Goodbye 2020, Hello 2021!

Saying goodbye to the old year and saying hello to the new one is a time-honored tradition. Never has the tradition been celebrated with more zeal than this year, as we kiss 2020 goodbye. I don’t know anyone who wants to repeat the last ten months. People, especially business owners, are looking forward to 2021 with its promise for reaping financial benefits from their hard work, instead of working hard and barely keeping afloat.

Saying a firm goodbye to 2020 and a hearty hello to 2021is an opportunity to reflect on accomplishments and challenges from 2020, and to plan for goals and achievements in 2021. We don’t know what next year will bring. Conditions will change and we will adapt, but we need to plan no matter what. You know what they say…A goal without a plan is just a dream

Making a new plan starts with identifying an overarching change or improvement you want by the end of 2021. Need a new worker or system? Want to offer a new service or product? Follow these three tips to establish a plan and achieve your goals in 2021:

  • Gather the Numbers – Quantify your goals as much as possible. This task will require some research and could require making estimates and assumptions. For example, how much time and money would a new worker or system cost? How much of that cost would be one-time and how much would be ongoing? The more numbers you can nail down, the better.
  • Be Realistic – Know your market conditions and your resource capacity when setting your goals. It’s important to be realistic to help ensure that your plan is achievable. Setting unrealistic objectives is discouraging and could result in spending time and money on activities that are unlikely to succeed. Better to use those resources on realistic, achievable goals.
  • Adjust As Needed – No matter how well you research the numbers and focus on what’s realistic, the market conditions and other factors used to set goals and make plans will change. Periodically assess your plan and progress on meeting your goals. Are you on track? Why or why not? Based on the answers, adapt your plans and goals accordingly.

Saying goodbye to 2020 and hello to 2021is an opportunity to close the door on a year we don’t want to repeat and plan for renewal. It’s the perfect time to savor your achievements and to plan for a much better new year. Don’t let your goals turn into dreams that you never achieved. Establish a plan for 2021 and turn those dreams into your reality. 

Home Daycare Provider Tax Workshop

Recordkeeping is probably the least interesting part of owning a business, but it is one of the most important. The Women’s Business Center of Northern Virginia recognizes the challenges of running the financial aspects of a business while also running every other part of the operations. That’s why they sponsored me to virtually share valuable financial recordkeeping tips to over 100 daycare professionals last week. 

My workshop, “Organize your Recordkeeping for Easier Tax Preparation”, covered a wide range of topics that the participants could use in their businesses immediately:

  • Keeping Business Finances and Records

Each business should have a bank account and credit card separate from personal accounts and cards. Personal credit will probably be needed to secure a credit card for a new business. Financial transaction records should be kept for all income and expenses starting with the first penny spent on the business, even if it’s before any income is received.

  • Financial Information to Get and Review

Keep financial records up-to-date for real-time tracking of the business’ financial health. Records and reports should include an income statement (aka P&L), balance sheet (e.g., cash and credit card balances), and projected cash flow for at least three months. Review all financial reports periodically. Quarterly is advisable, but reviews should be more frequent when business is new to consider and incorporate more information.

  • Business Expenses

“Ordinary and necessary” costs associated with carrying on a trade or business are deducted from business income to determine net profit and to calculate taxable business income. Ordinary expenses are common and accepted in that business. Necessary expenses are appropriate for the business type. Common examples include employee wages, employer payroll taxes, supplies, equipment, liability insurance, and training.

  • Deducting Home Business Use for Daycare Providers

Licensed daycare providers get an exemption from the “exclusive use” rule that other businesses must follow to take a home use deduction. Home space used regularly for providing daycare may be claimed based on the square footage of the home used for providing daycare and the percentage of time it is used as a daycare center. Calculating the deduction is explained in IRS Publication 587, Business Use of Your Home (Including Use by Daycare Providers), https://www.irs.gov/pub/irs-pdf/p587.pdf

The Women’s Business Center of Northern Virginia wants daycare providers to know the importance of financial recordkeeping, so they asked me to share some tips about getting organized. Up-to-date and complete business financial records are key to knowing what’s going on in the business at any point in time. Participant feedback was positive, so the 100+ daycare providers must have found the information helpful for organizing their financial recordkeeping and easier tax preparation.

Unintended Consequences of Working from Home

Working from home quickly became the “norm” back in March or April for many workers who had traditionally worked from their employer’s location. In some cases, working from home means working from a different state than the employer. This situation could result in the unintended consequence of an unwelcome “surprise” at tax-filing time. While this could be an unusual situation, it won’t seem so rare if it happens to you.

In general, a state imposes income tax on the worldwide income of its residents, regardless of where the income is earned. Each state has its own rules to define a resident, but it’s usually someone who is lives in that state. If a worker earns income in a state other than where she or he lives, the worker files a Nonresident Tax Return and is taxed only on her or his income earned in that state. The worker would then claim a tax credit on her or his home state’s Resident Tax Return for taxes paid to the nonresident state. 

It can get even more complicated, depending on the states involved. For instance, in addition to the credit for taxes paid to another state, many states also have a Second Residency rule. In that case, taxpayers who are a resident in one state, owns a home in another state, and are physically present in that other state for 183 days or more, are considered a resident and subject to income tax in that state. This could result in some income being taxed in more than one state.

Confused? I am, and I’m writing this! An example might help:

Brad is a resident of Wisconsin, living just across the border with Minnesota. He normally commutes daily into St. Paul for work and pays state income tax to Minnesota on his W-2 wages that are earned at his employer’s location. He then claims a tax credit on his Wisconsin income tax return for income taxes paid to Minnesota. That prevents Brad from paying state tax in two different jurisdictions.

Brad also owns a second home on a lake near Bemidji, Minnesota, where he and his family vacation for several weeks each year. In March 2020, Brad’s employer required him to telecommute rather than drive to his St. Paul office because of COVID-19 stay-at-home orders. Brad and his family decide to head up to his lake home to live and work during the pandemic. Brad spends most of the rest of the year living and telecommuting from Bemidji. 

In this example, Brad is physically present in his secondary home in Bemidji for at least 183 days during 2020. Therefore, Minnesota will consider Brad to be a resident and tax him on his worldwide income. Wisconsin will also tax Brad on his world-wide income because he owns a home and considered to be domiciled (aka a resident)) of Wisconsin. That’s the unwelcome “surprise” at tax filing time.

Doing your homework before filing your 2020 state tax return is more important than ever, thanks to the COVID-19 pandemic. Depending upon the states involved and their respective state tax laws, as well as your work situation, now is the time to do all that you can to avoid any unintended consequence of working at home.

Deductible Donations for Non-Itemizers in 2020

A tax deduction is not the only reason to donate to the charity of your choice. Many people are happy to give to charity, even if no tax savings is involved. Donating to charity and paying less in taxes would make those people extra happy. So, the special provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act for non-itemizers to make deductible charitable donations of up to $300 will make those generous people ecstatic.

Non-itemizers are taxpayers who take the standard deduction instead of itemizing deductions on their federal income tax return. Nearly nine in ten taxpayers take the standard deduction because it results in lower taxable income and lower income tax. However, only taxpayers who itemize their deductions can typically deduct donations to a qualified charity.

Under one of the CARES Act provisions, individual taxpayers who take the standard deduction can claim a deduction of up to $300 for cash donations made to a qualified charity during 2020. Unless it’s extended, the deduction disappears in 2021. “Cash donations” means those made by check, credit card or debit card. Donations of securities, household items, or other property are not included.

Not all donations to organizations that do good work in the community are tax deductible. The organization must be considered a qualified tax-exempt entity by the IRS. Before making a donation, check the Tax Exempt Organization Search (TEOS) tool on IRS.gov to make sure that the organization is a qualified tax-exempt entity, and that donations are eligible for a tax deduction.

Check Publication 526, Charitable Contributions, and the TEOS tool for more information about qualified charities, donation limits, and how to report donations on your federal income tax return. More information about the special tax deduction for cash donations up to $300 in 2020 is at https://www.irs.gov/newsroom/special-300-tax-deduction-helps-most-people-give-to-charity-this-year-even-if-they-dont-itemize. That site also has the special recordkeeping rules for claiming a tax deduction for a charitable donation.

The CARES Act, passed by Congress last spring, included several temporary tax provisions that may not be well known. One was designed especially for people who do not itemize deductions on their income tax return and who donate to a qualified charity. The deduction of up to $300 for cash donations made to a qualified charity is only available during 2020, unless extended by Congress. Non-itemizers will want to jump on this one-time opportunity to donate to charity and pay less in taxes.

IRS Notices Resume for the Holidays

Just in time for the holidays, the IRS announced that it will resume issuing “balance due” notices to taxpayers. IRS Notices to taxpayers who have unpaid tax balances were suspended temporarily in early May due to the COVID-19 pandemic that created incredible delays in receiving and processing IRS mail. The IRS feels that their mailroom is caught up now and that all payments that taxpayers mailed in have been processed. So, they decided to re-start notifying taxpayers of their unpaid taxes, plus interest and penalties, of course.

Here’s what to know if you get an IRS Notice about unpaid tax balances:

Why the IRS sends Notices
The IRS sends Notices to taxpayers who have a balance due, or who the IRS hasn’t heard from them after a prior contact. IRS Notices explain why the amount is due and what the taxpayer’s options are. The urgency of each Notice escalates if prior Notices are ignored, up to placing a lien on assets or property. IRS Notices are usually multiple pages long and tedious to read, but they contain a lot of valuable information about the issue. So, read carefully.

How to Respond
IRS Notices generally require a response by a specific date. There are two main reasons you’ll want to meet that deadline – to minimize the accrual of additional interest and penalty charges, and to preserve your appeal rights if you don’t agree. If the information that the IRS has on file doesn’t match the information you reported on your tax return, you may need to complete the Notice Response Form and provide more documents to support the return. If you made a mistake, you need to pay up.

Payment Options
Taxpayers who are unable to pay are encouraged to consider available payment options to stop penalties and interest from continuing to accrue. Taxpayers who were impacted by the pandemic or other circumstances may qualify for relief from penalties due to reasonable cause if they made an effort to follow the rules, but were unable to pay the tax due because of circumstances beyond their control. Taxpayers should call the toll-free number on their notice to request penalty relief due to reasonable cause.

Whatever the Notice says or how you respond, be sure to keep copies of all the Notices, your responses, and any support documents in your tax records. You might need to refer to them later.

Getting an IRS Notice shouldn’t ruin your holidays. Knowing why you got a Notice, how to respond and your payment options will get you back to trimming the tree before you know it. Need more details? The IRS has them for you at https://www.irs.gov/individuals/understanding-your-irs-notice-or-letter.