Sunstone Blog

Much like the days of early January bring about thoughts of making life changes in the wake of the Holiday Season, the aftermath of Tax Season sparks in many people thoughts of improving their financial situation and management.

Here’s our short list for the self-employed small business owner. You are one of these if you are a sole-proprietor (including a single member LLC or independent contractor), a partner in a partnership, or a member of a multi member LLC. (Yes, this includes you side-hustlers and gig-economy entrepreneurs!)

Avoid a big tax bill in April – Make your estimated self-employment tax payments!

First, you should be reviewing your financial results routinely.  Quarterly is good, monthly is better.

Second, know your payment periods and deadlines for payment:

Third, put it in your calendar to calculate your net income for each payment period and the amount of your self-employment tax. This process has the added benefit of forcing you to keep your books in order so you aren’t scrambling (AGAIN!) every single March.

The calculation is straightforward:  Multiply your quarterly net earnings by 92.35%, then multiply that amount by 15.3%.

Fourth, send in the payment. The easiest thing in the long run is to set up your online account with the IRS and then you can submit your payment electronically.  If you prefer to mail a check, send it a week ahead of the deadline.  However, an electronic payment doesn’t depend on how well-funded or overworked the USPS is at any particular time.  You can find more info at this link:  https://www.irs.gov/taxtopics/tc554

Get smart at keeping your books in order!

You don’t need to get an accounting degree to be an intelligent user of your financial information. We recommend Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know Paperback by William G. Droms as a good starting point (here’s an admission: this book helped us when we were working on our MBAs). There are other similar books to help you out too if that one doesn’t appeal to you. We’d also say to “watch this space” as we’re working on our own course to help you appreciate the form and function of your financial information.

Get smart on tax deductions!!

Knowing what’s deductible is the first step and then you just keep receipts. Don’t like a pile of paper in the corner or a cardboard box overflowing with receipts? Use your smart phone and take a picture of the receipt and store it in the cloud. It’s simple.

To get knowledgeable on the basics of tax-deductible small business expenses, we recommend the following free IRS Publications as a good start (bonus: these resources are relatively easy to read):

Publication 334, Tax Guide for Small Business

Publication 535, Business Expenses

Publication 583, Starting a Business and Keeping Records

In addition, we recommend Tax Savvy for Small Business as a comprehensive primer on the topic if you want a one-stop guide and don’t want to wade through the IRS website. In addition to many of the basics covered in the above IRS publications, this book also provides guidance on pros-and-cons of various business structures, retirement plan options, and dealing with IRS examinations.

Much like the days of early January bring about thoughts of making life changes in the wake of the Holiday Season, the aftermath of Tax Season sparks in many people thoughts of improving their financial situation and management.

For individual tax filers, here are our top suggestions:

Fix your withholdings

The biggest headache we see year-in and year-out are people under withholding and ending up with a large tax bill. It’s become clear to us that employer HR departments are not helping people out with this adjustment in the way we would expect and remember.

The easiest thing to do is go to the IRS Tax Withholding Estimator. It’s a good time to do it while the issue is fresh in your mind, you still have time to course-correct, and you have your tax return handy. All you need is a couple of your most recent paystubs and tax return handy and fill it out. Then, print out the instructions and go see your HR department to adjust your W-4.  It’s that easy.

Set up your IRS Online Account

We preach this. We give discounts for this. Go set up your IRS account and put in your calendar reminders to check it a few times a year to monitor for identity theft and IRS activity in your account. That simple. Added benefit: you can pull your tax transcripts to double check your records in case you lose or don’t receive a 1099 or other informational filing (or if the IRS gets one with your name on it that is not yours!).

Keep an eye on your financial investments

If you have a brokerage account of any type, be sure to check it quarterly at least and we strongly suggest speaking with your advisor/broker in the late summer/early fall around year-end tax planning. If your account is actively managed by another person, you need to know what that person is doing so you can prepare for the tax consequences. Don’t view your brokerage account in isolation; if you are generating capital gains or losses elsewhere, there may be opportunities to save with careful planning. Think about looping your tax planner into the conversation since your broker/advisor isn’t necessarily focused on these concerns.

Talk to your tax planner

We get bored and lonely after tax season is finished; we miss you. Drop us a line when you are making any moves that might have tax implications. We can’t speak for every tax pro out there, but we’ll answer a quick question for free for our clients and let you know ahead of time if it gets more involved.

Bonus: Non-Tax Book recommendation

We aren’t financial planners or investment advisors, but we do have a favorite book to get you started thinking about investing: A Random Walk Down Wall Street by Burton Malkiel. In addition to an introduction to the theory behind financial markets, the book provides a well-thought-out life-cycle approach to investments. Even if you don’t want to follow this plan, it provides a good benchmark for framing your investment goals. If nothing else, reading this book will give you the tools to think carefully about investment opportunities.

The good news for small businesses is that there aren’t a ton of changes to the tax rules for you to consider for your 2022 tax year filing, certainly fewer than for individuals. Below is a non-exhaustive highlight of things to keep in mind.

We are going to start with something that might have slipped under the radar for some: the requirements for third-party payment settlement networks, such as PayPal and Venmo, to send you and the IRS a Form 1099-K if you receive over $600 during the year for the sale of goods and services. Previously, that requirement kicked in at $20,000 and if you had more than 200 transactions. So, if you’ve had a small side-hustle selling for profit online, you need to be aware that not only has the obligation to report that income always existed, but now the IRS is much more aware of you receiving that income.  (Accepting personal payments through channels like personal Venmo or PayPal’s “Friends and Family” option should not trigger a Form 1099-K filing. Important note: YOU SHOULD NOT use personal electronic payment options for business transactions; it’s a violation of the Terms & Services and could lead to you losing your account, not to mention possible penalties for underreporting your income if you forget to include them in your tax filing).

The phase out of the 20% self-employment income deduction for pass-through income begins at $340,100 in income for joint filers ($170,050 for all others) this year, rising from $329,800 ($164,900).

Standard Mileage Rates got an unusual two-stage bump for 2022; the rate for business was 56 cents per mile in 2021, increased to 58.5 cents for the first six months of the year, and increased again to 62 cents for the second half. Charity rates remain at 14 cents per mile (you get the feeling our lawmakers aren’t great fans of charities).

On the reporting side (as opposed to pure money items), the requirement for the completion of the K-2 and K-3 for partnerships and S-corps kick-in in full in 2022 after certain relief was granted in 2021. These schedules are meant to help partnerships and S-Corporations report certain international tax information to their partners so that the partners can better comply with their taxes. This is a complex topic so keep in mind if you have an interest in a partnership or S-Corporations, be sure to ask your tax preparer what you need to do.

If you took advantage of deferral of Social Security taxes as an employer, remember that the last half is due 31 December 2022. Don’t mess this one up; the penalties are steep.

Starting in 2023, bonus depreciation is limited to 80%, so if you want to take advantage of the 100% write off, make that acquisition by 31 December 2022.

If your business was impacted by a natural disaster (as declared by the federal government), consider accelerating any disaster losses and filing Form 4466 to apply for a quick refund of overpayment of estimated tax.

As in each year, think about year-end items to optimize Qualified Business Income deductions or look at how retirement plan changes could be beneficial.

Lastly, looking ahead to doing business in 2023, the 100% deduction for food bought in restaurants goes away; feel free to call your lawmakers on this one.

We’ll be back with some thoughts on key items to consider for 2023 for possible tax implications of your business decisions. While we believe that taxation implications rarely provide a good sole justification for a decision, we also know that knowing those implications can help you avoid bad tax outcomes and occasionally benefit from the tax code.

In the 2020 and 2021, a very limited sense of “we are all in this together” prevailed and various tax measures were put in place to ease the pain of the COVID-19 pandemic. For 2022, most of those measures are going away, because apparently everything’s normal again or, more likely, politicians aren’t worried that economic hardship for those below the “big donor” level could cost them their positions.  Below we highlight some key changes you should consider for your upcoming tax return; there are other detailed changes out there, this is not a complete list.

We are going to start with something that might have slipped under the radar for some: the requirements for third-party payment settlement networks, such as PayPal and Venmo, to send you and the IRS a 1099-K if you receive over $600 during the year for the sale of goods and services (money sent under the “Friends and Family” option should not trigger the filing). Previously, that requirement kicked in at $20,000 and if you had more than 200 transactions. So, if you’ve had a small side-hustle selling for profit online, you need to be aware that not only has the obligation to report that income always existed, but now the IRS is much more aware of you receiving that income. If you sold your used personal property at a loss, you should square away your documentation just in case the IRS takes an interest. If you were collecting funds for your model train club, knitting group, or dart team and it wasn’t sent as “Friends and Family”, you should collect correspondence and receipts showing this was not a business enterprise (and make sure your club mates use Friends and Family in the future).

The Child Tax Credit is falling back to its pre-2021 level of $2,000 per child under 16 from $3,000 for 6- to 17-year-olds and $3,600 for under 5s. The CTC, which was fully refundable in 2021, also reverts to being only partially refundable and only to the extent 15% of earned income exceeds $2,500.

Similarly, the Child and Dependent Care Tax Credit diminishes for 2022 with the maximum credit percentage dropping to 35% from 50%, a reduction in the types of expenses eligible, and

Adding to this general theme of reducing help to working families, the Earned Income Tax Credit sees an increase in the age to qualify (25 versus 19), reinstatement of the maximum age limit of 65, and the maximum credit available for childless working falls to $560 from $1,502.

The “above-the-line” deduction of up to $300 for charitable deductions has been phased out and again charity giving is only deductible if you itemize. And of course, the 60%-of-Adjusted Gross Income limit on cash donations for those who itemize is back in play after being suspended for 2020 and 2021.

Teachers get a break with an increase to $300 ($600 if married-filing jointly) for the above-the-line (i.e., you don’t have to itemize to take this deduction) for digging into your own pocket for supplies needed to fill the gap from chronic school under-funding.

The Residential Clean Energy Credit is no more! It’s been renamed to the Residential Clean Energy Credit (I want to meet the staffer who made that their “big win” for the year)

Standard Mileage Rates got an unusual two-stage bump for 2022; the rate for business was 56 cents per mile in 2021, increased to 58.5 cents for the first six months of the year, and increased again to 62 cents for the second half. Medical Mileage Rates increased from 16 cents in 2021 to 18 cents for the first six months of 2022 and then to 22 cents for the last six months (the moving only applies to active duty military).  Charity rates remain at 14 cents per mile (you get the feeling our lawmakers aren’t great fans of charities).

We won’t bore you with the details of the various inflation-driven changes to things like income tax brackets, income levels applicable to Long Term Capital Gains Tax Rates, and changes in the standard deductions. You should be aware to look these up for detailed tax planning.

We will note that the limits on the 20% self-employment income deduction for pass-through income rose to $340,100 for joint filers and $170,050 for other from $329,800 and $164,900.

In summary, your 2022 tax return is going to look a bit different from 2021 due to a lot of these changes and, in general, reflects a less kind and generous tax situation. Please know that the above is not inclusive of all changes that may be relevant to you, and you should speak with your tax expert to assess your own situation.

Bylur has the right idea – time to chillax now that tax season is done!

However … and I hate to be THAT person, but I gotta … tax season is really never over.  Because after you’ve taken a little time to recharge after the stress of getting the taxes filed, you need to take a look at this year’s finances to make sure you’re on top of everything for the next tax filing.

Examples of business changes to review with your tax preparer (even if that’s you):

• • If you hired employees for the first time, you need enter the transactions correctly so you’re not overstating your payroll tax expense and understating your wage expense.
  • If you purchased any equipment or property, you may need to calculate depreciation in order to spread the expense over the next few tax years.
  • If you took out loans, you’ll need to make sure the payments are divided between the principal and interest portion.

Reviewing these changes now, while we’re still in the first half of the year, will help lower the time and stress for next year’s tax filing.  If you’d like to schedule an hour of our time to review any of these changes with you, click here to schedule a One-Hour Bookkeeper appointment.

Again, reward yourself with some rest after all your hard work!

It’s less than a week until the May 17, 2021, deadline for filing individual tax returns. Even with the one-month extension granted this year to everyone, you might still be scrambling to get your records and filing in order. It might seem overwhelming, but there is another way: you can get more time!

File Form 4868 for an automatic filing extension until October 15, 2021.*

Notice we underlined and italicized the words “filing extension”? That’s because you still need to PAY any taxes you owe by May 17 or potentially face a payment penalty and interest charges.

Why pay without filing? Filing penalties are often higher than non-payment penalties. So, make an estimate (there are numerous online calculators to assist you) of what you might owe and pay that to avoid those penalties if you can, but definitely file for the extension if you simply don’t think you can get the filing done in time.

Do you need to file your taxes on time or get an extension if you expect a refund? Technically no, but you can lose your refund if you wait too long and for some taxpayers there are certain tax elections that must be made by the filing deadline.

In summary, if you are struggling to get your filing done, it’s really in your best interest to file an extension and take some of the pressure off.

*(If you are an American citizen living abroad, your regular deadline is June 15, 2021 and you can file Form 2350 for an extension until December 15, 2021.)

** Credit to Steve Miller for this post’s title — love the song “Fly Like an Eagle” 🙂

The extended tax filing deadline for your personal taxes continues to creep up on us; that extra month is down to only an extra two weeks. With that in mind, it is a good moment to make sure you don’t fall victim to some common mistakes that can cost you money, time, and hassles.

Getting your filing filed:

• Use electronic filing: the tax software applies all updates to the law, checks for available deductions and credits, prompts you for required info, and does the calculations. This is a way to reduce the chance of errors. IRS Free File is a good option if your return is straightforward.
• Also, the pandemic has slowed processing time for paper returns by the IRS, so e-filing should be faster for processing any refunds.
• If filing on paper, make sure you have the right address. Use this link to double check.
• Keep a copy for your records. If you have an issue, it could be invaluable.

Don’t make silly mistakes! Every year, droves of taxpayers face delays and possible penalties resulting from simple slips.

• Get names and Social Security numbers right, including dependents. If someone doesn’t qualify for an Social Security number, provide their Individual Tax Identification Number.
• Double check your bank routing and account numbers for direct deposit.
• Sign and date the return. Yep, this mistake happens a lot. If filing jointly, both spouses must sign and date the return.
• Answer the virtual currency question! It’s rather new and is an easily overlooked item on the Form 1040.
• Report all taxable income. Don’t forget about those 1099s etc.

Lastly, if things are just going wrong and you can’t get your filing together in time, get an extension rather than pay a late filing penalty. You can easily request an automatic extension to October 15 on Form 4868 or on Free File. Remember though, you still have to PAY by May 17, 2021 or face potential fines and penalties.

Did you need to tap your IRA, 401(k), or 403(b) due to financial setbacks suffered due to the pandemic before December 31, 2020? Then you need to pay careful attention to the tax implications and report it to the IRS even if you don’t need to file a federal income tax return.

(By the way:  We are assuming here that you were qualified to do so; there are specific criteria for that that can be found at this site: IRA Coronavirus related relief for retirement plans FAQ.)

The good news is that you are able to avoid the 10% penalty tax for early withdrawal if you were under 59-and-a-half years old at the time of withdrawal, and if you repay the withdrawal within three years, you can avoid income tax on it … sort of.

The “sort of” disclaimer above is that you do have to recognize the income and pay applicable taxes before the repayment, but:

1. You can spread the income recognition over three years in equal portions to soften the blow.
2. If you make a repayment, you can file an amended return that excludes that income up to the amount recognized.

For example, if you took a distribution of $30,000 in 2020, you could elect to recognize the full amount as income in 2020 or recognize $10,000 in each of 2020, 2021, 2022. If you were to repay $12,000 in 2021 to any qualified retirement plan, you can file an amended 2020 return to exclude the $10,000 of income recognized (and taxed) in 2020 and the remaining $2,000 would apply to 2021 so that you only recognize $8,000. Conversely, if you repaid $21,000 in 2021, you would be able to amend 2020, exclude $10,000 for 2021, and then the remaining $1,000 for 2022.

Other key points:

• Your retirement plan was required to report the distribution on a 1099-R but is not required to treat it as a Coronavirus related distribution. You can still report it as a Coronavirus related distribution on Form 8915-E.
• Retirement plans are not required to amend their terms to accept repayments (which technically are treated as rollovers). In this case, you’ll need to find another plan to pay into to make a “repayment” for tax purposes.

This situation is a bit tricky, so be careful and make sure your tax preparer is paying close attention.

Did you file your 2017 1040 federal income tax return?

No? You didn’t think you needed to as you were sure you didn’t owe taxes?

Did you double check that you might just be due a REFUND, particularly if you are a low- to moderate-income worker?

There might be cash sitting in government coffers for you and you might be about to lose it forever.

The IRS has sent out a notice that 1.3 million taxpayers who didn’t bother with that 2017 return are owed refunds.  That three-year deadline to claim any 2017 refunds expires on Monday, May 17, 2021. If you haven’t filed 2018 or 2019 either, they could still hold that money until you do so.

The Earned Income Tax Credit (EITC), which is refundable, is a key item giving rise to potential refunds for low- to moderate-income worker; it could be worth up to $6,318.

Thresholds in 2017 for EITC eligibility were:

• $48,340 for those with three or more qualifying children
• $53,930 if married filing jointly
• $45,007 for people with two qualifying children; $50,597 if married filing jointly
• $39,617 for those with one qualifying child; $45,207 if married filing jointly
• $15,010 for people without qualifying children; $20,600 if married filing jointly

There’s more information on the IRS website here.

Check your records, call your tax preparer*, and get those returns filed if you think you are eligible.

(*Cautionary note: Avoid any tax preparer who “guarantees” a refund, tries to base their fee on the refund, or requires that your refund must come to them directly instead of to your account.)