Death and Taxes

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Life is like a day. Sunrise, Sunset. A lot of us anticipate that we will die, later in life and if we are “fortunate”, life will give us notice before we do.

Unfortunately, we know, objectively, that is not always true. We all know someone that left us too early. I have had that happen 3 times, just since 6/7/18.

“Life is a movie. Death is a photograph” – Susan Sontag

When someone we love dies, our natural emotional response is grief. Taxes are the furthest thing from our mind-, and, as they should be. This is true for me and for many others that I know or have helped over the years. It is probably true for you, too.

Life dictates change, and even though we do not like it, sometimes our priorities need to change as well. There are things we must take care of, some of which can be time sensitive.

This blog was written to help others learn a little about death and taxes. In my experience, people are often very surprised (or shocked) to learn that tax returns may be required when someone dies. This blog is written in general terms because for many, state rules also apply. Ask your experienced Tax Professional for guidance, as needed.

There are three (3) possible IRS tax returns that may need to be filed after a death:

  1. The Final 1040
  2. Form 1041
  3. Form 706

 

  1. The IRS Final 1040 (Individual Income Tax Return)
  • Income received prior to and including death is reported on the decedent’s Final 1040 tax return
  • Upon death of the taxpayer a new entity, the estate, is created
  • A revocable trust becomes irrevocable upon the grantor’s death. From that point on, do not report income on the grantor’s individual income tax return, use Form 1041
  • The due date remains April 15 for calendar-year taxpayers
  • Your first step, prior to starting the final Form 1040, is to determine who is responsible to file and sign the return
  • If appointed, the representative files Form 56, Notice Concerning Fiduciary Relationship with the IRS
  • The person filing the return should write “DECEASED,” the decedent’s name and the date of death across the top of Page 1 of the tax return. Mail the form to the IRS Service Center for the area in which the person signing the return lives.

 

  1. Form 1041: Estate Income Tax Return
  • Income received after death is reported on IRS Form 1041
  • Notice that Form 1041 and Form 706 both use the word “estate” – learn to distinguish between the two (2) Forms; Form 1041 is for income (like the 1040)
  • An estate is comprised of all assets owned at the time of death, whether they are distributable through the probate process or an alternate way
  • The decedent and their estate are separate taxable entities; obtain an Employer Identification Number (EIN) for their estate or trust from the IRS website
  • The fiduciary of a domestic decedent’s estate, trust, or bankruptcy estate files Form 1041 to report:
  1. The income, deductions, gains, losses, etc. of the estate or trust
  2. The income that is either accumulated or held for future distribution or distributed currently to the beneficiaries
  3. Any income tax liability of the estate or trust
  4. Employment taxes on wages paid to household employees

 

Who Must File Form 1041:

Domestic Estate that has:  Gross income for the tax year of

  • $600 or more, or
  • A beneficiary who is a non-resident alien

 Domestic Trust  that has:

  • Any taxable income for the tax year
  • Gross income of $600 or more
  • A beneficiary who is a non-resident alien

 

Decedents Estates have an Exemption, but do not have a Standard Deduction.

Exemption:

  • Decedents’ Estate : A decedent’s estate is allowed a $600 exemption
  • Trusts required to distribute all income currently. A trust whose governing instrument requires that all income be distributed currently is allowed a $300 exemption, even if it distributed amounts other than income during the tax year

 

Form 1041 – Due Date

  • Form 1041 is due by the 15th day of the 4th month after the end of the estate’s tax year. For taxpayers choosing a calendar year, the due date is April 15
  • If you are preparing Form 706, you should prepare Form 706 at the same time as Form 1041 to determine where to report certain deductions

 

Tax

  • Like IRS Form 1040, the Estate Income tax rate for Form 1041 is progressive, but the rates rise very quickly. For example, the 2017 rate is 39.6% for income of $12,500 or more
  • The 2018 tax rate, inclusive of tax reform, is 37% for income of $12,500 or more

 

Important Form 1041 Takeaways:

Earlier in this post, I highlighted the following fragment in bold, any income tax liability of the estate or trust, and now, I will explain why I did this.

Uncle Sam, generally, may need to be paid before money is distributed to heirs. I am not providing you specific tax advice, nor am I providing you legal advice. However, I am sharing what I have learned via education and experience because this is something that a lot of people do not know and mistakes can be painfully expensive.

Cancelled debt, can trigger taxable income, which can result in an expensive IRS tax bill.

For example, one client received a 1099-C for student debt that was cancelled after the death of a family member. This triggered a large tax bill because of information shared earlier; i.e. a $600 exemption and a 39.6% tax rate. Exceptions, such as bankruptcy or insolvency, were not options.

Fortunately, recent tax reform changed this rule effective January 1, 2018:

Discharged of Student Loan Indebtedness

“The exclusion from income resulting from the discharge of student loan debt is expanded to include discharges resulting from death or disability of the student.”

A 1099-C may be issued for other forgiven deceased debt, such as credit card debt. Be prudent, and know your federal and applicable state rules before distributing assets to heirs. Your attorney may be a good resource to help guide you through this process.

 

3.  Form 706: Estate Tax Return

This form is used to report the transfer of assets from a decedent at the time of death.

The government imposes federal estate tax on the decedent’s entire estate. It is an excise tax on the right to pass property at death.

The Gross Estate includes the total value of the decedent’s interest in all property owned as of the date of death which can transferred due to the will or law. The form includes a number of schedules on which the estate lists the various assets or includes the expenses.

The theory behind the transfer tax system is to tax the value bequeathed to heirs. Since certain debts need to be paid and funeral expenses are customary, these amounts never become part of the inheritance. Because of this, the estate accounts for expenditures and debts in addition to assets.

Form 706 is due exactly nine (9) months after the date of death, unless the IRS has granted an automatic six (6) month extension of time.

For decedents who died in 2017, the executor of the Estate of every U.S. citizen or resident, files Form 706 for those:

  • Whose Gross Estate, plus adjusted taxable gifts and specific exemption is more than $5,490,000; or,
  • Whose executor elects to transfer the DSUE (Deceased Spousal Unused Exclusion) amount to the surviving spouse, regardless of the size of the decedent’s gross estate

Recent Tax Reform, the #TCJA, doubled the Estate Tax and Gift Tax Exemption, for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. The exemption increased to $11,180,000 for 2018.

 

Non-Resident Filing Requirements

Use Form 706-NA, to compute estate and generation- skipping transfer tax liability for nonresident alien decedents. If an individual who is a nonresident alien has a gross estate of property located in the United States in excess of $60,000, an estate return is required.

 

In closing, Ben Franklin is often credited for saying: “Tell me and I’ll forget. Teach me & I may remember. Involve me & I learn.”  I write because it is one more way I can help others from getting hurt financially.

I hope this blog helped you learn a little  about death and taxes. The information provided was written to provide a broad perspective; individual facts and circumstances need to be reviewed to determine what, if any, tax returns may apply for you (or for those that you love).

If I can answer questions or help you, please let me know.

 

Thanks for reading,

Deb

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth though education, strategy, and proactive tax planning. Deb thinks this is the fun part of tax because it makes a financial difference for her clients, their business, and their families.

She offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

https://www.DeborahFoxCPA.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

The blog is provided as general information only and should not be considered a substitute for specific advice and services of a Certified Public Accountant, Enrolled Agent, or an Attorney

2018 IRS Casualty Loss Rules for Federal Disaster Areas

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“Out with the old, and in with the new” is a well known quote, first said by Lee Douglas IV.

The IRS Casualty Loss rules that we could use to deduct losses as recently as 12/31/17 are “out” and more restrictive rules are “in”- effective January 1, 2018. This change was part of recent tax reform titled ‘The Tax Cuts and Jobs Act of 2017’.

  • Old rules allowed you to take a Casualty or Theft loss without a presidential Federally declared major disaster
  • New rules only allow a Casualty (not a theft) loss deduction when a presidential Federally major disaster is declared
  • On 8/4/18, The Carr Fire, in Shasta County, CA received this declaration verbally and the declaration was posted on the IRS website on 8/6/18, on the California state specific page

When this occurs, the IRS has special tax law provisions that may help taxpayers and businesses recover financially. Depending on the circumstances, the IRS may grant additional time to file returns and pay taxes. Both individuals and businesses in a federally declared disaster area can get a faster refund by claiming losses related to the disaster on the tax return for the previous year, usually by filing an amended return. Yes, this means that your 2018 loss could be used to amend your 2017 tax return, or the loss could be used be used on your 2018 tax return. Applying the loss to an amended return, could provide funds to help rebuild now. If you wait, possibilities can be quantified for both years before the decision is made. Affected taxpayers claiming the disaster loss on a 2017 return should put the Disaster Designation, “California, Wildfires and High Winds” at the top of the form so that the IRS can expedite the processing of the refund. With the broad perspective in mind, lets explore beginning details.

Casualty Loss:

A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. It does not include normal wear and tear or progressive deterioration (termite damage). Although only the Carr Fire currently qualifies for this special IRS treatment, a broad definition is provided, because of the possibility of future Presidential Declared Disasters (PDD’s).

Initial Hurdles:

  1. Is your casualty loss in a PDD area?
  2. If so, the deduction is used on Schedule A- Itemized deductions
  3. Is your Itemized Deductions greater than your Standard Deduction?

 

2018 Standard Deduction:

  • Married Filing Joint $24,000
  • Head of Household $18,000
  • Single $12,000
  • Married Filing Separate $12,000
  • Additional small deduction is available for over 65 &/or blind

 

2017 Standard Deduction:

  • Married Filing Joint $12,700
  • Head of Household $ 9.350
  • Single $6,350
  • Married Filing Separate $6,350
  • Additional small deduction is available for over 65 &/or blind

 

Claiming the Loss:

  • Individuals claim their casualty loss as an Itemized Deduction on Form 1040, Schedule A
  • For property held by you for personal use, you must subtract $100 from each casualty event that occurred during the year after you have subtracted any salvage value and any insurance or other reimbursement
  • Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty loss for the year
  • Consider using your 2017 Adjusted Gross Income (AGI) as a benchmark – (the last line, on the 1st page, of your 1040 tax return)
  • Report the loss on Form 4684, Casualties and Thefts
  • Use Section A for personal-use property and Section B for business or income-producing property
  • If personal-use property was damaged or destroyed you may wish to refer to Pub 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
  • For losses involving business-use property, refer to Pub 584-B, Business Casualty, Disaster, and Theft Loss Workbook
  • These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records

 

Initial Action Steps:

  • Inventory your loss by property type- Real Property (real estate); Personal Property (automobiles); Business or Investment property
  • If you own real estate, determine your basis – (cost or adjusted basis)
  • If you need to replace IRS information, use their “Get Transcript” tools, for wage/income information and to obtain previous tax returns
  • State tax rules are different; research yours when you can, to see if tax benefits are available there
  • When you can:
  1. Quantify the value of items lost
  2. Quantify the money received to replace part of your loss
  3. Find your initial IRS loss number: Value of items lost – money received = unreimbursed loss
  4. Use the Unreimbursed loss number to see if the IRS rules, included above, can help you recover, at least some, financially
  5. If you have questions, feel free to contact me via e-mail or by phone; if you use e-mail, please do not send attachments or any personal financial information- that information should always be protected

 

More Information:

Almost two (2) years ago, on 8/23/16, I wrote a blog titled, “Can the IRS help you recover from Mother Nature?” Information about “Net Operating Losses” or “How to Quantify the Loss” can be found there.

In January 2018, I attended an eight (8) hour “Casualty Loss Training” workshop, hosted by the National Association of Tax Professionals. The workshop was created to help Tax Professionals help those affected by Hurricanes Harvey, Irma, and Maria. It may be helpful to know that special legislation was passed to further help those affected by the named hurricanes. The Disaster Tax Relief and Airport and Airway Extension Act of 2017, HR 3823, was signed in to law on September 29, 2017. Perhaps, special rules will be provided to help California recover, faster, with new legislation written just for you.

As I finish writing this blog, the Mendocino Complex fire has just become the largest fire in California history. My heart goes out to all those affected. Although I was born in Michigan, I grew up in Los Gatos, CA and have family residing from one end of the state to the other-literally.  I have family in Redding and in Weaverville, which is why I have followed the Carr Fire so closely; I also have a lot of family/friends in San Diego and others scattered through out the state.

 

Personal Note:

From a heart perspective, I have a sense of what loss and recovery feels like. As a result of the hurricanes last year, I had family/friends living in 5 federal disaster areas: Bexar County (myself in San Antonio); Harris County (my son and others in Houston); and my parents and other family in Florida. During that time, I was posting helpful resources as they became available to me. I will continue to watch the California fires and will share information with you. We might live in separate states, but that just means we are not close neighbors. People as far away as Australia and New Zealand are coming to help you and I want to help you too.

“It always seems impossible until it is done.” – Nelson Mandela

 

Thanks for reading,

Deb

Deborah Ann Fox, CPA helps Individuals and Small Business Owners build and protect their financial wealth. She can help by being your financial compass by providing education and service, while you captain your ship and make the decisions.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

https://www.DeborahFoxCPA.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

Get Started on the “Right Foot” Financial Planning for 2017

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When it comes to your finances, accounting, or tax rules, do you ever feel like a “Duck out of Water?”

If so, this post is designed to help you get started on the right foot, make your 2017 easier, and ideally, more profitable.

Here are 6 tips to help you get started:

1. Employ your money by considering how you can make it work for you:

One way to do this is to work with a tax accountant who can help you learn to use the tax rules to help you improve your financial results by decreasing your income tax expense. A tax software program may help you prepare and file your tax return, but it does not help you plan or make informed financial decisions.

A tax return is based upon the past. The best opportunity to make a difference is in the present.

Tax planning (and acting) may also help you save some money on your 2016 tax return – before you file. You can read the rules, read some of my others blogs, or ask someone for guidance.

 

2.  Self-employment comes with both a lot of perks and responsibilities; this is particularly true for income tax rules and obligations.

The IRS defines Earned Income as all taxable income and wages from working either as an employee or from running or owning a business (net earnings from self-employment).

Last year at tax time, a lot of people were caught by surprise because they had not considered how their UBER or other self-employment income would be taxed. It is important to know the rules to avoid penalties for either not reporting on time and/or for not paying income tax on time.

Use the following information to avoid penalties, price your products/services and to plan your budget:

IRS Business Basics – Compliance – “Must Do”:

  • The U.S. tax system is “Pay as You Go, generally, not at the end of the year
  • If you owe the IRS more than $1K during a year, it is not ok to wait to pay
  • Quarterly Reporting & estimated tax payments are required to avoid late payments, interest & penalties
  • Accounting records must be current to determine – if you need to pay quarterly tax
  • Generally, Calendar Year Due Dates are 4/15, 6/15, 9/15, and 1/15 for the previous year
  • If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty
  • Individuals (Sole Proprietors, Partners, S-Corp Shareholders) need to pay estimated tax if they owe $1,000+
  • Corporations need to pay estimated tax if they owe $500+
  • 2 Possible Penalties: Failure to Fail and Fail to Pay on time – If you can’t pay, at least file; prevents 1 penalty
  • Estimated tax is used for: Income Tax; Self-Employment Tax and Alternative Minimum Tax
  • Reconcile payments on your annual tax return

 

 3. Self-Employment Tax of 15.30% is required on Annual Net Earnings of $400+ – “Must Do”

  • You, need to know “Up front” to budget for cash expense and to consider for product/service profitability
  • Sole Proprietors & Independent Contractors must pay both the employer and the employee side of Social Security and Medicare taxes
  • The 2016 SE tax rate on Net Earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax)
  • The Self-Employment tax rate is 15.3% of the first $118,500 of income and 2.9% of everything above that amount
  • If you also work as an employee, be careful that you do not overpay your Social Security tax. The $118,500 applies to your combined wages, tips, and net earnings
  • Sole Proprietors can deduct ½ of this cost on Form 1040-Line 27, the deductible part of self-employment tax

 

  1. QuickBooks Self-Employed can help you with your business recordkeeping and to determine your estimated tax:

This product is a little less than 2 years old and was designed to simplify the basics for those who are self-employed, own a small business, and who do not have employees (payroll) or inventory. Good examples include realtors and independent contractors.

The program allows you to track business income and expenses and to make tax time simple by capturing all expense deductions, including tracking business mileage. The program also estimates your required IRS quarterly tax payments, lets you separate personal and business expense and create and send invoices on the go.

The cost of $10 or less per month makes it affordable. If you work with a Certified QuickBooks ProAdvisor Accountant, they may be able to provide you a 50% discount on the program cost for your 1st year of use. Reach out to them and ask. If so, they can send you a link to help you get started at the discounted rate.

 

  1. MileIQ is an easy way to track your mileage for expense purposes.

The app is an automatic mileage tracker, which can improve accuracy and add convenience.

2017 rates are:

  • $0.535 for business
  • $0.170 for medical or moving
  • $0.140 for charity

Alternatively, you can use actual expenses incurred.

Either way, the IRS requires documentation, which includes both the beginning and ending mileage, where you went, and why. If you have not been doing this, step outside and record your odometer reading today. That number can provide a good estimate to end your 2016 tax year and to begin 2017.

Also note that if you used accelerated depreciation for your vehicle and used the Section 179 deduction, you cannot revert and use the standard mileage rates.

 

6. Don’t Believe, “Don’t Worry, it’s a Write-Off:

There are a lot of rules for what is an acceptable deductible business expense that apply for who, for what amount, and when.

Following are some general terms that will help you get started in learning IRS terminology and rules.

Note that what is an acceptable taxable deduction in your business may not be acceptable for my business. The “tool belt” is different for a carpenter than for an accountant.

  • Use IRS rules to decrease income tax expense
  • Business Income can be reduced by “ordinary and necessary” expense:
  1. Ordinary expense = Common or Accepted in your trade or business
  2. Necessary expense= Helpful or Appropriate for your trade or business
  • Operating Expense = expense incurred under normal business operations (rent, utilities, insurance, payroll)
  • Capital Expense= benefits more than 1 year (property, plant & equipment)
  • Capital Assets are generally expensed over a period of time by using depreciation and amortization rules
  • Depreciation and Amortization are both a Non-Cash expense
  • They reduce Net Income on an Income Statement, but do not reduce the Cash account on the Balance Sheet
  • The expense can either be based on standard or accelerated rules.
  • Section 179 is an example of an accelerated expense i.e. take a larger deduction in earlier years. Be careful here because you can also be subject to “recapture rules”.
  • This list is not exhaustive nor does it include all the rules. The information is shared to provide general concepts and to plant seeds for future learning.

 

I hope these tips to help you get started on the “right foot” and help you feel less “like a duck out of water”.

We all have gifts we can use to make a difference for each other.

I hope this blog post might have made a small difference for you.

 

Thanks for reading.

To your success,

Deb

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Deb offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

http://www.DeborahFoxCPA.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

Does the IRS think you have a Business?

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Many taxpayers started a business and thought, or were told, “Don’t worry about the expense, it’s a write off on your tax return”.

The truth is that this may or may not be true.

Tax is not a cookie-cutter industry and as you can probably guess, the IRS did not make a “One Size Fits All” tax rule for write-offs.

If your intent is to enjoy your hobby and perhaps make some incidental income, this blog may not be of interest to you.

If your intent is to make money through a legitimate business, as defined by the IRS – this is for you

  • My purpose is to provide you “heads up” and “eyes open” to help ensure your business and financial success
  • This blog is provided to help educate you on how to organize, manage and conduct your business to improve your chances with the IRS in the event that your “activity” is audited ***

 

IRS Hobby VS Business Rules:

  • An “Activity” is either a hobby or a business
  • The IRS uses facts to decide if an activity is a (hobby) or a business
  • Neither the Code nor the Regulations provide an absolute definition
  • It is difficult for a taxpayer to win a hobby-loss case at the Tax Court level
  • If your tax return pays tax as a business and the IRS finds that it is a hobby, your tax return can be corrected and your tax liability could go up; i.e. you might owe the IRS money ***
  • The financial adjustment may be significant. In addition to the loss of the deductions, you, may face a §6662 understatement penalty for the tax years in question ***

 

Hobby Rules:

  • An activity is presumed to be a Hobby if a profit is not earned in at least 3 taxable years of a consecutive 5-year period
  • A taxpayer can overcome the presumption if he/she can show the activity was operated with a For-Profit motive
  • Under IRC §183, a taxpayer’s deduction for Hobby losses is limited to the income produced
  • You must itemize deductions to claim hobby expenses on your tax return
  • Hobby expenses, along with other miscellaneous expenses you itemize on Schedule A, must come to more than 2% of your adjusted gross income before you can deduct them
  • Hobby Expenses can bring your Hobby Gross Income, to zero
  • Income is reported on your IRS Form 1040, Line 21, Other Income
  • I understand that this can be confusing, so I will rephrase differently, to help bring clarity:
  • Hobby Income needs to be reported
  • Hobby Expense deductions have 3 limitations:
  1. Total Itemized Deductions have to be greater than your Standard Deduction
  2. Hobby expense deductions are limited to the hobby income produced, and then
  3. Then those expenses must be reduced by 2% of your Adjusted Gross Income (AGI)

 

Business Rules:

  • A Business has a For-Profit motive
  • A simple, general rule is that if the business makes a profit in 3 of 5 years there will be a presumption of profit
  • IRC § 183(d) is a safe harbor for the taxpayer
  • If the business is For-Profit, no limit on deductions is imposed and the taxpayer may be able to use losses to offset (reduce) other taxable income
  • If an activity has not produced profits in three of the past five years, the taxpayer may still argue that the business has a profit motive by relying on Reg. §1.183-2, which provides for a nine-factor test
  • More weight is given by the courts to the objective facts (rather than to the taxpayer’s statement intent) Dreicer v. Comr., 78 T.C. 642 (1982)
  • Judicial decisions suggest that no one factor is controlling
  • Court decisions often seem to consistently rely on the first factor as the most important

 

The prevailing regulations list nine critical factors for determining whether an activity constitutes a Hobby or a Business. They are:

  1. The manner in which the taxpayer carries on the activity
  2. The expertise of the taxpayer or his or her advisers
  3. The time and effort expended by the taxpayer in carrying on the activity
  4. The expectation that assets used in the activity may appreciate in value
  5. The success of the taxpayer in carrying on other similar or dissimilar activities
  6. The taxpayer’s history of income or losses with respect to the activity
  7. The amount of occasional profits, if any, which are earned by the taxpayer
  8. The financial status of the taxpayer
  9. Any elements of personal pleasure or recreation

 

Business Tax Reporting:

  • A Sole Proprietor or Qualified Joint Venture will file a federal return on Form 1040 and Schedule C- Profit or Loss from Business
  • If you have another Schedule C business activity; a separate Schedule C is required for each business; the same is true for your business records
  • Check to see what tax reporting is required by your state tax board and local municipality
  • The IRS expects you to pay tax as the money is earned
  • If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year
  • Quarterly estimated tax payments should be paid if you expect to owe more than $1,000 in federal taxes on an annual basis
  • Use 1040ES for Individual Estimated Payments
  • Reconcile payments on your annual Year End tax return
  • Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400

 

Building the Foundation for a For-Profit Business Intent

Tips for Success:

  • Conduct your business, like a business, consistently
  • Consistency includes Quarterly tax reporting and payments – as required
  • Quarterly reporting requires that your accounting records be current – so you know if you have a profit or a loss
  • Taxpayers bear the burden of proving that they engaged in the activity with an actual and honest objective of realizing a profit
  • Keep detailed financial records
  • Credit Card and Bank statements and cancelled checks are not enough- the IRS needs to see the detail of what you bought
  • Receipts are your Audit Protection – the IRS has Strict Substantiation Requirements
  • The Cohen Rule,” states that you can use “other credible evidence,” or rely on IRS Publication 463 which states that you don’t need to keep receipts for expenses under $75 – it is safer to save all receipts and to follow a consistent business practice
  • Don’t use Cash: it is hard to track, easy to spend and nearly impossible to reconcile with receipts
  • Establish separate checking and credit accounts for your business – don’t co-mingle business & personal funds
  • Keep a Time/Activity Log- Outlook or Google calendar may be requested during an audit
  • If you have had business losses and made changes in the attempt to improve profitability, keep a list of changes made and the date the change was made
  • Establish a level of expertise by attending seminars, networking, and joining professional organizations related to the activity
  • Anticipate that you could be audited ***
  • Pursue your passion, enjoy the journey, and ask questions as you learn along the way

 

If you want to learn more about IRS tax rules, contact for me for a $75.00 Special: includes a 45 minute Q&A phone session plus a free “cheat sheet” for your personal use. The “cheat sheet” includes accounting/tax tips about what is a deductible expense, etc. Offer is valid until 9/5/16.

 

“Success is nothing more than a few simple disciplines practiced every day” – Jim Rohn

“To open a shop is easy; to keep it open is an art” –Chinese Proverb

 

Thanks for reading,

Deb

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

Is Your Tax Situation Causing You Pain?

 

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Perhaps, a little humor can help the “medicine go down”

Is a Tax problem (and pain) keeping you up at night? If so, I hope to provide you some relief to feel better by:

  • Helping you Identify your status & gain perspective
  • Provide education – process, proposed solutions, and
  • Suggest do’s and don’t to remedy your situation, or
  • Identify those that can legally help you and with what

Pain Scale:

0 – I hope it stays this way – always

Mild Pain – Filed an extension & still not ready to file?

1-2 – Mild Pain – Can be Ignored?

Moderate Pain – Audit – Find your Records?

3 or 4: Interferes with Tasks

5 or 6: Interferes with Concentration

Severe Pain – Assets seized? Wage Garnishment?

7 or 8: Interferes with Basic Needs

9 or 10: Bed Rest Required

Regardless of your situation, know that you are not alone and help is available.

Tips for those with a Mild diagnosis

  • You have until 10/17/16 to file your 2015 return
  • Now is the time to request help if you want it
  • Reminder to stay current with your estimated tax payments for 2016

Tips for those with a Moderate/Severe diagnosis

Remind yourself that being afraid of things going wrong isn’t the way to make things go right.

Fear is interest paid on a debt you may not owe” – anonymous

Take a breath and let’s dig deeper.

There are 3 types of IRS Audits (verified compliance)

  • Correspondence Exam– not Face to Face
  • Office – Local IRS office – Desk Audit
  • Field – Your office or home or your Accountants office

Audit Scope/Complexity varies from low to high risk

  • In a Correspondence Audit, the IRS, generally, will not expand the scope
  • If you request a transfer to an Office Audit, because of complexity or large amount of documents, the Revenue Agent has the authority to Expand the Scope- IRS internal approval required
  • Field Audit scope can be expanded without approval 

An Audit LifecycleSimplified

  • Inquiry
  • Provide info
  • Wait
  • Proposed Changes
  • Wait
  • Provide Additional info
  • Finalize

Timeframe to Resolve (perspective)

  • Correspondence Exam – 3 to 6 months
  • Office Exam – can take over a year

 

What you need to know:

  • A discrepancy is not an audit; i.e. Form CP 2000, but should be treated like an audit
  • For Audits, the Burden of Proof, falls upon the Taxpayer- show why you are entitled to deduction
  • The IRS may give you a Proposed Tax Bill if you don’t substantiate your position
  • Your Tax Adviser can help you by being the Auditor before the Audit; examples:
  1. Can help you identify Audit Risks – problem areas on your return and/or overlooked deductions & credits
  2. Poor Books & Records & the need to recreate

 

Dos and Don’ts

Do:

  • If you handle your own IRS correspondence, Be Clear, Concise, and To The Point
  • Do provide credible evidence
  • Be timely in your response and provide the requested information – Be organized and help them do their job
  • Do know the Limits on Representation:
  1. CPA, EA, & Attorney can help through the Appeals process
  2. Attorney only for Tax Court

 

Don’t:

  • Do not include needless facts- the auditor could miss your main point if you ramble
  • Do not send/bring a big box of loose unorganized paper- this sets your audit off on the wrong foot
  • Don’t ignore their letters

Action Steps:

  • Read what the IRS is looking for
  • Gather documents, organize, & summarize
  • Recreate unavailable documents
  • Decide, am I going to do this alone or get help

 

Process:

Audit Determination:

  • No change
  • Agree with changes – make payment arrangements
  • Disagree with changes – Appeals Mediation or Appeal

Collection:

  • Generally, the IRS will send you a written notice requesting that you pay a specific amount
  • If not paid and you do not contact them, the IRS could force you to pay by taking future refunds, placing liens on your property, seizing assets, & garnishing your wages

Installment Agreement:

  • Signed agreement to pay down the debt over a period of time
  • Can prevent Wage Garnishment IF payments are made on time

Offer in Compromise:

  • An agreement to settle the debt for less than the amount owed
  • You must qualify by meeting compliance and eligibility requirements. Requirements are strict and the IRS only accepts this under limited conditions

Appeals Mediation:

  • Alternative Dispute Resolution
  • Helps to develop resolution strategies
  • Appeals mediator has no power to render a decision or to force either party to accept a settlement.

Appeal:

Appeals is the place for you if ALL of the following apply:

  • You received a letter from the IRS explaining your right to appeal the IRS’s decision.
  • You do not agree with the IRS’s decision.
  • You are not signing an agreement form sent to you.

 

Closing Comments:

  • This blog is intended to provide you some insight and helpful solutions. It is not exhaustive of all possibilities
  • 1st Time Abatement Penalty and relief from other penalties were not discussed in this blog

 

If you have questions, feel free to call me at 619-549-2717.

“They always say time changes things, but you actually have to change them yourself “ – Andy Warhol

 

Thanks for reading,

Deb

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

5 Ways a CPA can help Small Business

 

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Small Business Owners, particularly in the early stages, are doing it all.

Sometimes it can feel like an up hill battle. There is so much to do, and learn, and not enough time to do it. Financial resources can be scarce and stretched thin.

Sometimes spending a little can help you a lot. The value is apparent.

What We Do:

CPA’s do much more than crunch numbers and report on facts that have already happened in your financial statements.

CPA’s provide advice. We educate our clients and help them improve their financial business results.

Our value can often be quantified, measured, seen and/or felt by business owners.

CPA’s provide a wide variety of services.

I enjoy helping small business owners with income tax and with all the detail that includes. I understand almost no one likes tax; however, we all like to save money. For me, using IRS rules to help others is fun.

How We Help:

1.  A CPA  can help prevent “Blind Spots”:

What you don’t know can hurt you. I’m not telling you this to scare you. Rather, to educate you and provide an objective example.

Many new Small Business Owners do not know that the IRS expects them to pay tax as the money is earned and that quarterly reporting and payments are required if you expect to owe more than $1,000 annual tax to the IRS.

This means that you need to keep your accounting records current so you can determine if you need to begin quarterly reporting and payments. 

2.  A CPA can help with your Budget:

  • Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400
  • The 2015 SE tax rate on Net Earnings is 15.3: (12.4% social security tax and 2.9% Medicare tax)
  • Do you include this expense in your budget so you have cash when it is time to pay the IRS?

 

3.  A CPA can help you make Decisions:

  • Data (information) can be used to help you make cost effective decisions
  • Review Forecasted to Actual Financial results – what happened?
  • Help a business owner interpret the financial statements and offer suggestions to improve profitability, cash flow, and efficiency

 

4.  A CPA can help you Minimize your Income Tax:

  • Do you know what you can legally deduct on your tax return?
  • Do you know how to use strategy to reduce your business tax bill?
  • Tax Planning includes education, evaluation, and action

 

5.  CPA can help you improve Profitability:

  • When I told an architect that they were required to pay Self-Employment tax, they were shocked. They told me, I have to raise my prices immediately. I am not making any money.
  • We can help you determine if your pricing is profitable or if you are working for free or for not as much money as you thought you were making
  • You don’t want to wait until year-end to find out
  • As we all know, time is money and the faster we can earn it and build a financial cushion, the more comfortable we feel

 

You have 3 choices:

  1. Do it yourself – inexpensive, but can be costly
  2. Do it for me – expensive & might be seen as a luxury until the cash starts coming in – consistently
  3. Do Some of it for me: a cost effective bridge to obtain education and help on a “as needed” basis

 

Thanks for reading,

Deb

Call me about an Accounting & Tax Tip Cheatsheet  619-549-2717

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

 

Starting Over – A Happy Tax Story

 

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Zig Ziglar said, “We cannot start over, but we can begin now and make a new ending”.

The Problem:

A few years back, I had a contact call me in a panic after she had finished her initial attempt at preparing her own tax return. She owed almost $5,000 and was shocked that she owed that much money.   It was scary because she didn’t have the money to pay that kind of tax bill. She called me for help and advice.

The Beginning:

To put this into perspective, this was her 1st year to file Single.

Previously, her husband of almost 25 years had handled their tax returns. They had filed Married Filing Joint and had dependent children. At work, her tax withholding was based upon her previous situation, not her present circumstance.

Originally, she thought filing a tax return would be simple and at first, it seemed as if it was. TurboTax asked her questions and she completed the answers the best that she could.

The Middle:

After receiving her call, we agreed to meet and I reviewed what she had completed, but had not yet filed. After a good interview process, we had a game plan and she began to collect tax related documents that could be used to determine the feasibility of itemizing rather than to use the standard deduction.

The End:

After several weeks of back and forth questions and answers, I had the documentation that I needed to help her complete a revised return. This resulted in about a $3,900 savings and she thankfully, filed her federal and state tax returns.

The Zig Ziglar quote is great, but it did not fully apply in this situation. She could “start over” and could also make a new ending.

Since that time, we work together every year. We don’t just wait until the tax season to talk. We use tax planning and action during the year to manage her annual tax bill and to keep it as low as possible. Frequently she knows her current tax situation before 12/31. We don’t know the exact number, but she does have the comfort of “No Surprises” when the tax season officially arrives.

The Lessons:

  • Sometimes, a 2nd look can make a big difference
  • If the tax filing process is new to you, having someone help you, may prove to be beneficial
  • If you ask someone to help,  try to find someone that will take the time to educate you about the process.
  • It is empowering to learn and apply the tax rules; it saves you money 

Thanks for reading!

Deborah Ann Fox, CPA is working to make a difference in peoples lives and wallets, by helping them build and protect their financial health.

Debbie offers free 30 minute no obligation consultations and is available for appointments – including remote. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com