Tax Return Tips for Last-minute Filers
When it comes to working on your taxes, earlier is better, but many people find preparing their tax return stressful and frustrating and wait until the last minute. Complicating matters this year is tax reform and the newly redesigned Form 1040. If you’ve been procrastinating on filing your tax return this year, here are eight tips that might help.
Resist the temptation to put off your taxes until the last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error. Getting a head start (even if it is a week or two) will keep the process calm and mean you get your return faster by avoiding the last-minute rush.
Gather Tax Documents in Advance
Make sure you have all the records you need, including W-2s and 1099s. Don’t forget to save a copy for your files. If you’re missing important tax documents, see What To Do If You’re Missing Important Tax Documents below.
Double-check Math and Verify Social Security Numbers
These are among the most common errors found on tax returns. Taking care will reduce your chance of hearing from the IRS. Submitting an error-free return will also speed up your tax refund.
E-file for a Faster Tax Refund
Taxpayers who e-file and choose direct deposit for their refunds, for example, will get their refunds in as few as ten days. That compares to approximately six weeks for people who file a paper return and get a traditional paper check.
Don’t Panic if You Can’t Pay
If you can’t immediately pay the taxes you owe, consider some stress-reducing alternatives. You can apply for an IRS installment agreement suggesting your monthly payment amount and due date and get a reduced late payment penalty rate. You also have various options for charging your balance on a credit card. There is no IRS fee for credit card payments, but the processing companies charge a convenience fee. Electronic filers with a balance due can file early and authorize the government’s financial agent to take the money directly from their checking or savings account on the April due date, with no fee.
Request an Extension of Time to File
If the clock runs out, you can get an automatic six-month extension bringing the filing date to October 17, 2022 – but make sure you pay by the April 18 due date. However, the extension does not give you more time to pay any tax due. You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date.
Taxpayers Outside the United States File June 15
U.S. citizens and resident aliens who live and work outside the U.S. and Puerto Rico have until June 15, 2022, to file their 2021 tax returns and pay any tax due. The June 15 deadline also applies to military members on duty outside the U.S. and Puerto Rico who do not qualify for the longer combat zone extension. Affected taxpayers should attach a statement to their return explaining which of these situations apply. Although taxpayers abroad get more time to pay, interest – currently at the rate of 3% per year, compounded daily – applies to any payment received after this year’s April 18 deadline.
Military Service Members Serving in a Combat Zone
Combat zone taxpayers (including eligible support personnel) have at least 180 days after they leave the combat zone to file their tax returns and pay any tax due – including those serving in Iraq, Afghanistan, and other combat zones. A complete list of designated combat zone localities is available on the IRS website. Combat zone extensions also give affected taxpayers more time for various other tax-related actions, including contributing to an IRA. Various circumstances affect the exact length of the extension available to taxpayers.
Help is Just a Phone Call Away
If you run into any problems, have any questions, or need to file an extension, contact the office today.
Reminder: Rules for Depreciation and Expensing
As part of final guidance issued that pertains to the Tax Cuts and Jobs Act of 2017, new rules and limitations are in effect for taxpayers who deduct depreciation for qualified property acquired after September 27, 2017. As a business owner, they could affect your tax situation. Let’s take a closer look:
Businesses Can Immediately Expense More Under Tax Reform
A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. These changes apply to property placed in service in taxable years beginning after December 31, 2017.
As a reminder, the new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation. As such, for tax year 2022, the Section 179 expense deduction increases to a maximum deduction of $1,080,000 of the first $2,700,000 of qualifying equipment placed in service during the current tax year. For 2021, the maximum deduction was $1,050,000 and $2,620,000, respectively.
The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:
- Qualified improvement property, which means any improvement to a building’s interior. Improvements do not qualify if they are attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
- Roofs, HVAC, fire protection systems, alarm systems, and security systems.
Temporary 100 Percent Expensing for Certain Business Assets
The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after September 27, 2017, and is sometimes referred to as the first-year bonus depreciation.
As a reminder, the bonus depreciation percentage for qualified property that a taxpayer acquired before September 28, 2017, and placed in service before January 1, 2018, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.
The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after September 27, 2017, if all the following factors apply:
- The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
- The taxpayer didn’t acquire the property from a related party.
- The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
- The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
- The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
- Also, the cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).
Furthermore, qualified film, television, and live theatrical productions also qualify as qualified property that may be eligible for 100 percent bonus depreciation. This provision applies to property acquired and placed in service after September 27, 2017.
Certain types of property, however, are not eligible for bonus depreciation in any taxable year beginning after December 31, 2017. One such exclusion from qualified property is for property primarily used in the trade or business of the furnishing or sale of the following:
- Electrical energy, water or sewage disposal services,
- Gas or steam through a local distribution system or
- Transportation of gas or steam by pipeline.
This exclusion applies if the rates for the furnishing or sale have to be approved by a federal, state or local government agency, a public service or public utility commission, or an electric cooperative.
The new law also adds an exclusion for any property used in a trade or business that has had floor-plan financing indebtedness if the floor-plan financing interest was taken into account under section 163(j)(1)(C). Floor-plan financing indebtedness is secured by motor vehicle inventory that in a business that sells or leases motor vehicles to retail customers.
The new law eliminated qualified improvement property acquired and placed in service after December 31, 2017, as a specific category of qualified property.
Depreciation Limitations on Luxury Automobiles and Personal Use Property
Depreciation limits for passenger vehicles acquired after December 31, 2017, and placed in service in 2022 have also changed:>/p>
If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:
If a taxpayer claims 100 percent bonus depreciation, the greatest allowable depreciation deduction is:
- $19,200 for the first year,
- $18,000 for the second year,
- $10,800 for the third year, and
- $6,460 for each later taxable year in the recovery period.
- $11,200 for the first year,
- $18,000 for the second year,
- $10,800 for the third year, and
- $6,460 for each later taxable year in the recovery period.
Computers or peripheral equipment have been removed from the definition of listed property. This change applies to property placed in service after December 31, 2017.
Treatment of Certain Farm Property
The new law shortens the recovery period for machinery and equipment used in a farming business from seven to five years. This shorter recovery period, however, doesn’t apply to grain bins, cotton ginning assets, fences or other land improvements. The original use of the property must occur after December 31, 2017. This recovery period is effective for eligible property placed in service after December 31, 2017.
Also, property used in a farming business and placed in service after December 31, 2017, is not required to use the 150 percent declining balance method. However, if the property is 15-year or 20-year property, the taxpayer should continue to use the 150 percent declining balance method.
Applicable Recovery Period for Real Property
The new law keeps the general recovery periods of 39 years for nonresidential real property and 27.5 years for residential rental property. The new law changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years.
Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and no longer have a 15-year recovery period under the new law. These changes affect property placed in service after December 31, 2017.
Under the new law, a real property trade or business electing out of the interest deduction limit must use the alternative depreciation system to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property. This change applies to taxable years beginning after December 31, 2017.
Alternative Depreciation System for Farming Businesses
Farming businesses that elect out of the interest deduction limit must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more, such as single-purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements. This provision applies to taxable years beginning after December 31, 2017.
Tax law can be confusing. If you’re a small to medium-sized business owner with questions about depreciation and expensing, help is just a phone call away.
The Tax Consequences of Crowdfunding
With the onset of the coronavirus pandemic, crowdfunding websites such as Kickstarter and GoFundMe have become an increasingly popular way for small business owners to stay afloat. The upside is that it’s often possible to raise the cash you need; the downside is that the IRS considers that money taxable income. Let’s take a closer look at how crowdfunding works and how it could affect your tax situation.
What is Crowdfunding?
Crowdfunding is the practice of funding a project by gathering online contributions from a large group of backers. It was initially used by musicians, filmmakers, and other creative types to raise small sums of money for projects that were unlikely to turn a profit. More recently, it has been used to fund projects, events, and products and, in some cases, has become an alternative to venture capital. However, with the onset of coronavirus, many struggling business owners have turned to crowdfunding to raise cash to continue operating their businesses.
There are three types of crowdfunding: donation-based, reward-based, and equity-based. Donation-based crowdfunding is when people donate to a cause, project, or event. GoFundMe is the most well-known example of donation-based crowdfunding, with pages typically set up by a friend or family member (“the agent”) such as to help someone (“the beneficiary”) pay for medical expenses, tuition, or natural disaster recovery.
Reward-based crowdfunding involves an exchange of goods and services for a monetary donation, whereas, in equity-based crowdfunding, donors receive equity for their contribution.
Are Crowdfunding Donations Taxable?
This is where it can get tricky. As the agent or person who set up the crowdfunding account, the money goes directly to you; however, you may or may not be the beneficiary of the funds. If you are both the agent and the beneficiary, you would be responsible for reporting this income. Suppose you are acting as “the agent” and establish that you are indeed acting as an agent for a beneficiary who is not yourself. In that case, the funds will be taxable to the beneficiary when paid – not to you, the agent. An easy way to circumvent this issue is to make sure when you are setting up a crowdfunding account such as GoFundMe; you designate whether you are setting up the campaign for yourself or someone else.
Again, as noted above, as the beneficiary, all income you receive, regardless of the source, is considered taxable income in the eyes of the IRS – including crowdfunding dollars. However, money donated or pledged without receiving something in return may be considered a “gift.” As such, the recipient does not pay any tax. Up to $15,000 per year per recipient may be given by the “gift giver.”
Let’s look at an example of reward-based crowdfunding. Say you develop a prototype for a product that looks promising. You run a Kickstarter campaign to raise additional funding, setting a goal of $15,000, and offer a small gift in the form of a t-shirt, cup with a logo, or a bumper sticker to your donors. Your campaign is more successful than you anticipated it would be, and you raised $35,000 – more than twice your goal.
Taxable sale. Because you offered something (a gift or reward) in return for a payment pledge, it is considered a sale. As such, it may be subject to sales and use tax.
Taxable income. Since you raised $35,000, that amount is considered taxable income. But even if you only raised $15,000 and offered no gift, the $15,000 is still considered taxable income and should be reported as such on your tax return even though you did not receive a Form 1099-K from a third-party payment processor (more about this below).
Generally, crowdfunding revenues are included in income as long as they are not:
- Loans that must be repaid;
- Capital contributed to an entity in exchange for an equity interest in the entity; or
- Gifts made out of detached generosity and without any “quid pro quo.” However, a voluntary transfer without a “quid pro quo” isn’t necessarily a gift for federal income tax purposes.
Income offset by business expenses. You may not owe taxes however, if your crowdfunding campaign is deemed a trade or active business (and not a hobby) your business expenses may offset your tax liability.
Factors affecting which expenses could be deductible against crowdfunding income include whether the business is a startup and which accounting method (cash vs. accrual) you use for your funds. For example, suppose your business is a startup. In that case, you may qualify for additional tax benefits such as deducting startup costs or applying part or all of the research and development credit against payroll tax liability instead of income tax liability.
Timing of the crowdfunding campaign, receipt of funds, and when expenses are incurred also affect whether business expenses will offset taxable income in a given tax year. For instance, if your crowdfunding campaign ends in October but the project is delayed until January of the following year, it is likely that there will be few business expenses to offset the income received from the crowdfunding campaign since most expenses are incurred during or after project completion.
How Do I Report Funds on My Tax Return?
Typically, companies that issue third-party payment transactions such as Amazon if you use Kickstarter, PayPal if you use Indiegogo, or WePay if you use GoFundMe) are required to report payments that exceed a threshold amount of $20,000 and 200 transactions to the IRS using Form 1099-K, Payment Card and Third Party Network Transactions. The minimum reporting thresholds of greater than $20,000 and more than 200 transactions apply only to payments settled through a third-party network; there is no threshold for payment card transactions.
Form 1099-K includes the gross amount of all reportable payment transactions and is sent to the taxpayer by January 31 if payments were received in the prior calendar year. Include the amount found on your Form 1099-K when figuring your income on your tax return; generally, Schedule C, Profit or Loss from Business for most small business owners.
Again, tax law is not clear on this when it comes to crowdfunding donations. Some third-party payment processors may deem these donations as gifts and do not issue a 1099-K. This is why it is important to keep good records of transactions relating to your crowdfunding campaign, including a screenshot of the crowdfunding campaign (it could be several years before the IRS “catches up”) and documentation of any money transfers.
Seek Professional Tax Advice
If you’re thinking of using crowdfunding to raise money for your small business, call a tax and accounting professional who will evaluate your tax situation and help you figure out a course of action to help your small business succeed.
Got Debt? How To Improve Your Financial Situation
Being debt-free is a worthwhile goal; unfortunately, for most people, it is unrealistic – especially for those of pre-retirement age with children, a car payment or two, and a mortgage. As such, most people need to focus on managing their debt first since it’s likely to be there for much of their adult life. With inflation on the rise (and subsequent interest rate hikes), your credit card debt could be even more difficult to pay off.
Eliminating debt is especially crucial for anyone approaching retirement age. However, the good news is that when debt is handled wisely, you won’t need to shell out every cent of your hard-earned money to your lender because of exorbitant interest rates or feel like you’re always on the verge of bankruptcy.
Here’s how you can pay off debt the smart way while at the same time-saving money to pay it off even faster:
Review Each Debt
First, assess how much and what type of debt you have by writing it down using pencil and paper or entering the data into a spreadsheet like Microsoft Excel. You can also use a bookkeeping program such as Quicken or a debt management app such as Debt Manager, Debt Payoff Planner, or Changed if you are only concerned about student loan debt. When compiling or entering your list, be sure to include every instance you can think of where a company has given you something in advance of payment, such as your mortgage, car payment(s), credit cards (all of them), tax liens, student loans, Paypal Credit, and store payments or cards used on electronics or other household items such as Home Depot or Best Buy.
Record the day the debt began and when it will end (check your credit card statements), the interest rate you’re paying, and your typical payments. Next, as painful as that might be, add it all up – try not to be discouraged. Remember, the goal is to break this down into manageable chunks while finding extra money to help pay it down.
Make sure that the debt creditors claim you owe is actually what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.
If you have trouble making your payments, contact each creditor and let them know you are having difficulty making your payments. Tell them why you are having trouble – you recently lost your job, for example, or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.
Identify High-Cost Debt
Even if you haven’t lost your job or experienced sickness related to COVID-19, it never hurts to identify which debt is more expensive than others and pay it off first. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense.
In addition, there are several ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage. However, keep in mind that second mortgages greatly increase the risk that you may lose your home.
Unless you’re getting payday loans (which you shouldn’t be!), the worst offender is consumer debt such as personal loans, auto loans, and credit cards with high-interest rates. Credit cards are the easiest to tackle, so start with them first. Here’s how to deal with them:
- Don’t use them. You don’t have to cut them up, but take them out of your wallet, put them in a drawer, and only access the one with the lowest interest rate in an emergency.
- Identify the card with the highest interest, pay off as much as you can every month, and pay the minimum amount due on other cards. When that one is paid off, work on the card with the next highest rate.
Check your credit cards for balance transfer rates and transfer balances from higher interest accounts to lower interest ones. When you pay less interest, you can pay down your debt faster. The catch is that at the end of the balance transfer period (typically six months to 12 months), the low or, if you’re lucky, zero interest rate reverts to a higher credit card interest rate.
- Don’t close existing cards or open new ones. It won’t help your credit rating and will only hurt it.
- Pay on time, absolutely every time. Late payments – even one – can lower your FICO score.
- Go over your credit card statements in detail and look for monthly charges for things you no longer use or don’t need anymore.
- Call your credit card companies and ask them nicely if they would lower your interest rates – sometimes it works!
Be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.
Live Below Your Means and Save, Save, Save
Do whatever you can to retire debt – even if it means reevaluating your priorities and changing your lifestyle. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.
According to the IRS, the average tax refund this year is $3,536. If you are expecting a large (or even small) tax refund this year, consider using it to pay down any debt you owe. If you feel like you have a handle on debt, use your windfall to increase your emergency savings or contribute to a retirement account.
Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses such as housing and healthcare and optional expenses such as entertainment and vacation travel. Stick to the plan. Leave your credit cards at home. Make it a habit to pay for everything you purchase with cash or a debit/credit card. If you don’t have the cash (or the money in your bank account) for it, you probably don’t need it. You’ll feel better about what you have if you know it’s owned free and clear.
Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Think twice before purchasing the latest high-tech gadgets. Do you really need the latest iPhone? You’ll be surprised at what you don’t miss. Consider buying a used car, forgoing that expensive gym membership you don’t have time to use anymore, visiting the public library to check out DVDs, or subscribing to a video streaming company instead of going to the movies – at least until your debt is under control.
Never, Ever Miss a Payment
Not only are you retiring debt, but you’re also building a stellar credit rating. If you ever get another job, buy a house, rent an apartment or buy another car, you’ll want to have the best credit rating possible. A blemish-free payment record will help with that. Besides, credit card companies can quickly raise interest rates because of one late payment, and a completely missed one is even more serious.
Need Help Managing Debt?
While each of these steps, taken alone, probably doesn’t seem like much, you’ll see your debt decrease every month if you adopt as many as you can. If you’re having financial troubles or need help managing debt, or need advice regarding steps you can take to recession-proof your finances, help is just a phone call away.
Cash Management Tips for Your Small Business
Cash flow is the lifeblood of every small business but many business owners underestimate just how vital managing cash flow is to their business’s success. In fact, a healthy cash flow is more important than your business’s ability to deliver its goods and services.
While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, you are out of business.
What is Cash Flow?
Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.
Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.
A tax and accounting professional is the best person to help you learn how your cash flow statement works. He or she can prepare your cash flow statement and explain where the numbers come from. If you need help, don’t hesitate to call.
Cash Flow versus Profit
While they might seem similar, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.
Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.
In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.
If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.
Analyzing Your Cash Flow
The sooner you learn how to manage your cash flow, the better your chances of survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.
The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.
Some of the most important components to examine are:
- Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable balance sheet is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
- Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
- Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.
- Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
- Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable at some point in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.
Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts or spend extra cash to expand its line of business.
For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.
Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.
Make sure your business has adequate funds to cover day-to-day expenses.
If you need help analyzing and managing your cash flow more effectively, please call.
File on Time Even if You Can’t Pay
Generally, taxpayers should file their tax returns by the deadline even if they cannot pay the total amount due, but if you can’t, there are several options. Let’s take a look at a few scenarios:
1. An individual taxpayer owes taxes but can’t pay in full by the deadline. If this is the case, file a tax return or request an extension of time to file by the April 18 deadline. If tax is owed and a return is not filed on time – or an extension is not requested – the taxpayer may face a failure-to-file penalty for not filing on time.
2. File an extension. Taxpayers should remember that an extension of time to file is not an extension of time to pay. An extension gives taxpayers until October 17, 2022, to file their 2021 tax return, but taxes owed are still due April 18, 2022 (April 19 if you live in Maine or Massachusetts).
To file an extension, taxpayers must do one of the following:
- File Form 4868, Application for Automatic Extension of Time, through their tax professional
- Submit an electronic payment with Direct Pay, Electronic Federal Tax Payment System or by debit, credit card or digital wallet and select Form 4868 or extension as the payment type.
3. Set up a payment plan as soon as possible. Taxpayers who owe money but cannot pay in full by April 18 (April 19 if you live in Maine or Massachusetts) don’t have to wait for a tax bill to set up a payment plan. Instead, they can:
- Apply for a payment plan on IRS.gov; or
- Submit a payment plan request using Form 9465, Installment Agreement Request
4. Pay as much as possible by the April 18 (or 19) due date. Whether filing a return or requesting an extension, taxpayers must pay their tax bill in full by the May deadline to avoid interest and penalties. People who do not pay their taxes on time will face a failure-to-pay penalty. The IRS has options for taxpayers who can’t afford to pay taxes they owe.
Don’t wait. If you need assistance filing a tax return or an extension for 2021, please call the office as soon as possible.
Small Business: Rent Expenses May Be Tax-deductible
If you’re a small business owner who is just starting out, you may not realize that some rent expenses may be deductible on your tax return. Here are some things small business owners should keep in mind when it comes to deducting rental expenses:
How Rent is Defined
Rent is any amount paid for the use of property that a small business doesn’t own. Typically, rent can be deducted as a business expense when the rent is for property the taxpayer uses for the business.
Lease or Purchase
- Sometimes a business must determine whether its payments are for rent or for the purchase of the property, because different tax rules may apply.
- Businesses must first determine whether an agreement is a lease or a conditional sales contract.
- Payments made under a conditional sales contract aren’t deductible as rent expense.
Businesses can’t take a rental deduction for unreasonable rents paid. Rent is unreasonable for deduction when it is higher than market value or a professional appraisal.
- Usually, unreasonable rent becomes a problem when business owners and the lessors are related.
- Rent paid to a related person is reasonable if it’s the same amount a business owner would pay to a stranger for use of the same property. The definition of a related person is not limited to family members. Please call for more information.
Office in the Home
A business owner’s workplace can be in their home if they have a home office that qualifies as their principal place of business.
- Business owners who rent their home and have a home office as their principal place of business may also qualify for a deduction.
- IRS Publication 587, Business Use of Your Home, Including Use by Daycare Providers, has more details about this deduction.
Rent Paid in Advance
Rent paid for a business is usually deductible in the year it is paid.
- If a business pays rent in advance, it can deduct only the amount that applies to the use of the rented property during the tax year. The business can deduct the rest of the payment over the period to which it applies.
- Business owners can review Publication 535, Business Expenses, for detailed examples on rent paid in advance.
Canceling a Lease
A business can usually deduct the costs paid to cancel a business lease.
If you have any questions about whether rental expenses are tax deductible for your small business, please contact the office.
Tax Credits To Help Cover Costs of Higher Education
Whether your child attends trade school, private college or public university, you already know that higher education in the United States is expensive. The good news is that many taxpayers are able to take advantage of two education tax credits to help offset these costs: the American opportunity tax credit and the lifetime learning credit. Taxpayers, their spouses, or their dependents who take post-high school coursework, may be eligible for this tax benefit.
How the Credits Work
These credits reduce the amount of tax someone owes. If the credit reduces tax to less than zero, the taxpayer could even receive a refund. To be eligible to claim either of these credits, a taxpayer or a dependent must have received a Form 1098-T, Tuition Statement from an eligible educational institution. There are exceptions for some students.
Key Things to Know
The American opportunity tax credit is:
- Worth a maximum benefit of up to $2,500 per eligible student.
- Only available for the first four years at an eligible college or vocational school.
- For students pursuing a degree or other recognized education credential.
- Partially refundable. People could get up to $1,000 back.
The lifetime learning credit is:
- Worth a maximum benefit of up to $2,000 per tax return, per year, no matter how many students qualify.
- Available for all years of postsecondary education and for courses to acquire or improve job skills.
- Available for an unlimited number of tax years.
Claiming the Credit
Taxpayers can use the Interactive Tax Assistant tool on IRS.gov to figure out if they’re eligible for either of these credits. If eligible, taxpayers who paid for higher education in 2021 can see these tax savings when they file their tax return. To claim either credit, taxpayers should complete Form 8863, Education Credits, and file it with their tax return.
Taxpayers should keep in mind that although there may be four academic years, there are five tax years. As such taxpayers can take advantage of both the American Opportunity Tax Credit (four tax years) and the lifetime learning credit (the fifth tax year), if eligible.
Don’t hesitate to call the office if you have any questions about these and other tax credits that could reduce your tax bill this year.
What To Do if You’re Missing Important Tax Documents
As the April 18th tax deadline quickly approaches, last-minute tax filers should make sure they have all their documents before filing a tax return. You should have received a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2021 earnings and withheld taxes no later than January 31, 2022. As such, most taxpayers should have received their documents near the end of January, including:
- Forms W-2, Wage and Tax Statement
- Form 1099-MISC, Miscellaneous Income
- Form 1099-INT, Interest Income
- Form 1099-NEC, Nonemployee Compensation
- Form 1099-G, Certain Government Payments; like unemployment compensation or state tax refund
Taxpayers who haven’t received a W-2 or Form 1099 should contact the employer, payer, or issuing agency and request the missing documents. This also applies to those who received an incorrect W-2 or Form 1099.
If they can’t get the forms, they must still file their tax return on time or get an extension to file. To avoid filing an incomplete or amended return, they may need to use Form 4852, Substitute for Form W-2, Wage and Tax Statement or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.
If a taxpayer doesn’t receive the missing or corrected form in time to file their tax return, they can estimate the wages or payments made to them and any taxes withheld. They can use Form 4852 to report this information on their federal tax return.
If they receive the missing or corrected Form W-2 or Form 1099-R after filing their return and the information differs from their previous estimate, they must file Form 1040-X, Amended U.S. Individual Income Tax Return.
Incorrect Form 1099-G for unemployment benefits
Many people received unemployment compensation in 2021. Unemployment compensation is taxable and must be reported on the recipient’s tax return.
Taxpayers who receive an incorrect Form 1099-G, Certain Government Payments (Info Copy Only), for unemployment benefits they did not get should contact the issuing state agency to request a revised Form 1099-G showing their correct benefits. Taxpayers who are unable to obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they did receive.
Filing an Amended Return
If you receive a corrected W-2 or 1099 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.
Don’t Wait, Take Action Now
If you’re missing important tax forms, please contact the office for assistance.
Taxpayer Rights: Pay No More Than the Correct Amount
As a reminder, taxpayers have the right to pay only the amount of tax legally due, including interest and penalties. They also have the right to have the IRS apply all tax payments properly. This is one of 10 fundamental rights known collectively as the Taxpayer Bill of Rights.
The Taxpayer Bill of Rights (TBOR) is a cornerstone document highlighting the ten fundamental rights taxpayers have when dealing with the Internal Revenue Service. Every taxpayer needs to be aware of these rights in the event they need to work with the IRS on a personal tax matter.
With this in mind, taxpayers should know six important things about their right to pay no more than the correct tax owed. Here is a summary of what taxpayers can expect:
- File for a refund if they believe they overpaid their taxes.
- Contact the IRS by calling the number listed on the notice or bill if they believe there is an error on a notice or bill. Taxpayers may also write to the IRS office that sent the notice or bill within the time frame given and should provide photocopies of any records that may help correct the error.
- File an amended tax return if an error is discovered after the original return was filed. An amended return should also be filed if there is an error or change in your filing status, income, deductions, or credits.
- Request that any amount owed be removed if it exceeds the correct amount due under the law, if the IRS has assessed it after the period allowed by law, or if the assessment was done in error or in violation of the law.
- Request that the IRS remove interest from the account if the agency caused unreasonable errors or delays.
- Submit an offer in compromise using Form 656-L, Offer in Compromise. Taxpayers use this form to ask the IRS to accept less than the full amount of tax debt. Taxpayers do this if they believe all or part of the debt is not owed.
For general information about taxpayer rights, take a look at IRS Publication 1, Your Rights as a Taxpayer, which includes a full list of taxpayers’ rights. If you have specific questions, don’t hesitate to contact the office. Help is just a phone call away.
Memorized, Commented, and Scheduled Reports
QuickBooks reports are your reward for conscientiously tracking your business income and expenses. Rather than scanning through lists of customer invoices to see which ones are past due, you can run an A/R Aging report with a couple of clicks. Same goes for your bills: A/P Aging. Need to know what items are selling well and which are not? Run Inventory Stock Status by Item.
The insight reports can give you don’t just tell you how many products you’ve sold and what you owe and who owes you. They help you make better business decisions and plan for the future.
But you can do much more with them than just absorb their information and move on with your day. You can modify them, share them and make comments on individual line items. Here’s how. (You can work with a QuickBooks sample file for most of these steps. Go to File | Open Previous Company.)
Where does QuickBooks start when you create a report? How does it know, for example, what date range you want the report to cover and what customers and vendors, and items should be included? It doesn’t. The pre-built reports that QuickBooks can create have default settings. That is, they just provide a starting place. To run the reports with the content you want to see, you have to modify them by clicking the Customize Report button in the upper left and specifying your preferences.
Figure 1: You can change numerous settings in QuickBooks’ reports, and then memorize those preferences for use again.
Once you’ve modified a report that you want to save, it’s easy to keep a copy of it with its new settings. With the report open, click the Memorize button at the top of the screen. When the Memorize Report window opens, give your report a Name that you’ll remember and will associate with its settings and content. If you’d like to save it in a Memorized Report Group, check that box and open the drop-down menu to select from the options there ( Company, Customers, etc.).
Do you think other QuickBooks users might want to use the model you created? Click the box next to Share this report template with others. In the window that opens, you’ll need to give your report a Description. You can choose to share your name or post it anonymously.
Click Share, and you’ll be able to see your template in QuickBooks’ Report Center by clicking Shared with the Memorized tab highlighted. Other users will only be able to access the settings and use them with their own data. Yours will not be included.
Figure 2: You can click the dialogue balloon next to any item and enter a comment about it in the box below.
QuickBooks’ Reports menu is a comprehensive listing of all of your report options. Click on it, and you’ll see that there’s a link for your Memorized reports right at the top. You’ll also see a link for Commented Reports. QuickBooks allows you to enter comments in reports.
To see this in action, open the Sales by Item Detail report. Click Comment on Report at the top of the screen. QuickBooks will open another copy with small dialogue balloons displayed next to every element of the report (Name, Qty, Sales Price, etc.) in every row. Click the one you want to comment on, and a window opens below. Enter your comment.
The number in front of the comment (1) matches the correct location in the report. Click Save over to the right. You can now Print or E-mail the commented report or Save it after giving it a Name. To see the list of reports you’ve entered comments on, open the Reports menu and select Commented Reports. Your original report will not contain the comments, only the commented one you saved.
You may be commenting on reports for your purposes, but you may also want to share them with colleagues or other business contacts sometimes. QuickBooks allows you to email selected reports on a schedule, as long as they’re memorized.
Scheduling reports isn’t such a complex process, but your system has to be set up precisely for it to work. For example, you must:
- Be in single-user mode.
- Have an email service connected to QuickBooks (if it’s Outlook, it must be open and running).
- Not be in sleep or hibernation mode.
- Have QuickBooks updated to the latest release.
- Have QuickBooks running.
Your report data is very sensitive, and emailing it to the wrong person could be disastrous. If you need help with this or any other QuickBooks-related issues, please call, and someone can walk you through this process.
Tax Due Dates for April 2022
Employees who work for tips – If you received $20 or more in tips during March, report them to your employer. You can use Form 4070.
Individuals – File an income tax return for 2021 (Form 1040 or Form 1040-SR) and pay any tax due. If you live in Maine or Massachusetts, you may file by April 19. If you want an automatic 6-month extension of time to file the return, file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return and pay what you estimate you owe in tax to avoid penalties and interest. Then file Form 1040 or Form 1040-SR by October 17.
Household Employers – If you paid cash wages of $2,300 or more in 2021 to a household employee, file Schedule H (Form 1040 or Form 1040-SR) with your income tax return and report any employment taxes. Report any federal unemployment (FUTA) tax on Schedule H (Form 1040 or Form 1040-SR) if you paid total cash wages of $1,000 or more in any calendar quarter of 2020 or 2021 to household employees.
Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in March.
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in March.
Individuals – If you are not paying your 2022 income tax through withholding (or will not pay in enough tax during the year that way), pay the first installment of your 2022 estimated tax. Use Form 1040-ES.
Corporations – File a 2021 calendar year income tax return (Form 1120) and pay any tax due. If you want an automatic 6-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe in taxes.
Corporations – Deposit the first installment of estimated income tax for 2022. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers – Federal unemployment tax. Deposit the tax owed through March if more than $500.
Employers – Social Security, Medicare, and withheld income tax. File form 941 for the first quarter of 2022. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until May 10 to file the return.