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Business Taxes for Start-ups

Workshops are great opportunities to share valuable information that business owners can use immediately. Last week, I was asked to talk about business taxes with a roomful of entrepreneurs in various stages of starting up their businesses. In spite of being at the start-up stage, they asked some pretty sophisticated questions. Quite impressive.

Entrepreneurs start their businesses because they have expertise in their profession, not because they know about business taxes. That’s why my workshop focused on some basics that every business owner should understand to make good choices. Here are three of the tax topics covered in last week’s workshop that might be valuable for you and your business:

Filing Requirements by Business Type

Many small businesses form an LLC, which allows for three options regarding business type. Each business type has different filing requirements:

  • Operating as a Sole Proprietor is the simplest form of business for one person. It requires no legal paperwork. Net business profits from the business are reported on a separate schedule on the owner’s IRS Form 1040 and taxed at the owner’s individual rate.
  • Two or more people can form a Partnership by executing an operating agreement and requesting a tax ID from the IRS. Partnerships are required to file IRS Form 1065, “U.S. Return of Partnership Income”. Partners receive an IRS Form K-1 to report the allocated portion of income and expenses on her or his individual return.
  • An option for one person or up to 100 domestic entities is to form a Subchapter S Corporation. Sub S Corporations are required to file an IRS Form 1120S, “U.S Income Tax Return for a Sub S Corporation”. Shareholders receive a K-1 to report the allocated portion of income and expenses on her or his individual return.

New Tax Law Highlights

The tax rules are complex and numerous. They can also change, like we saw with the Tax Cuts and jobs Act of 2017. There are more, but these are the “big three” changes that business owners need to be aware of:

  • Qualifying pass-through businesses get a deduction of 20% of qualifying net business income (IRS link to more info – https://bit.ly/2Mg97wK ). Special rules apply for services that depend on reputation or skill of high-income owner/employees.
  • Higher limits for business asset depreciation that generally result in higher deductions (IRS link to more info – https://bit.ly/2skk9FG).
  • Losses from pass-through businesses can no longer offset other income, such as wages, investments or another business (IRS link to more info – https://bit.ly/2M18MLR).

Other Tax Considerations

Businesses of any type are obligated to register in their state and local jurisdiction and pay the required taxes and fees. Depending on location, that could involve an annual business license and business property taxes.

Last week’s business start-up workshop was filled with valuable information that attendees could use immediately. These three basic topics are a great start for every business owner to make good choices about business taxes.

Are you Eligible for the EITC?

Everything you hear about the new tax law is bad news – state and local taxes capped at $10,000 and miscellaneous deductions eliminated. It seems like a lot of tax benefits are gone or reduced. Isn’t there any good news?

Yes, there is good news about taxes! Some tax benefits have been retained, including one that helps hard-working people who deserve a financial break. It’s called the Earned Income Tax Credit, or EITC, a valuable benefit for working people with low-to-moderate income. Eligibility for the credit and the credit amount depend on your earned income and number of children in your household.

A tax credit is even better than a tax deduction because it’s a dollar-for-dollar reduction of your tax liability, not a reduction of your taxable income. Even better, the EITC is a refundable credit. The EITC could take your tax liability to a “negative” amount, meaning that your refund is even more than just paying back all of your federal taxes due for the year.

To qualify for EITC, you must have earned income (e.g., wages or self-employment income). Your income cannot exceed a specified amount that is adjusted annually by the IRS. To get the credit, you must file an income tax return, even if you do not owe any tax or are not required to file.

Some people don’t know about this credit or do not know that they qualify. Not taking a credit you qualify for? That’s just like giving away money! Who wants to do that?

Don’t miss your EITC refund. Don’t let your friends and family miss their EITC refund. Each year, 30% of the EITC-eligible population is new to this valuable tax credit, many of whom don’t know about it.

Need help? Get details about income limits and credit amounts at www.irs.gov/eitc. Made less than $55K in 2018? Check if you qualify for a larger federal tax refund at www.irs.gov/eitc.

Did you get the hint that you should look into the EITC on the IRS website? Great! Make sure you check it out and keep your friends, family and neighbors from missing a tax credit because they don’t know about EITC. They will thank you.

New Tax Law Still Requires Patience

Top down view of a cluttered desk with hands folded showing a watch.
Photo by rawpixel on Unsplash

In January 2018, less than a month after the Tax Cuts and Jobs Act was passed, I blogged that we all need patience. “Less than a month after passing a new law is too soon for all the details and unintended consequences to be fully explained,” I said.

Little did I know back then that we would need so much patience now, a year after the law was enacted.

Many new tax law provisions became effective in 2018, making the 2019 tax filing season the first time that many taxpayers will be aware of how the tax law impacts her or him. Getting clarity about those impacts may not be quick or easy, especially for businesses. Figuring it out will take some patience, whether you prepare your own taxes or pay a tax professional to do it.

Tax filing season officially opened this week. The deadline to file or extend an individual return is April 15, new law or not. During those 12 weeks of tax filing season, the following people will need to show and be shown lots of patience:

  • Self-Preparers – Reading instructions not your thing? You could be sorry if you rush into preparing your 2018 taxes without slowing down and understanding the new rules. Approach your tax software as though it were the first time you’ve used it. Everything will look so different, you will want to take each step with patience and care.
  • Tax Professionals and Their Clients – Your tax preparer may ask new questions and require more documentation to ensure your returns are accurate and comply with all the new rules. She or he will also need to explain the new rules and why you may not get your expected refund. Those conversations could be more stressful than usual, so a bit more patience will be needed by all parties.
  • IRS Employees – If you need to call an IRS representative, please remember that this mess is not her or his fault. Plus, as of this writing, the federal government is partially shut down. That IRS employee could be working without pay. Demonstrating patience on the phone makes the situation more pleasant for everyone.

The 2019 tax filing season is going to be more stressful than usual because of the new tax law and its impact. Approaching your software, your tax professional and the IRS with some patience will go a long way to making the 2019 tax filing season as painless as possible.

What to Expect from a Tax Preparer

Changes to the tax law enacted in December 2017 means we’ll be dealing with a lot of new rules this filing season. Tax filing “simplification” means that all the individual forms for 2018 look different than ever before. As a result, more taxpayers than ever before could be looking for a tax preparer, even people who have always filed their own tax returns. But just any tax preparer isn’t good enough, especially this year!

You are responsible for the contents of your tax return, even if you pay someone to prepare and file it for you. It’s essential that you engage a qualified tax preparer who has the right experience and knowledge of your tax situation. The tax industry is unregulated; anyone can hang up her or his “Tax Preparer” shingle. So how do you find a qualified tax preparer to meet your needs?

First, get referrals from colleagues, family and friends about who prepares their taxes. Ask them why they like their tax preparer. Briefly interview two or three of the tax preparers that sound like a good fit, including these three questions:

How Do You Keep Up with Changing Tax Laws?

Tax laws are constantly changing, as we know. It’s important to work with a tax professional who keeps up, so you don’t have to. Your tax preparer should describe attending conferences, webinars, or other methods she or he uses to stay current.

What are Your Experience and Credentials?

Working with a credentialed tax professional, like an Enrolled Agent or Certified Public Accountant, provides confidence that your taxes are being prepared accurately. Also ask for examples of tax situations and complex issues where she or he has experience. The answers will indicate whether your needs will be addressed.

How Do You Communicate with your Clients?

Discuss whether the tax preparer meet regularly with clients, how confidential documents are shared and stored, and whether the person is available for you if a tax-related question or issue comes up outside of “normal” tax season. Make sure you feel comfortable with the tax professional’s style, manner and process.

It’s important to have a qualified tax preparer that is prepared to meet your needs. Feeling confident and comfortable with the answers to these three questions is a good sign that your taxes will be prepared accurately and consider all the new tax rules.

Regulators Stop Fraud with Whistleblowers Payments

Organizations are vulnerable to fraud, especially smaller organizations and nonprofits that have lower staffing levels and technology investments. Fraud losses are estimated total about 5% every year. That’s a lot of lost revenue or donations!

Federal regulators, like the Securities and Exchange Commission (SEC), focus on large-dollar fraud committed at public companies that usually involve mid- or high-level management. Some frauds go on for years, perpetrated by insiders who know the organization and its controls well enough to circumvent them.

In 2011, the SEC established a Whistleblower Program to provide incentives to whistleblowers to report federal securities law violations. Individuals who provide information that leads to a successful SEC enforcement action resulting in sanctions greater than $1 million are eligible for a monetary award. Whistleblowers may be an employee, an insider such as a consultant, or an outsider of the company. 

Since its inception, the Whistleblower Program has fined wrongdoers more than $1.7 billion, and the SEC has awarded more than $60 million to whistleblowers. Since the whistleblower rules took effect in 2011, the SEC has received more than 22,000 whistleblower tips. The annual number of tips submitted internationally has grown 75 percent since 2012.

Two fraud categories that tend to come up on the “Whistleblower Hit List” most often are Corruption and Financial Statement Reporting. Those tend to be large-dollar schemes perpetrated by senior-level members of an organization. Here’s a little information about each category to help you to recognize it, just in case:

Corruption

Corruption often involves senior management with authority over essential elements of an organization, like sales and operations. About 70 percent of corruption cases are perpetrated by someone who misused her or his authority to gain direct or indirect benefit. Examples include bribery, kick-backs and conflicts of interest.

Financial Statement Reporting

Financial statement fraud is less common, but is usually the most costly. The median reported cost is a whopping $800,000. This type of fraud is commonly perpetrated by middle or senior managers whose income is based on meeting projected financial targets.
The SEC Whistleblower Program is one way to tamp down on corporate fraud. With the monetary rewards increasing, reports to the SEC’s Whistleblower Program are likely to grow. Let’s hope that this upward trend dissuades fraudsters from corrupt practices altogether.

Impacts of the 2017 Tax Act on Individuals

Pretty soon, it will be time to think about pulling together your W-2s, investment statements, and other documents to prepare your 2018 income tax returns. Are you ready? Even if you usually have an easy time getting ready to prepare your income tax returns, your experience could be more challenging this year because of the Tax Cuts and Jobs Act passed in December 2017.

Many articles have been written describing the new tax law. The IRS website is packed with explanations and links that interpret the tax law changes. But how do you know which changes impact you and how to prepare? One option is to attend a workshop given by a qualified tax professional who has educated herself on all the tax law updates and their impacts.

You’ll have an opportunity to hear about the latest tax law changes that impact individuals and their families at my upcoming workshop. It will be at the Arlington Central Public Library in Arlington, VA on Wednesday, February 13, 2019, from 7:00 – 8:30 PM. I’ve been studying up on the changes you’ll see on your 2018 returns. Bring your questions and test me!

Register at this link: https://arlingtonva.libcal.com/event/4740642

So what can you expect if you attend my workshop? Here’s a taste:

  • A description of redesigned federal tax forms
  • Overview of lower individual income tax rates
  • Elimination of personal exemptions
  • Limits on state and local tax deductions
  • Limits on interest deduction for mortgage indebtedness
  • Elimination of most miscellaneous itemized deductions

Wow, that’s quite a list!

The Tax Cuts and Jobs Act signed into law in December 2017 impacts almost every U.S. household. How big that impact will be depends on your family situation, income, and location. For some, those changes will be dramatic. Things could get even more dramatic if you don’t understand how those changes impact you. Are you ready? Have questions? Get them answered on February 13th at the Arlington Central Public Library.

Higher Standard Mileage Rates for 2019

Using your vehicle for business, charitable, medical or moving purposes could still qualify you for a tax deduction. As usual, deductibility depends on your particular situation. So, if you qualify, how much is that deduction worth? Again, it depends.

One option is to take the standard mileage tax deduction, which is determined each year by the Internal Revenue Service, based on IRS data about the cost of operating and maintaining a vehicle. A “vehicle” includes passenger cars, vans, pickups or panel trucks.

The IRS recently issued the new standard mileage rates used to calculate the deductible costs of operating a vehicle for business, charitable, medical or moving purposes. Beginning on January 1, 2019, the standard mileage rates for the use of a vehicle will be:
 

  • 58 cents per mile driven for business use, up 3.5 cents from the rate for 2018,
  • 20 cents per mile driven for medical or moving purposes, up 2 cents from the rate for 2018, and
  • 14 cents per mile driven in service of charitable organizations. The charitable rate is set by statute and remains unchanged.

Sounds great, right? Those mileage rates can really add up. Just remember that there are limitations and exclusions, some of which got stricter under the Tax Cuts and Jobs Act. Under these limitations, taxpayers cannot:

  • Claim a miscellaneous itemized deduction for unreimbursed employee travel expenses.
  • Claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station.
  • Use the business standard mileage rate for a vehicle after using any depreciation method or after claiming a Section 179 deduction for that vehicle.
  • Use the business standard mileage rate for more than four vehicles simultaneously.

Also remember that you always have the option of calculating the actual costs of using your vehicle instead of using the standard mileage rates. You have to track your mileage for each vehicle no matter which method you use. Compare the standard mileage calculation to the actual cost. You can select whichever option results in a higher deduction.

Taking vehicle deductions involves a lot of tracking, but the effort can be worth it. Those deductions can really add up, especially with the new standard mileage rates issued by the IRS for 2019 to operate a vehicle for business, charitable, medical or moving purposes.

Year End Reflections and Plans for 2019

Year end is the perfect time to reflect on and celebrate accomplishments made during 2018. Yes, year-end is time to enjoy your success. It’s also a great time to plan for the accomplishments you want to achieve in 2019. Whether you are expanding or launching something new, setting objectives is your starting point.

First, identify a few specific areas of your organization you’d like to change or improve in 2019. Want higher profits, cash flow or client base? Need a new employee or system? No change or improvement will happen without a plan to get it done, starting with clear and detailed objectives.

Follow these three tips for objectives that give you a head start toward the finish line:

Gather the Numbers

Quantify all the applicable aspects of your objective. This task will require some research

and could entail making estimates and assumptions. For example, how much profit or client growth do you want to achieve? Can you express that growth as a dollar amount and as a percentage? How much would a new system or employee cost? How much of that cost would be one-time and how much would be ongoing? The more numbers you can nail down or estimate, the better.

Be Realistic

Keep market conditions and your resource capacity in mind when setting growth objectives. It’s important to be realistic in order to ensure that your objectives are achievable. Setting unrealistic objectives is not only discouraging, it can result in allocating resources – aka time and money – on activities that are unlikely to succeed. Better to target those resources on realistic, achievable objectives.

Adjust As Needed

No matter how well you research, estimate and focus on the achievable, any view of future events is imperfect. Market conditions and other factors that you depended on when setting your objectives could change. Periodically assess progress on meeting your objectives. Are you on track? Why or why not? Based on those answers, you may need to make some adjustments to the objectives that you set at the beginning of the year.

Year end is the perfect time to reflect on and celebrate the year’s accomplishments and to plan for the objectives you want to set for next year. Identify specific things you’d like to change, set detailed and clear objectives, and you’ll have a great head start to improve your organization in 2019.