Category: General Info

When the American Rescue Plan was signed on March 11, 2021 with provisions aimed at helping the bulk of the taxpaying public suffering the economic consequences, it created a bit of mess as some of those measures were retro-active to 2020.

The measure that created the most concern amongst taxpayers (and us tax preparers) was the exclusion of unemployment benefits from 2020 taxable income up to $20,400 for married filing jointly and $10,200 for all others for those with less than $150,000 in adjusted gross income.

The IRS has announced that it will take steps to automatically refund money later this year to taxpayers who filed before the changes and were eligible for the tax relief. Taxpayers will not need to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.

So, you should double check that return if you’ve already filed to see if you need to refile, and if not, just be patient: they are on it.

So, you filed your taxes – congrats!

 

Are you expecting a refund?  Or do you need to verify your tax return was filed?

 

Are you the sort of person who eagerly tracks expected deliveries from the likes of Amazon and eBay?

 

Then, we have good news for you!

 

Did you know you can track your filing and refund status with Dude, Where’s my Refund? on the Internal Revenue Service website?

 

(Note: The “Dude” part is our attempt at cultural humor and not part of the official site name … yeesh, such a missed opportunity.)

 

This tool will provide you with a personalized date only after the return is processed and a refund is approved – usually within 21 days.

 

It is worth noting that the IRS is jammed because of last year’s extensions and the numerous legislative actions that have altered tax policy, so tax documents that were mailed in are taking longer to process.  If you are in a hurry for that refund and have yet to file, it may be advisable to file electronically.

 

The IRS site warns that delays could also result from errors in the return, identity theft, or fraud, so keeping an eye on the refund tracking tool may give an early alert that there are issues with your return.

 

This brings us to an unappreciated fact about the IRS: the agency is actually a great source of information. Their website is reasonably easy to search, and the publications are well-organized and straightforward.

 

It is tempting to chalk it up to the agency wanting to give you zero reasons not to pay your taxes.  But we prefer to view it as the agency’s way of making an irritating yet mandatory process as manageable as possible – including tracking your refund.

 

 

Last week, the United States Treasury announced an automatic extension for federal income tax filing and payments for the 2020 tax year to May 17, 2021.

 

First reaction for most of us was a combination of “Yay!” and “Whew!”

 

However, there are two important items to remember:

1. If you owe any estimated tax payments (including self-employment taxes), the deadline for those payments DID NOT CHANGE, and the payments are still due on April 15.
2. The U.S. Treasury decision did not extend deadlines for states’ income tax filing.  Some states have extended the filing deadlines, but some have not.  Check with your state tax agency for announcements of any changes.

 

But even with this extension, don’t relax for too long – May 17 will be here before you know it!  Contact us if you need help with compiling your paperwork and getting everything ready for filing.

 

 

As of this writing on the late afternoon of March 10, 2021, the House and Senate have just passed the American Rescue Plan Act (ARP) and shortly the president is expected to sign it into law. This bill includes many provisions that have major tax impacts for 2020 and 2021 tax returns.

A word of caution is merited as final guidance under IRS regulations does not exist for exactly how to include some items in your filing, but we suggest you start identifying key items that apply to your tax circumstances.

We’ll keep you apprised as things clarify. Below is a bullet-point list of headline items.

• Unemployment benefits: A retroactive tax provisions makes the first $10,200 of unemployment payments nontaxable ($20,400 in the case of a joint return, but only $10,200 per spouse) in 2020 for households earning less than $150,000.
  • Additional provision of a $300 weekly federal unemployment benefit through 6 September 2021
• Economic Impact Payments: Single taxpayers with AGI under $75,000 will receive a $1,400 refundable tax credit, while joint filers with AGI under $150,000 will receive $2,800.
  • In addition, taxpayers will receive $1,400 for each qualifying dependent (including adult dependents).
  • The credit will completely phase out at an income threshold of $80,000 for single filers and $160,000 for joint.
  • The Treasury is directed to issue this credit as an advance payment based on the information on 2019 or 2020 tax returns.
  • It may make sense to delay filing until after payments are disbursed.
• Child Tax Credit: Special rules for 2021 include an expansion of the credit from $2,000 to $3,000 per eligible child under age 18 ($3,600 per child under age 6). Starting in July, the Treasury will issue advance payments of 50% of the child tax credit based on 2019 or 2020 tax return information.
• Earned income credit: For 2021 only, the bill expands the eligibility and the amount of the earned income credit (EIC) for taxpayers with no qualifying children. The maximum credit amount for childless people will increase from $543 to $1,502. For 2021, taxpayers can use their 2019 income if it was higher than 2021.
  • The disqualified investment income limit has increased from $3,650 (2020) to $10,000 and will be adjusted for inflation.
• The act includes other tax changes, such as:
  • Refundability and enhancement of child and dependent care tax credit
  • An individual can receive an advanced premium tax credit (APTC) to lower their monthly health insurance payment (premium).
  • Increase in exclusion for employer-provided dependent care assistance
  • Extension and expansion of the Families First Coronavirus Response Act (FFCRA) paid sick leave and paid family leave credits
  • Extension of employee retention credit
  • Modification of the premium tax credit
  • Change to the tax treatment of targeted economic injury disaster loan (EIDL) advances
  • Exemption of student loan forgiveness from federal taxation through 2026
  • Expanded COBRA continuation coverage premium assistance credit

Many U.S. taxpayers opt to prepare and file their own return.  With the many challenges of 2020, though, you might be thinking of calling a tax preparer to handle your filing this year.  Here are some things to consider:

 

• Make sure the tax preparer has the fulfilled the requirements to prepare and file federal and state returns. At the minimum, all tax preparers should have an IRS Preparer Tax Identification Number (PTIN) for federal returns.  Each state will also have its own qualifications, which are listed in the state’s revenue department.
• Don’t just hire the first person you find. Schedule a phone call or meeting to get to know the preparer before signing an agreement.  Ask questions about critical things like background and experience, but also see how comfortable you feel about the conversation in general.
• Determine what level of tax preparation service you need. Is your return complicated enough to require a tax attorney?  Do you need someone who can represent you on the returns they prepare for you?  The higher the involvement level, the higher the fees you’ll pay — but also the higher your peace of mind in case you need extra support with your filing.
• Get a fee quote before agreeing to work with a tax preparer. Ask if the fee is fixed or a minimum – sometimes a tax preparer will offer a fee that includes a small amount of bookkeeping time, but you’ll have to pay more if it turns out a significant amount of bookkeeping work needs to get done to calculate the return accurately.
• Be careful of “ghost preparers” who will prepare your return but not sign off as preparer. In addition to this being a violation of IRS rules, it is a warning sign that the preparer isn’t properly competent and may be looking to scam you in other ways.
• Finally, DO NOT sign your tax return until you review everything carefully, including your routing and bank account number for direct deposit refunds. If something in the tax return seems off, ask!  Ultimately, you are responsible for the accuracy of your return, even if you pay someone to prepare it.

 

A good starting place on your search is the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications (https://irs.treasury.gov/rpo/rpo.jsf).  But don’t wait too long – the filing deadline is just five weeks away!

 

If you operate your business from your home, chances are high that you’ve been considering how to deduct the use of your home space on your taxes.  The good news: The Internal Revenue Service offers home office deductions for business owners who don’t own or rent space for business operations.  The bad news: Those deductions are subject to specific definitions of what qualifies as a “home office”.

 

I’m very lucky to own a house with more bedrooms than people.  We bought a larger-than-necessary-for-three-people house so we could have space for our visiting friends and family.  But I claimed one room as mine when we moved in.  I installed a closet organization system, bought some bookshelves and a comfy couch, and enjoyed exercising, crocheting, sewing, and relaxing in “my room”.

 

Then I started Sunstone Bookkeeping, and the most logical move was to change “my room” to “the office”.  I bought office furniture and equipment, moved my craft supplies to another room, and set up operations.  I have signs to put on the closed door to warn my family in case I’m on a call or video meeting or working on a deadline (though the signs don’t seem to work on the dogs, as they still feel compelled to loudly let me know there’s a squirrel in the back yard).  I continue to use the space for exercise three mornings a week as well as to read or crochet with the door closed when I need a little decompression time to myself, but most of the time it’s where I conduct business activities.

 

It’s that “most of the time” phrase that prevents me from claiming the space as a home office deduction.  The IRS rules are very clear:  the space (FYI, “space” can mean a room or a specific section of a room) must be used exclusively for business in order to qualify as a deductible expense.  By using my office for any personal activities, the space is no longer exclusively used for business.

 

The most comprehensive source for information on all the specific qualifications and calculations is IRS Publication 587, Business Use of Your Home.  You’ll also find worksheets, information on recordkeeping, and even specific situations for daycare facilities.

 

One more thing to keep in mind: The home office deduction is reported as an audit trigger by several financial sites:

 

https://www.personalcapital.com/blog/taxes-insurance/10-irs-audit-triggers/

https://www.thebalance.com/top-audit-triggers-that-catch-irs-attention-4153034

https://www.hrblock.com/tax-center/irs/audits-and-tax-notices/irs-audit-triggers/

 

That’s not to say you shouldn’t claim the deduction, but you need to make sure that you’ve carefully followed the IRS rules (including – and you know I’m always going to say this – keeping detailed records) in case you are audited.

This week’s tax tip is less technical and more mindful:  I’m going to talk about the positive side of tax season.

What?!!

You heard (or read) me.  “Positive side.” I know – it sounds bizarre, but stay with me:

Every year, when the excitement of the holidays is over and we realize we should probably take down the holiday decorations, the stress and dread of tax season begins for U.S. business owners.

“Ugh,” we moan. “I have to gather all that paperwork and the calculator and the tax software and fill out all these forms and send them in.”

Of course, we do it – because we’re required to by U.S. law.

But in our complaining, we’re overlooking the fact that this annual obligation provides us with something all business owners should have:

A record of the business’s financial performance for the year.

Think about it:  We’re obligated to submit a document that outlines our business’s revenue, expenses, and profit – a document all business owners need to review to run their business!

So, this year, why not try changing your perspective?  Instead of looking at tax preparation as a chore required by law, look at it as a way of reviewing your business’s performance.  You have to do it anyway – might as well do it with a positive mindset!

“OK, you’ve already said that all these business receipts/canceled checks/bills/invoices/register tapes are important to hold on to.  Really, are they THAT important?”

 

Yes.  They are THAT important.  And I mean totally, completely, and unequivocally IMPORTANT.

 

(Yes, bold caps was necessary.)

 

There are many reasons why they are IMPORTANT (yes, that needed to be in bold caps again), but I’ll start with the more timely since I’m writing this in February:  TAXES.

 

You should always prepare your tax filing as if an auditor from the Internal Revenue Service is going to appear at your door the second the paperwork is processed, ready to demand proof of your calculations.  (In fact, your tax preparer has a duty to calculate your taxes as if this exact scenario were to happen.)

 

In other words, if you can’t defend the expenses you claimed, you could be in for a lot of frustration, headaches, and probably some fines and penalties.

 

Therefore … fewer receipts on hand at tax time means less proof of deductible expenses, which means fewer expenses you can deduct, which could mean more taxes that you owe.

 

The IRS Publication 583 “Starting a Business and Keeping Records” may not have the most riveting plotline, but it’s a great reference for all things related to supporting documents.

 

Make your tax filing season less stressful … and save those receipts!

Late in 2020, the Internal Revenue Service (IRS) announced a plan to increase audits of small businesses and their investors by 50% in 2021 and, in a sign that they are serious, put hiring plans in motion to add the capacity.

To be clear, the rate of audits of small businesses has been quite low in recent years, so the increase, while meaningful, doesn’t mean you are assured of being audited. However, your business could be chosen for audit solely by statistical algorithms, or could be flagged because of doing business with someone who is under audit (including an investor/partner/member).

The targeted taxpayers are mostly “pass through entities” including LLCs, LLPs, Subchapter S corporations, and partnerships. It should be noted as well that 2015 legislation made it possible for the IRS to collect underpaid taxes from such entities themselves rather than only chase the partners/members, meaning the business entity itself is at risk now if an audit finds underpaid taxes.

Now, you’re probably thinking, “Well, that’s just dandy.  So what do I do now?”

The last few years have seen a bewildering array of changes in tax laws, so what might be a “red flag” that draws attention today versus yesteryear is probably unknowable.  Our suggestion: Focus on what you can do be prepared if that audit algorithm picks you at random.

The law requires you keep all records relating to tax returns for three years and the IRS usually only audits returns filed in the last three year (more often within the last two years) but if the IRS auditor identifies substantial errors, you might have to provide earlier records.. The auditor may request records such as receipts, bills, cancelled checks, legal papers, loan agreements, logs/diaries, tickets, medical/dental records, theft/loss documents, employment documents (including employee policies), K-1s, and whatever else is relevant to your tax return.

What we strongly suggest is to use your tax preparation as a chance to organize your business records so that you know if you are missing any vital substantiation of expenses or inadvertently underreported income. If you start with the proverbial shoe box of receipts, don’t just dump them back in there after you file your return.  Instead, file them physically in an organized manner that cross-references your return (e.g. keep inventory records together and separate from your auto expenses) or, better yet, enter everything into bookkeeping software with scans of the records attached.

If the worst-case scenario happens and that audit letter hits your mailbox, you’ll be ready to deal with it rather than scrambling in a panic. The side benefit is that you will know how your business really performed, have a clearer view of how to manage going forward, and have the basis for ongoing record keeping that will make next tax season easy and your return able to withstand scrutiny.

Tax Day 2021 in the U.S. is, as usual, April 15 – 74 days away.  Seems like a long time, right?

But for many business owners, because you’re so busy running a business, the annual gathering of the paperwork/receipts/statements/information/all things financial ends up happening waaaaay too close to that filing deadline.

Which means stress, and hurrying, and a higher chance of deductions getting missed or mistakes being made.

So … how about we make 2021 a little different?

Join me on Facebook for a second FREE Five-Day Prepping for Tax Prep Challenge!

We’ll meet for five days in the group, where we’ll guide you on how to locate the relevant information for the different sections of the Schedule C.

The best parts?

1.  No calculator or bookkeeping knowledge required.  We’ll be showing you where to find the information needed to file the taxes, NOT filling out any of the forms.

2. The challenge runs from February 8 to February 12.  There will be a pre-recorded video available each day, plus a live Q&A session each night at 7:00 pm via Zoom.

So, if you want a tax filing season that’s less stressful than usual, click on over to the Facebook group and join us!