co-working space neighbor even said that she opened an IRA online and it was super easy, so you smile, nod, and commit to check it out because it is a step in the right direction. Wait, but what is an IRA actually? Are you even eligible? Which one should you choose? Like most things in the US tax world and small business the answer is, “it depends”. Like a philips or a flat head screwdriver each IRA fits the tax screw in a slightly different way.

Here is the nutshell version. An IRA is a retirement account that should have a tax benefit. Tax money saved is just like money earned now or later and we all like to earn more money (especially easy money). The tax benefit either comes now (Traditional) or later (Roth). As a general rule everybody can contribute the smaller of $5500 or their taxable compensation each year to either Roth or Trad (or a combination of both). If you do make too much for either one than there are tricks that add steps but work to get you the same or similar tax benefits (at least as of the date of this article).

Traditional IRA – The Trad IRA reduces your tax NOW with a current period deduction so it is akin to the pre-tax deductions for your old 401(k) or 403(b) retirement plan when you were employed. However, now that you are self-employed, you actually see the money first then you contribute the bucks just before the filing deadline and get an immediate tax bang in the form of a reduced tax bill. Oh. Yeah. Your $5500 contribution now only cost $4,125 if it works the way it should (assuming 25% tax bracket).

You only getting this tax benefit if your income is low enough to allow your contribution to be deductible (link here), this means it shows up on your tax return front page as an adjustment to your income. This adjustment makes it the right tool if your goal is to keep your AGI low for any reasons (like tuition or financial aid). However, if you can’t deduct the contribution than you should not use a Trad because you are losing the tax benefit

PRO TIP: Because you are a small business owner you can get an immediate tax benefit by using another “tax deferred" style of retirement account (like a SEP) that will duplicate the traditional IRA benefits while you use your annual IRA allowance to cash in on Roth benefits.

Roth IRA – With the Roth you get nothing now but you keep everything later. You pay the tax on $1000, put it in the Roth, let it grow for 30 years, then take out $3000 totally tax free when you retire. We don’t know what the tax rate will be in 30 years but you won’t be paying it.

HISTORY: Senator William Roth had an idea to boost the Federal budget by reducing the use of traditional IRAs so that the government would be able to spend tax money sooner than later. Favorably to you, it worked. Now the government will now have to pay you by giving up the tax when you retire because all those earnings (growth, dividends, etc.) will be coming out of your Roth and filling your sails (tax free) while you watch the sunset shine through Old Glory waving behind your sailboat.

A benefit to having tax free income when you retire is that you might just keep more of your Social Security income free from tax. A little more history tells us that ALL Social Security used to be tax free but then the changed it to “save social security”. Now, if your other income is more than $34,000 on a single return or $44,000 on a joint return, up to 85% of your benefits could be taxed. We won’t speculate (here) what it is going to take to “save social security” once the silver tsunami baby boomers have been collecting for a few years.

If you are considered a high-income earner and your Roth allowance starts to phase out at $118k and once your AGI reaches $133k then you are not allowed to make direct Roth contributions. This is where the Back-Door Roth comes in handy.

Back-Door Roth – This little tax trick allows those who earn more than the Roth AGI limits (and pay more taxes) to avoid being discriminated out of their $5500 annual IRA allowance. This can be done because there is no income limit when you convert Traditional IRA funds into a Roth IRA funds. So, by making an otherwise lame duck non-deductible traditional contribution with your allowance and immediately converting it to a Roth you get your annual gift with a little tax swagger.

PRO TIP: Combinations. Speaking of saavy, if you know what income level you are shooting for than you can tailor your tax return with Traditional IRA contributions and take the rest in Roth. For example, if you kid’s school gives you a 20% tuition discount if your AGI is $50k or under and you make a $55k salary, you can contribute $5k to your Traditional and $500 to your Roth. Now you have your tuition discount AND your full $5500 annual gift from Uncle Sam. Cha-Ching!

Summary – It is never too soon to start saving for retirement so try to use some or all of your annual IRA allowance even when it feels like you need the cash as a security blanket for your new business. Talk to a lender about emergency options and a tax adviser to see if you can get the best of both worlds to balance the need for cash and the need to invest. Spend the time to plan and allow your business to pay you (for your IRA) first to feel more stable during the ups and downs of small business ownership.

#westernmass #ta #tax #accounting #accountant #bookkeeping #smb #smallbusiness #small biz

Massachusetts Community Investment Tax Hack

Looking for an opportunity to be charitable this holiday season? Get a wicked tax bang for your benefactor buck while investing in a (Massachusetts) local community.

Here is how:

Take Beacon Hill up on their Community Investment Tax Credit offer. It pays big because In addition to the Federal tax deduction for charitable contributions, you (a Massachusetts taxpayer) also get a 50% Massachusetts tax credit if and when you give to one of these award winning local community development programs. (e.g. Franklin County CDC)

Basically, because of this deduction and credit combination, you can walk into your certified CDC’s office with a $1000 check for your local community and only $375 will come out of your pocket (assuming 25% federal tax bracket). Sounds good because it is good; just don’t forget to tell your tax preparer that you did it.

Note: This credit is refundable so you will still monetize the full 50% credit even if it reduces your MA tax below zero.

#taxstrategy #masstax #taxcredits #deduction

No more Sales Tax Holiday in Massachusetts for 2016; Mauling your Main St. business

Massachusetts legislature failed to establish the sales tax holiday that retailers have seen for 11 of the last 12 years.

Only once during the recession of 2009 did the holiday not encourage summertime main st. retail sales in the Commonwealth of Massachusetts.

Jon B. Hurst, president of the Retailers Association of Massachusetts said, “To not authorize these two days would be both economically and politically shortsighted,”. The holiday, he said, is “about keeping struggling Main Street in business at a time when tax-free mobile commerce is increasing at alarming rates.” - Credit to Joshua Miller of the Boston Globe for the quote.

Massachusetts sales tax is 6.25% on most retail items (the exceptions are listed here) and the Department of Revenue has estimated that the two day holiday can cost the state as much as 25.5 million in forgone revenues. Amazon and other major online retailers do collect sales tax so this may be partially true but it may be overstated.

What we do know for certain is that Massachusetts retailers DEFINITELY LOSE money when tax thrift shoppers flip what would have been a tax-free weekend of shopping in Massachusetts into a tax-free weekend of shopping in *gasp* Connecticut for their tax holiday (please do not do this) or a New Hampshire getaway (Anytime) whilst whistling the tune of another mauling of Massachusetts main street retailers desperately fighting to compete with online retailers.

Because the issue often comes down to the wire, retailers counting on the summertime cash flow were already advertising for it.

According to Josh Miller of the Boston Globe when the matter was being discussed in July;

"House Speaker Robert A. DeLeo said that pausing the sales tax holiday “may be, possibly be, something we may have to take a look at.”

Additionally, The Senate, said its president, Stanley C. Rosenberg, “has increasingly been skeptical about whether this is a good use of $20 [million], now $25 million a year.”

Governor Charlie Baker said skipping the tax holiday “ought to be part of the conversation” as the state looks to close the projected budget hole.

It is a big deal to abandon this holiday because even if your representatives that did it are correct in their supposition that the same purchases will be made during the winter holiday season, what we know for sure is that many retailers really struggle with cash flow in their business.

For retailers to lose this tax-holiday induced cash injection means many of them will have to incure additional time and cost to closely watch cash flow; causing them to hold thier dollars tightly to make sure they can make it to winter holiday season.

How does this affect you? Maybe now they do not hire your child for her first job stocking shelves and/or maybe now they will not have the ipad in stock when you need to get a last minute gift for your friends last minute party.

Maybe now you wont have the store to walk to all because the added stress causes the weary business owner to decide that it is not worth the added stress to try and compete anymore.

Five Time Saving Tips for Using the Search Bar in QuickBooks Online

Here at Prepared Accounting we know your time is valuable, so we've put together a list of five tips for saving you time in QuickBooks Online so you can get in, get out, and get back to your life.

These tips are all centered around the search bar located in the upper right hand corner of your screen.

Tip #1: Searching for a Specific Dollar Amount.

Instead of wasting time looking through a whole year's worth of entries, just navigate to the search bar and type in the amount that you're looking for. Make sure to include the dollar sign ($) and a decimal point (.) and then hit enter. (Ex. $5.00). Your search will return all entries with that dollar amount.

Tip #2: Search for a Customer

Navigate to your search bar and just start typing the name of the customer you're looking to obtain information for and QuickBooks will begin to return accounts containing that name. Just select the appropriate account and you'll get all of the details pertaining to that customer.

Tip #3: Quickly Run a Profit/Loss, Balance Sheet or Other Report

Bypass multiple clicks and menus on the left navigation bar and just type the letter "r" into the search bar. QuickBooks will automatically generate a list of reports for you to select. Alternately just type "profit" or "balance" to find the reports that you're looking for.

Tip #4: Run Account Reports

Need to see transactions within a specific account? Type the name of the account or the letter "a" to browse your chart of accounts.

Tip #5: Quickly Begin an Advanced Search

To begin an advanced search within QuickBooks, just type "advanced" into the search bar and hit enter. From here you'll be able to select specific criteria for performing your search.

If you found value in this post, please share and help others save time too!

#QuickBooks #tax #northampton #Quickbooks Online #Easthampton #Holyoke #accounting

Low income year? Convert your Traditional IRA to a Roth IRA; Understand Tax Bracket Efficiency

Some years you just have lower (OK a lot lower, OK maybe zero) income. Carpe Annum to get a big future tax benefit with your Traditional IRA.

If you left your job to start a small business or took a year off to travel the world, you are in a unique position to make some tax moves. This opportunistic position exists because you can fill up your low tax bracket 'buckets' with your Traditional IRA monies that have already been deducted. With this conversion style tax move you can grab the benefits of the Roth IRA as well. Now your money grows tax free forever.

TAX TIP: Tax brackets are like buckets, once you fill up the 10% bucket with income that year you pay 15% only on the rest of income that pours in until you fill up that bucket and start paying 25%... and so on. The standard deductions and personal exemptions are basically your 0% tax bucket.

Another way of looking at it is that, in the absence of income, you have a standard deduction and a personal exemption (these create a zero tax bucket of $10,300 in 2015) to use this year that might be wasted or underutilized.

Here is how it lets you keep more of Caesar's money:

If you already have a Traditional IRA, you already got a income tax reduction with the contributions you made in earlier years; so you got the benefit of a Traditional IRA as opposed to a Roth. The trade off is that the earnings on your (well invested) traditional contributions are taxed when you retire. The benefit of a Roth IRA is that the earnings are not taxed when you retire, however you pay tax (at whatever income bracket you are in) when you put the money in.

It follows that if you convert a $10,000 Traditional IRA into a Roth IRA (totally legitimate) in a year that you have no income than you get the benefit of both types of IRAs. Now your $10,000 grows tax free and you never paid tax on it. Voila!

This still works if you went from the 10% tax bracket in 2014 to the 15% tax bracket except now you pay less tax instead of no tax.

Got it? Now go for it!

IRS Transcripts and Tax Return data stolen: What? How?

What happened?

According to IRS statements available online, 100,000 taxpayers had their transcripts stolen from the IRS Get Transcript website. Of the 100,000 tax payers

· About 35,000 had already filed their 2014 income tax returns before the unauthorized attempts at access. This means that these taxpayers’ 2014 returns and refund claims were not affected by this fraudulent activity, because any fraudulent return subsequently filed in their names would be automatically rejected by IRS systems;

· For another 33,000, there is no record of any return having been filed in 2015.

· Unsuccessful attempts were made to file approximately 23,500 returns. These 23,500 returns were flagged by our fraud filters and stopped by our processing systems before refunds were issued; and

· Since this activity occurred, about 13,000 suspect returns were filed for tax year 2014 for which the IRS issued refunds. Refunds issued for these 13,000 suspect returns totaled about $39 million

How did this happen?

"In this sophisticated effort, third parties succeeded in clearing a multi-step authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The multi-layer process also requires an additional step, where applicants must correctly answer several personal identity verification questions that typically are only known by the taxpayer." IRS Statement online

Because the thieves already had the information, they were most likely looking to increase the value of the information by either ‘cashing in’ in the data with a fraudulent tax return filings or gaining additional information (e.g. spousal or dependent identification for future use). Here is a good example of just one thief who was able to purchase stolen information from a website and used it to file false tax return information. But keep in mind we are dealing with someone or some organization who had (at the VERY least) 200,000 sets of taxpayer’s personal and financial data.

So where did the criminal(s) get the taxpayer information? Perhaps the investigation will be able to draw a link to the source but if the data came from a random data sample from a larger database breached from a credit bureau than small correlations in the victim’s data may by unhelpful in identifying who is really at fault. Some other possibilities are large banks or government agencies. It is clear in IRS Commissioner’s Koskinen’s statement before the senate that he recognizes an exponentially growing problem and states that he believes that he is fighting organized crime syndicates.

How do I know if my tax return transcript was stolen?

If your transcript was one identified as being stolen, you will be getting a letter from IRS.

What I do?

We are talking about institutional sized leaks so there is often little that the individual can do other than protecting the access to and the ‘need to know’ of sensitive data whenever possible. Generally, organizations who have your data should use heightened clearances (like multi-step authentication logins and risk profiling of employees) while concurrently reducing the number of people who have access to that data.

Thieves will usually go to places where they can get the most data for their effort (large business or governments), however even the smallest business, NGO, or governments with access to sensitive data should be concerned with protecting their patrons. Written information security policies (WISPs) concurrent with the size of the business, type of data, and amount of stored data are a good start to begin the discussion. Here is a link to a nice two page Massachusetts WISP regulation (.pdf).

In accordance with our policy, all prepared employees use multi-factor authentication for all email, drive, and virtual network access. That way if someone at google sells our login information to a thief, that thief would need our key generator as well to log in. Additionally, prepared accountants only have access to the network folders of the clients that they are working on.

One other things that can be done is to file your tax returns early. If you file your tax return first, than the fraudulent efile would be rejected. Although many of the fraudulent efiles could be prepared prior to the efile season's opening and be ready file at the gate, it would not hurt to gather your complete information and meet with your tax preparer as soon as possible in the new year.

IRS Transcripts and Tax Return data stolen: What? How?

What happened?

According to IRS statements available online, 100,000 taxpayers had their transcripts stolen from the IRS Get Transcript website. Of the 100,000,

· About 35,000 taxpayers had already filed their 2014 income tax returns before the unauthorized attempts at access. This means that these taxpayers’ 2014 returns and refund claims were not affected by this fraudulent activity, because any fraudulent return subsequently filed in their names would be automatically rejected by IRS systems;

· For another 33,000, there is no record of any return having been filed in 2015.

· Unsuccessful attempts were made to file approximately 23,500 returns. These 23,500 returns were flagged by our fraud filters and stopped by our processing systems before refunds were issued; and

· Since this activity occurred, about 13,000 suspect returns were filed for tax year 2014 for which the IRS issued refunds. Refunds issued for these 13,000 suspect returns totaled about $39 million

How did this happen?

"In this sophisticated effort, third parties succeeded in clearing a multi-step authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The multi-layer process also requires an additional step, where applicants must correctly answer several personal identity verification questions that typically are only known by the taxpayer." IRS Statement online

Because the thieves already had the information, they were most likely looking to increase the value of the information by either ‘cashing in’ in the data with a fraudulent tax return filings or gaining additional information (e.g. spousal or dependent identification for future use). Here is a good example of just one thief who was able to purchase stolen information from a website and used it to file false tax return information. But keep in mind we are dealing with someone or some organization who had (at the VERY least) 200,000 sets of taxpayer’s personal and financial data.

So where did the criminal(s) get the taxpayer information? Perhaps the investigation will be able to draw a link to the source but if the data came from a random data sample from a larger database breached from a credit bureau than small correlations in the victim’s data may by unhelpful in identifying who is really at fault. Some other possibilities are large banks or government agencies. It is clear in IRS Commissioner’s Koskinen’s statement before the senate that he recognizes an exponentially growing problem and states that he believes that he is fighting organized crime syndicates.

How do I know if my tax return transcript was stolen?

If your transcript was one identified as being stolen, you will be getting a letter from IRS.

What I do?

We are talking about institutional sized leaks so there is often little that the individual can do other than protecting the access to and the ‘need to know’ of sensitive data whenever possible. Generally, organizations who have your data should use heightened clearances (like multi-step authentication logins and risk profiling of employees) while concurrently reducing the number of people who have access to that data.

Thieves will usually go to places where they can get the most data for their effort (large business or governments), however even the smallest business, NGO, or governments with access to sensitive data should be concerned with protecting their patrons. Written information security policies (WISPs) concurrent with the size of the business, type of data, and amount of stored data are a good start to begin the discussion. Here is a link to a nice two page Massachusetts WISP regulation (.pdf).

In accordance with our policy, all prepared employees use multi-factor authentication for all email, drive, and virtual network access. That way if someone at google sells our login information to a thief, that thief would need our key generator as well to log in. Additionally, prepared accountants only have access to the network folders of the clients that they are working on.

One other things that can be done is to file your tax returns early. If you file your tax return first, than the fraudulent efile would be rejected. Although many of the fraudulent efiles could be prepared prior to the efile season's opening and be ready file at the gate, it would not hurt to gather your complete information and meet with your tax preparer as soon as possible in the new year.

How do I extend / file an extension for my Federal or Massachusetts Tax return?

Spring has sprung and with April 15th just around the corner, many individuals are still scrambling to file their Federal and State tax returns on time. If this is you, you should probably request for an extension of time to file your return and do it right. Even if you can not pay what you owe yet, your penalties will be much less (for the federal return at least).

The purpose of filing and extension is to allow the taxpayer more time to gather his or her financial information to file a complete return, without facing a late filing penalty.

Extending your Federal Tax Return

Anyone is eligible for a 6 month extension to file their federal income tax as long as they file Form 4868 postmarked by April 15th. This would extend the filing deadline of the federal tax return from April 15th to October 15th.

Form 4868 should be filed alongside payment (use a 1040-V).

An extension is only valid for filing the return and avoiding failure to file penalty; if you do not pay your tax liability by 4/15 you be subject to the failure to pay penalty and interest on whatever you end up owing.

The failure to pay penalty is only ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. (Failure to file is 5%/month!! max of 25%)

The Interest rate is the current short term AFR + 3% APR (.25%/month)

Oh, and the address where you need to mail the extension is in the form instructions.

Extending your Massachusetts (Form 1) Return

Massachusetts Department of Revenue offers Form M-4898 (Application for an Automatic Six-month Extension of Time to File your Personal Income Tax Return) which can also be done online. Tax payments of $5,000 or more are mandated to be filed electronically.

Once again, the extension of time to file the MA income tax return does not extend the due date for payment of any tax that would have been due on 4/15.

For Massachusetts, the extension is considered void if 80% of the total income tax liability has not been paid. Void extensions are subject to Massachusetts failure to file and failure to pay penalties (combined to 2% per month) and interest charges from the original due date.

However, if an individual calculates no tax due with Form M-4868 and 100% of his or her tax due was paid through withholding, estimated payments of tax, and credits or refunds in the prior year, then Form M-4868 is not required to be filed.

More information

IRS website http://www.irs.gov/uac/Extension-of-Time-To-File-Your-Tax-Return and for Massachusetts State extension filing http://www.mass.gov/dor/individuals/filing-and-payment-information/filing-options/webfile-and-electronic-filing/automatic-extensions-on-the-web.html .

Here is a good nytimes article.

We are Prepared Accounting in Northampton, MA and we prepare and prepare for tax returns.

Do I need to file a 1099 for a Corporation, LLC?

There is a requirement for businesses and rental property owners to prepare and file Form 1099-MISC for any persons who were paid in excess of $600 and who are not (W-2) employees. If you choose not to file, there is a risk of the deduction being disallowed in the event of an examination even if it is for an appropriate business purpose and otherwise properly documented.

A person in the eyes of tax law is The term “person” is an individual, a trust, estate, partnership, association, company or corporation. That means everybody gets a 1099 unless there is an exception; there is an exception for entities taxed a corporations and LLCs taxed as corporations.

Real World Tip: If you are not sure if your contractor's LLC is treated as a corporation, you might not want to waste valuable time getting through gatekeepers with eyebrow raising questions about organizational tax elections. Our advice is to just do the 1099 for them because it is unlikely that they will care that you did.

As is par for the course, there are exceptions to the exceptions and the biggest one for most people is Attorney's Fees. SO, If your attorney works for a corporation and she replied to one or two emails and charged you $600, you need to give her a 1099 to protect your deduction which could be the only thing that made you feel better about paying her $600 for two emails. What information do I need to file the 1099?

All the contractor information you need is on form W-9 and all the payment amount information should be in your business books. It is ordinary for businesses who employ domestic contractors to request a form W-9 from anyone doing contract work for them.

When do I need to file 1099s?

Form 1099-MISC is sent to the payee (your contractor), the state, and the US Treasury; Respective deadlines for electronic filing are 1/31, 2/28 (Mass), and 3/31.

Real World Tip: You should wait to file the 1099s with the State and IRS until the respective due dates in case you have to change information on a form (such as a businesses EIN).

What receipts do i need to keep for my business taxes?

In order to protect your deduction in the event of an IRS audit examination you should be able to 'substantiate' your expenses. Otherwise, even if the expense was for a business purpose and otherwise eligible for deduction on your tax return the IRS can disallow the expense if they decide to pin you with regulations.

Here are four classes of expenses requiring substantiation:

1. Travel expenses (including mileage, meals and lodging while away from home)

2. Entertainment, amusement, or recreation expenses in nature

3. Business gifts (limited to $25 per client, unfortunately)

4. Listed property expenses defined in Section 280F(d) (like luxury cars)

So what do I have to document?

At a minimum, you have to document amounts, time and place, business purpose, and note the affiliation with the vendor. Furthermore, the character of these expenses must be evidenced. Was the character of the expense for business or personal use? Are these expenses “ordinary and necessary” under Section 162? For gifts, meals, and entertainment you are also required to record the attendees names.

So how should I save my receipts?

We find that just doing it as you go or when you regularly clean out your bill fold helps prevent year end stress (not to mention giving your strong "contemporaneous" records).

We use the quickbooks online mobile app to take pictures of things like receipts (or our clients being entertained) as a mobile and 'contemporaneous' way to create and keep records together and paperless. You can even document your business purpose in the memo line!

Real World TIP: Try not to whip out your phone and snap pictures of receipts while your client is watching, you are supposed to be entertaining them with good stories and bad karaoke.

If you spend cash from your personal account or drive your personal car, you can use an app like Expensify to generate an expense report that you can submit to your corporation for things like mileage or out of pocket 'cash only' entertainment venues.

Bottom line is, especially for anything that could be argued to be personal or luxurious, taking the time to record and save a few details could save you bunches in the event of an audit.

IRS Correspondence Audits, welcome to the machine

As funding for the IRS has been reduced and budgetary pressure to collect has increased, it has become increasingly difficult to reach a human being at IRS in the event of an examination or a notice of proposed changes to a tax return. Like so many other businesses with limited resources, the IRS has turned sharply towards automated processes at the expense of customer service.

Fun fact from Taxpayer advocate Nina Olson:

"Last year, the IRS received about 8.4 million letters from taxpayers responding to proposed adjustments to their tax liabilities. As of the end of the fiscal year, 53 percent of taxpayer letters in the IRS’s “adjustments” inventory were considered “over age” (generally, more than 45 days old)" - Taxpayer Advocate 2013 annual report to congress

4 out of 5 audits are now being done by correspondence (mail for now) where you will not have a single agent assigned to your case. To get anything truly considered adequately requires you to call in and wait on hold for an average of 18 minutes (sometimes an hour) before you can speak to a Revenue officer; even then you will have a different person every time. Like when dealing with other authorities you should really know your rights and fight any incorrect adjustments to your tax return despite any failure of IRS to respond to your communication with clear, prompt, and fair consideration.

Example:

Lets say you did your own taxes for 2012 and did a $110k Kickstarter. You reported the kickstarter income on your tax return in the amount that hit your bank account ($100k because amazon and kickstarter charged you 10%).

The 1099 that amazon sends to you and the IRS says 110K so the IRS automated system is looking for $110k of gross income on your schedule C line 1. Because IRS only sees $100k it sends you a notice CP2000 saying that the propose a $10K increase to your taxable income because it only sees 100k on your return. You fax them a letter saying, "Wait, the fees were 'inside' the 100K amount instead of being listed as an expense so it is just cosmetic and I should not owe anything". You are in line for an IRS fail.

You hear nothing for 50 days and all of a sudden you get a 2626C letter. This letter makes no comment about what you sent them other than a "thank you for your response of (date of fax)"... now please sign this consent to an increase in tax and give up your rights to appeal (no amounts...hmmm) and we will be sending you a notice of deficiency in the mail saying you have 90 days to petition the tax court. If you read and sign the vague letter you give up your right to dispute the adjustment in court. So don't do it. Unreal? Sad, but true.

What has happened to you is indicative of the kind of 'automated collection' that the IRS has been increasingly using to collect without any human contact with the taxpayer. They say that your correspondence was received and matched it to your case, but no trained tax professional really looked at it and they didn't change anything from the original proposed adjustment. They simply put your letter on the shelf and went straight to the assessment process whether they have processed your response or not. Now you are wasting your time freaking out about what to do because the process has been obfuscated by poor and passing communication in an aggressively automated process.

What you can do with your rights as a taxpayer:

Like when dealing with other authorities you should really know your rights. Remember that your rights as a taxpayer include the right to quality service which includes receiving "clear and easily understandable communications from the IRS...". You also have the right to "expect that the IRS will consider your timely objections and documentation promptly and fairly and to recieve a response if the IRS does not agree with your position".

We recommend that you contact a tax professional who has had experience with IRS examinations and at least discuss how you should go about handling the communication or an actual agent (who will have the authority to expand the audit).

You may also request that a correspondence audit be transferred to a local IRS office so that you deal with a single (human) agent. You must request this in writing and explain the reasons in a letter sent to the contact information in the initial IRS notice.

Time your Crowdfunding campaign for tax, survival.

You have a great business idea and you are eager to raise some cash to launch using Kickstarter or Indiegogo or gofundme. Lets say you are getting stretched thin because you have almost spent all of your runway money from your last job so you want to launch your $51k campaign ASAP in 2014. However, if you really needed to you could wait until 2015 by polishing your pitch while selling holiday wreaths for cash to get you though November and December.

Wait to receive your funds until 2015 for tax timing purposes.

Why wait? because you know that you are going to crush your real entrepreneurial debut in 2015 because you read this blog and have an extra year with $10k of your $51k to help you get off the ground.

Individuals and most businesses file tax returns on a calendar year basis. If you get control of your funds prior to the end of the calendar year you will pay sooner and pay more. If you wait you will have more time to spend the money to keep you in a lower income tax bracket AND by waiting you defer paying any tax for another 12 months.

Example:

Let us say you are a single individual and all of your time in 2014 has been spent coming up with business ideas so you have no other income. You plan a gofundme and you raise $51k that requires actual business expenses of $25k for the first year with no other income (yet). Here are two scenarios with very different outcomes.

Scenario 1: You cant wait and take the money December 20th, 2014 (year 1) so you only have time to spend $1k on business expenses in the week and a half before the end of the year.

On April 15th, your CPA tells you that you have $50k in net income on your 2014 tax return which sadly equates to you paying up on a $9.5k Federal Tax bill and an $2.3k Massachusetts tax bill for a total of $10.8k in tax due on April 15th, 2015. Sure, in 2015 you spend the $25k in expenses and create a big tax loss that you can carry back to get your cash back but your cash was in the federal and state coffers when you needed it most. One of a few problems is that you needed that cash to feel comfortable bringing on that smart employee whose idea would have saved your business with a big sale in 2016.

Scenario 2: Same profit scenario except you bite the bullet and wait until 2015 to take the money. You take the 51k on January 2, 2015 and spend said 25k in expenses during the year. Now you have zero tax due April 15th, 2015 and a total tax bill fue in 2016 is only $2.4k for fed and less than $1k for Massachusetts. Total tax of $3.4k.

Your CPA says "Nice one!" and "your tax bill is less because of progressive tax brackets". The extra cash and the extra time with the cash in your pocket allows you to bring that smart employee on and keep business open for another 3 months. You survive 2016 and IPO in 2020 selling your shares and moving to Hawaii to surf for the next 10 years.

Here are some ideas to help you wait and maybe even make waiting fun and increasing donations:

A New Years Eve Party ending the funding at midnight.

Pictures of your prototype with a different cat for every day in December.

Create special gift incentives for every holiday to encourage donors to give while they are feeling generous anyways but not actually ending the funding until after 12/31/14.

Phone calls and emails from the IRS: Spot-a-Scam + what not to do, ever

Spot - a - scam

There are many highly aggressive scammers who are getting better every day and can be highly convincing (they might even know the last 4 of your social or your address) especially for people who do not like conflict.

Scammers will email you or call you using a badge number and title. If they miss you they will probably leave a message; if you call them back then they will try and bully you all they way to the nearest place to make an irrevocable payment.

The IRS almost always does business through the mail (USPS).

The likelihood that you will ever get an unexpected call or voicemail from any real tax related government agent (especially on a Saturday or Sunday) is practically nil.

Additionally, there is never going to be a legitimate IRS collection situation for which you have not received multiple mail notices about (proposed changes to your tax return, assessment of additional tax, demand for payment, intent to levy, etc.). Furthermore, there will never be a unexpected correspondence from an IRS agent that will result in you being arrested or requiring you to do anything with cash that same day.

How "they" might lie to you:

1. We have issued an arrest warrant with the sheriff's office or local authorities in one hour.

2. Do not interrupt me while I read you this affidavit; you can ask me questions at the end.

3. If you don't pay this today there will be additional penalties, seizure of bank accounts, arrests made, etc. Do not hang up or the resolution process will be over.

4. You are a liar, you are going to jail, your credit score would be penalized, there is a judgement in your name, there are local authorities coming to house, you ignored a certified letter from IRS, your accounts will be frozen, your drivers licence will be suspended, there is a federal investigation against your spouses social security number.

What not to do, ever

1. Never pay any immediately/today for any Federal or State Government official for any amount based on a phone call or email that you did not see coming from several mailed notices.

2. Never pay a tax bill (even a real one) that you do not understand or agree with. Always contact a tax professional before paying additional assessments or agreeing to any changes to your tax return. It is always harder to get your money back.

3. Never pay anybody you don't already know with any kind of money order, pre-paid card from CVS, 7-Eleven, or Walgreens, Western Union, or Supermarket payment system.

4. Do not buy any "government-issued bonds" at a local retailer.

5. Do not divulge any personal information or answer any questions about previous legal matters that might give them more ways to scam you.

Here is what you can do to help:

1. Go to this FTC Consumer Protection webpage and comment on what they said and post the phone number you were called from. This should get their latest tricks on the web, fast.

If you want to report it. Here’s how:

Report the incident to TIGTA online or at 800-366-4484.

If it’s an email, forward it to the IRS at [email protected]. Don’t open any attachments or click on any links in those emails.

Powerpetsitter rolls out a new interface with new Quickbooks online - change can be a good thing

You love powerpetsitter but you are not really sure how it integrates with quickbooks online (which you and your bookkeeper may hate right now). Additionally, you are still not really sure how the new versions of either is going to affect the accuracy of your receivable accounts in quickbooks

IMPORTANT: The old and the new interface between PPS and QBO is a ONE WAY STREET. PPS pushes data and updates to QBO and not the other way around.

Problem with the old interface BEFORE THE NEW PPS INTEGRATION: The AddInvoiceFailed or the Failed: Error that has been popping up in the QBTrans tab; it means that there is a problem. The problem with the old interface between the two programs was that Powerpetsitter was trying to delete invoices in quickbooks online to make changes every-time an invoice or appointment was changed. Unfortunately, if any deposit had already been linked to that invoice in Quickbooks online, QBO would not allow the invoice to be deleted.

Essentially, unless each "QB trans" error was addressed by the pet sitter co. or their bookkeeper, the old PPS to QBO interface was creating differences in credit, discounts, and invoice totals, between the two services every-time you hit the save button if there was a deposit attached to the invoice in quickbooks.

Solution for the problems caused by the old interface: Powerpetsitter has addressed the problem above with a new interface that should correct the issue after you migrate your petsitting company with PPS staff. However, you are likely going to have to clean up the QB transactions in PPS in order to rely on the customer account balances in QBO. This means matching what PPS thinks is a credit balance with what is showing up in QBO for each invoice that there is an error showing up in the QB trans tab.

Thankfully, with the NEW interface, Quickbooks invoices CAN be adjusted by PPS, and the credit amounts CAN be pushed from PPS to QBO. However, if you manually adjust a credit balance in PPS you will have to manually adjust it in QBO as well. Here is a link to the email that PPS sent out that explains this aspect of the migration.

Side note, with one of our clients, if discounts were applied to non-discountable services in PPS, than the discount was not being pushed through to QBO. A solution to that is to make all of your services "discountable" in Powerpetsitter so that if and when you discount the services in PPS, the discount will also be pushed to Quickbooks online.

Your Corporation is doing business in Massachusetts so you need to prepare an annual report and a tax return

You have a corporation that is legally doing business in Massachusetts. This means that your corporation is either formed in MA ("domestic corporation") or formed somewhere else. If you are formed somewhere else and doing business in MA than you should be registered as a "foreign corporation" with the secretary of state to legally operate.

There are at least two forms that all corps need to file with two MA agencies:

Secretary of State Annual Report

Domestic or foreign, The Massachusetts Secretary of State requires you to file an annual report 2.5 months after the close of the corporation's fiscal year. For most Corporations, that is the calendar year which means that this

Annual report is due February 15th each year. Filing Fee is $125 and the late filing fee is $25.

Department of Revenue Corporate Excise Tax Return

Your corporation is also required to file a tax return for 355 or 355S (for S-Corp).

The Massachusetts corporation tax return due date is March 15th for calendar year taxpayers or 3.5 Months after your corporation's fiscal year end. Along with it you will pay a minimum Corporate Excise Tax of $456.

There may be other filing requirements for you Corporation, like Payroll Tax returns, so this list is intended to be the bare minimum to get you started and can not be used for the purposes of avoiding any failure to file penalties or interest.

Any advice in this communication is limited to the conclusions specifically set forth herein and is based on the completeness and accuracy of the stated facts at the stated time, assumptions and/or representations included. In rendering our advice, we may consider tax authorities that are subject to change, retroactively and/or prospectively, and any such changes could affect the validity of our advice. We will not update this advice for subsequent changes or modifications to the law and regulations, or to the judicial and administrative interpretations thereof.

1099's For Contractors do I need to file a 1096?

Please be reminded that a business is required to file form 1099 for any contractor to whom who you paid >$600 to in 2013. This includes businesses who you contracted with to do work on your projects/clients.

The IRS is enforcing this requirement with penalties and disallowance of the associated expenses on the tax return.

These forms are due 3/31 if filed electronically (we can do this), however most people like to get them between now and February so that they can file their tax returns in March and April. If you file electronically, you do not need to file a 1096 form like you do with paper returns.

The first step is to ask all said contractors for a w-9 form.

Please refer us to other small business owners complaining about quickbooks, tax returns, or their current accountant!

Thanks and Happy New Year!

Book your tax appointment with us here!

Circular 230 Disclosure: To comply with Treasury Department regulations, we inform you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. tax-related penalties or promoting, marketing or recommending to another party any tax-related matters addressed herein.

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