Tax Tips

Owning your own business has significant tax advantages. Ask anyone who has gone from being an employee to being their own boss and they’ll tell you the deductions alone make it all worthwhile. Still, many business owners are missing out on a fair number of deductions. This may be for a combination of reasons. Maybe they don’t use a CPA, they don’t completely understand how to track expenses, or something else. The IRS is happy to let you take as many legitimate business deductions as you qualify for. But you need to be aware so you keep track of those expenses.

1. Research

There are two ways that tax write-offs apply when it comes to business research. Your CPA can amortize the costs, or you could get a research tax credit. Because research is an activity that boosts the overall worth of the business, research and experimental costs are typically capital expenditures. Capital costs must be depreciated over a specific time frame.
Costs for research and experiments that aim to give information needed to operate or expand your business, or that would remove doubt regarding the creation or improvement of a product are fair game as far as taxes go.

You may qualify for a tax credit of up to 20% of the qualified costs incurred for these activities if your small business conducts research. Additionally, you might be eligible to use a portion of this research credit as a payroll tax credit against your company's share of Social Security Tax if your small business qualifies.

Typically, experiments utilizing science to enhance a product or procedure are considered research activities for the purposes of this tax credit.

2. Startup Costs

Startup costs of $5,000 or less can be deducted. Specifically, if your startup costs are $50,000 or less, you can deduct up to $5,000. If startup costs are over $50,000 but less than $55,00, you are legally allowed to deduct $5,000, less the difference between your total startup costs and $50,000. If you had money to help with startup costs, such as from an angel investor or from venture capital, the equation is more complicated. In this case, you should keep track of strap expenses, but let your CPA handle how much deduction you’re entitled to.

3. Bad Debt

Considering the current economy, it’s good to know that bad debt can be used as a business deduction. Many of the most famous companies in the world have a lot of bad debt, which serves to give them a tax break. To establish bad debt, there must be a bona fide relationship between the creditor and the debtor, such as a purchase order, contract or similar. The business owner needs to be able to show that there was an expectation of payment. For this reason, be sure to keep all records of transactions, not just the unpaid invoice.

4. Bank Fees

Does your business use a credit card processor or an online payment platform like Stripe or PayPal? If so, remember that the fees charged by agents like this are considered bank fees and are legitimate business deductions. Every time you transfer money from PayPal directly into your business bank account, PayPal charges a percentage; that’s a business deduction. That 35 cent transaction fee on credit card purchases from your customers is also a business deduction. These are small amounts, but they can add up over the course of a year. Your CPA may have ideas for keeping track of the tiny expenses to ensure you take credit for each and every one.

5. Business Memberships and Dues

Do you have a club membership that you use for yourself and your clients? Do you take your clients to lunch at your golf club? Do you give your employees a club membership as a perk? Keep your receipts because these all count as business tax deductions with the caveat that they are business-related.

6. Petty Cash Expenses

One of the most overlooked business tax deductions is expenses from the petty cash box. This box gets overlooked in so many offices. A good bookkeeper will replace money out with receipts in, so that at the end of the month the petty cash box balances out and all the proof is available for any legitimate business expenses. But if you’re wearing all the hats in your small business, this is an easy one to overlook.

7. Trade Subscriptions

Do you fill your front lobby with trade magazines? Do you get subscriptions to trade magazines at home so you can keep abreast of new developments in your field? Trade magazine subscriptions are business tax deductible, as long as they are related to your area of business. Online paid newsletters are also business tax deductible, as long as they qualify as business-related.

8. Home Office Expenses

If, like many people, you’ve transitioned to a work-from-home set up, you should know that many home office expenses are deductible, such as internet, office equipment, office furniture and more. There are very specific rules about what percentage of home office expenses you can deduct, and different ways to calculate the deduction, so be sure to consult with your CPA about your situation.

The key ingredient for making sure that you’re not missing out on any business deductions is to work closely with your CPA. Your CPA can review all your expenses and point out ones that are tax deductible so that you are both on the same page. It’s easy to simply sign your business tax return at the end of the year, but understanding where your business tax deductions could increase will yield more favorable tax positions.

If you've been busy rolling the dice at a crap table in Vegas, playing the lottery now and then, or betting on your favorite team to win a few games, you may have accumulated some gambling winnings. While this is certainly putting a smile on your face, realizing you may need to report your gambling income at tax time may turn your smile into a frown. Are you in or are you out? Here's what you need to know about reporting your gambling income.

All Gambling Winnings are Taxable

Whether you were the person who had the hot hand at the craps table or played it cool with your buddies at your weekly poker game and came away with a few hundred dollars to show for your efforts, the bad news is that all gambling winnings, no matter how big or small they may be, are technically considered by the IRS to be income that is taxable.

In fact, any and all winnings you have from gambling, whether it's in the U.S. or somewhere else around the world, are taxable. Thus, when you sit down to discuss this with your CPA, don't be surprised if they tell you that those winnings you got from playing the slot machines, being a contestant on a game show, or even playing bingo are subject to taxation.

What if You Only Won $1.00?

Yes, even if you only won $1.00 gambling, the IRS and your state tax folks will expect you to report it on your taxes. Assuming you decide to report your winnings, you will do so by reporting the gross amount you received. Depending on the amount you won, your winnings may be reported on a W2-G. However, even if you are not issued a W2-G, you're still expected to report that one measly dollar you managed to win.

Don't Underestimate the Taxes You May Owe

When many people, especially those who win big at the lottery or on game shows, receive their checks, there is usually 24% withheld for taxes. However, this may not be the full amount that must be paid. Since the federal tax rate is significantly higher than 24%, don't be surprised if the IRS has its hand out wanting more of your money.

If you think this could be the case, plan on consulting with your CPA. After you've cut the cards, blown on the dice, and said a prayer or two, your CPA may suggest you send the IRS an estimated tax payment once you get your check. Also, expect your state to want its fair share as well, so make sure your CPA explains this to you during your conversation.

Can I Get Any Gambling Deductions?

If there is a bit of a silver lining to this roulette wheel of gambling income and taxes, it is that there are some deductions you can take on your taxes along the way.

However, before you start jumping for joy thinking you can somehow use the money you lost gambling to cancel out your winnings come tax time, have yet another talk with your CPA. According to the IRS, you assume the risk of losing when you decide to gamble. Because of this, you are not allowed to deduct certain gambling-related expenses, such as hotel, food, transportation, and cover charges at betting establishments.

Should you think your luck has finally run out, don't push aside your poker chips just yet. According to the IRS, gamblers are allowed to deduct all losses on their tax return, but only up to your winnings. Considered to be a miscellaneous itemized deduction, this may make it easier on you come tax time. Unfortunately, your CPA will tell you that unless you meet the standard deduction amount, which is quite high, you probably won't qualify for this deduction.

What About Non-Cash Prizes?

Should you be a contestant on a game show and come away with a car, vacation, or other prize that is not cash, you may think you have found a way to bluff your way by the IRS and not have to pay out thousands of dollars in taxes for your winnings.

Unfortunately, Uncle Sam also has quite a poker face, and is already several steps ahead of you on this matter. According to the IRS, the fair market value of non-cash prizes, such as cars, trips, furniture, or other items is classified as gambling income, and thus is expected to be reported on your tax return.

Are You a Professional Gambler?

If you gamble not just now and then but rather consider it to be your chosen profession, you and your CPA will take a slightly different approach to your winnings.

If you are indeed a professional gambler, your winnings are considered to be regular earned income, meaning they are taxed at regular income tax rates. Specifically, your winnings would be reported as self-employed income, making them subject to not only federal and state income taxes, but also self-employment tax as well.

Should you claim to be a professional gambler, your CPA will strongly suggest you be telling the truth to the IRS. If you are caught in a lie, the casino bouncers you encounter will look like cupcakes compared to what the IRS may have in mind for you down the road.

Play it Safe, or Go All In?

Whether you decide to play it safe or go all in when it comes to reporting your gambling income, make sure you discuss all the details with your CPA. Rather than make a bad decision or an honest mistake on your return, take the advice of your CPA on reporting gambling income. By doing so, your lucky streak will continue.

You may have noticed a lot of talk lately about something called, “universal basic income.” The increase in online chatter about universal basic income, or UBI, is likely connected to the government handing out stimulus money during the pandemic. 

When that happened, a lot of people were hopeful that “free money” in the form of monthly checks from the government would become the norm. That’s when others started chiming in about the concept of UBI and advocating its benefits. Of course, the pandemic stimulus checks ended up being a short-term solution, and the government currently has no concrete plans to distribute more stimulus checks. But the notion of universal basic income has not dissipated from social awareness, so it’s worth understanding exactly what is UBI.

What is Universal Basic Income?

Universal basic income is defined as guaranteed income for every adult, provided by the government. In a standard UBI system, every adult would be automatically given a monetary amount of money on a recurring basis, typically every month. Presumably, the amount of money would be the same across the board. So a person earning $200 a week would get the same amount of UBI as a person earning $500 a week, and so on. Of course, variations in a UBI system are available. If a government wanted to try to equalize the payouts, they could create thresholds where a person who earns more at their job might receive less UBI than a person who earns minimum wage, for example. 

Where Did the Concept of UBI Originate?

The concept of UBI is not new. Sir Thomas More, English 16th century humanist and statesman, talked about the concept in his tome, “Utopia.” Thomas Paine put forth the idea of UBI for younger people in his work, “Agrarian Justice.” He recommended a tax program where government revenues would provide a stream of income for “every person, rich or poor.” Martin Luther King wrote a book called “Where Do We Go From Here,” in which he proposed guaranteed income for all. Little known to all, President Richard Nixon attempted to enact UBI, which would have guaranteed, for example, that a family of four would receive $1,600 a year in “free money.” Not much now, but that amount would equate to about $10,000 per year in today’s money. As you can see, the concept of UBI is not new or foreign. Several of our own leaders and early “influencers'' advocated for UBI, centuries before the rest of the world thought of it.

Does UBI Exist Anywhere Currently?

Interestingly, another little known fact is that the state of Alaska has been distributing money to its residents since 1982. Due to the money coming in from oil, mining and gas reserves revenues, plus the lack of available employment opportunities in Alaska, residents now receive a check every September from what’s called the Alaska Permanent Fund.

While there are small pockets around the globe that offer temporary monetary compensation to residents or would-be residents, there is no country that currently offers UBI on a permanent basis. Mongolia and the Islamic Republic of Iran are the only countries that temporarily tried UBI, but they no longer have that system in place. 

The Case For UBI

As mentioned, the inciting incident of the economic distress that families experienced as a result of the pandemic brought UBI to the forefront. COVID-19 left many people without jobs and without means to provide for themselves and/or their families. It’s estimated that over 20 million people lost jobs due to COVID. The pandemic is one case that has been raised in favor of implementing UBI. 

A far more insidious case has also been made for UBI, and that is AI. AI, or artificial intelligence, is growing faster than most people realize. Behind the scenes, companies are building out their AI programs. AI started as innocuous automation. Who could be against automation when it made complex jobs more simple or alleviated the need for humans to conduct mundane tasks? But what started as convenience has become a full-fledged  movement for humans to be replaced by AI. And it’s coming sooner than anyone might have expected.

According to multiple experts, 36 million people will lose their jobs to AI. By the year 2030, 375 million jobs worldwide are at risk of being lost. That’s only nine years away.

This is why many individuals and reputable organizations are raising their voices to advocate for UBI. With so many jobs lost to AI, it is reasoned that people will need supplemental income to replace lost earned income. It’s not speculation. At this point, it’s a fact that more and more people will find themselves replaced by AI in the workplace. 

Will UBI Be Taxed?

There is currently no plan in place to implement UBI. However, the government is studying it and there are many representatives in D.C. who are for this new path to economic stability. So any answer to the question of whether UBI will be taxed would be purely hypothetical. If UBI is ever implemented in the U.S., there are no doubt many tax details that would need to be ironed out. For instance, would the child tax credit still exist? And how would the standard deduction be affected? No one really knows the answer; only that any UBI plan would need to be carefully planned and managed, and there would be multiple impacts on taxes from many fronts.

Theoretically, UBI is neither good nor bad. It’s just another possible way to ensure that families are able to support themselves in the wake of certain events, such as the pandemic and the rapid advancement of AI. It’s likely that if UBI is rolled out, there will be problems, adjustments and solutions. Things would be likely to happen in stages. The best thing you can do is to be aware of the possibility and to stay in contact with your CPA so you can be prepared insofar as your tax planning is concerned.

As you know, most income you earn or receive over the course of a year is subject to being taxed. While in many situations the taxes are paid through withholding, other situations may require you to make estimated tax payments. Most often, this occurs when an insufficient amount of taxes are withheld from your salary, you receive other forms of income, or you own a business. When you don't pay your fair share of taxes, the IRS can subject you to penalties that may quickly accumulate. To make sure you know everything you need to know about estimated tax payments, read over the following information and always consult with a CPA should you have additional questions.

Who Must Pay Estimated Taxes?

As to who is expected to pay estimated taxes, this applies to individuals such as those who have sole proprietorships, partners, and shareholders in S Corporations. In these situations, estimated tax payments are usually made if the expected amount of taxes to be owed when filing a tax return exceeds $1,000.

When it comes to corporations, estimated tax payments need to be made when the amount of taxes owed is expected to be at least $500. Finally, estimated taxes may need to be paid for the current year if your prior year's taxes were more than zero, so keep this in mind as well.

Who Does Not Have to Pay Estimated Taxes?

While you may assume almost everyone has to make estimated tax payments, that is not the case. In fact, you can avoid these payments by simply asking your employer to withhold more of your income for taxes and by filing an updated W-4 form with your employer. If you file this form, pay attention to the line for the additional amount you want withheld, and make sure you enter the correct amount.

In other situations, you will not have to make estimated tax payments if you had no tax liability for the previous year, were a citizen or resident of the U.S. for the entire year, and your previous tax year did in fact cover an entire 12-month period. Since you don't want the IRS to accuse you of avoiding your tax payments, always consult with a CPA if the need arises.

Figuring Your Estimated Taxes

While it can be confusing in some aspects, figuring your estimated tax payments is actually easier than you may imagine. To do so, you'll need Form 1040-ES, which is used by all taxpayers except corporations, which use Form 1120-W. To accurately figure your estimated tax payments, you will be required to first figure your taxable income, adjusted gross income, deductions, taxes, and credits for the tax year. Along with the worksheet contained in Form 1040-ES, the process will be easier if you also use your federal tax return from last year and the income, credits, and deductions from that year as well. Even if these have changed, they will serve as an excellent starting point to give you the help you may need. But since it is likely tax laws may have changed and your own financial situation may also be different, don't rely solely on how you interpret certain IRS regulations. Instead, talk to a CPA to avoid making costly mistakes.

When Should Estimated Tax Payments be Made?

When paying estimated taxes, remember that the IRS divides the year into four payment periods. Once you are ready to make your payments, you can do so by mail, online, or even through your smartphone or other mobile device. In addition, the IRS will give you options to make your estimated tax payments even easier. So long as you make all of your tax payments within the given time period, you can send in payments each week, every other week, or even monthly, depending on what will work best for you and your financial situation.

Penalties for Underpaying Your Estimated Taxes

While the IRS does have penalties that can be imposed on taxpayers who underpay their estimated taxes, these penalties are generally not very severe, and in most cases can actually be avoided altogether. In most cases, taxpayers can avoid financial penalties if the amount owed after subtracting credits and withholdings is less than $1,000, or if the taxes paid for the current year are equal to at least 90% of what is owed.

In addition, penalties for underpaying estimated taxes may also be waived by the IRS if you can show you failed to make payments due to unusual circumstances such as a casualty or natural disaster, you retired upon reaching age 62, or you became disabled in the tax year for which estimated tax payments were to be made. To be sure you can avoid any penalties, always have detailed records that can back up any claims you make, since it is likely the IRS will want to verify your story before waiving the penalties.

Coronavirus Tax Relief

Due to the impact the COVID-19 pandemic has had on people throughout the United States, the IRS and Congress have passed legislation and put new regulations in place to help provide tax relief to those who may have lost jobs or businesses due to the pandemic. Specifically, the CARES Act has a provision in it that applies to self-employed individuals, allowing them to defer part of the Social Security tax. Thus, if you are self-employed, you may be eligible for such relief. To find out how this may help your situation, talk to a CPA as soon as possible.

Along with this information about various aspects of estimated tax payments, the IRS has other programs in place that may provide additional help in making sure you don't have to pay penalties. Yet if you try to sift through the various forms, worksheets, and other information on your own, you are almost certain to make mistakes along the way. To ensure you don't make costly mistakes that could result in penalties or you missing out on important relief opportunities, consult with a CPA today.

While most people are accustomed to being in debt for homes, cars, and other things, being in debt to the IRS is a different matter altogether. Since the federal government does not appreciate it when folks don't pay the amount of taxes they owe, the penalties for tax debt are often severe. Unfortunately, many people try to ignore their tax debt problems, hoping they will magically disappear. Instead, they only get worse. If you are in trouble with the IRS, here are some tips for how to deal with your tax debt.

Make It Your Top Priority

First of all, make your IRS tax debt your top financial priority. Since the agency is allowed to seize your business assets or even your home, it is often suggested that paying off tax debt is a higher priority than paying a mortgage. Thus, rather than find yourself dealing with property liens and wage garnishments for years, get serious about dealing with tax debt and resolve this issue as fast as possible.

Loans and Lines of Credit

If you happen to be a business owner who owes back taxes to the IRS, taking out a bank loan or using a line of credit can sometimes be your ticket to paying off your tax debts. While the interest you wind up paying will probably not be deductible, it should be much less than the interest rates charged by the IRS. In most instances, the IRS charges penalties on unpaid taxes that accrue at .5% per month, or six percent annually. This, coupled with an additional three percent charged on your balance calculated at the federal short-term interest rate, means you will have at least a nine percent interest rate staring you in the face until your taxes are paid.

Retirement Account Loans

Along with traditional bank loans or lines of credit, you can also take out loans from your pension plan or retirement accounts like a 401(k) to pay your tax debt. Though you will lose some investment returns and be subject to paying interest when replacing the money, the difference will be much less than it might be if you continue to carry the IRS debt. However, don't be like many people who panic and simply withdraw money from their retirement accounts without thinking. If you do so and thus make it a taxable distribution, you'll have even more money that needs to be paid back. Consult with your CPA about withdrawal strategies that won’t set you back too much.

Installment Payment Plans

If you have no viable means of immediately paying off your entire tax debt balance, don't give up. Instead, you can work with the IRS to set up an installment payment plan to solve your problem. If you select this option, you can have as much as 72 months to pay back your debt. Also, if the debt you owe is under $10,000, you won't even have to disclose any financial information, since you can set up your plan on the irs.gov website. However, if you owe more than $10,000, the IRS requires you to submit detailed information about your monthly income and expenses. It’s always best to consult with a CPA prior to making any installment payment agreement with the IRS.

An "Offer in Compromise”

Should you feel your financial situation is as dire as it could ever get, you do have the option of making what is known as an "offer in compromise" to the IRS. In other words, you are making a plea to the IRS to reduce the amount of money you owe the agency. While this initially sounds like you can wave a magic wand and suddenly owe thousands of dollars less to the IRS, don't count on it. In the view of the IRS, your financial circumstances would have to be extremely dire for the agency to agree to this option. If you have suffered a catastrophic medical event or lost a job, you may succeed with this. However, if your income is still quite high, don't expect the IRS to cut your tax bill.

If It Sounds Too Good to be True…

While watching television, you have likely seen commercials for companies claiming they can settle your IRS tax debt for pennies on the dollar. Of course, they make it sound oh so easy, and likely have you thinking that their solution is the answer to your prayers. However, as you know, if it sounds too good to be true, it usually is, so be very wary of dealing with these companies. Instead, speak to an experienced and trusted CPA to get experienced advice you know is reliable and truthful.

Is Your Debt Collectible?

While the IRS of course wants the money it says you owe them, it also does not want to waste lots of time, energy, and money trying to collect a debt that may in fact not be very collectible. Ultimately, any decisions made by the IRS as to how to proceed in collecting your tax debt will come down to the current amount of your disposable income, how much equity and assets you own that can be used to pay off the debt, and other related factors. During the COVID-19 pandemic, the IRS has been much more lenient when trying to collect taxpayer debt, but that is not expected to last forever. Therefore, if you have unresolved tax debt, striking while the iron is hot may give you an edge you won't have a few months from now.

If you try to go it alone when dealing with IRS tax debt, you are virtually certain to make an already tough situation much worse. To get your questions answered and embark on a viable plan to solve your problem, consult soon with a CPA whose advice and guidance you can trust.

Whether you are a business owner or an individual, meeting with your CPA is of course important when it comes to your taxes or other financial matters. However, even if you consider yourself to be well-versed in accounting, there are usually a few terms tossed your way that may leave you confused. Rather than sit there and continue to wonder what it is your CPA is talking about and how it will impact your situation, here are 15 of the most common accounting terms explained in easy-to-understand language.

1. Book Value

When you have an asset that depreciates in value, such as a motor vehicle, it of course loses value each year. When your CPA refers to the book value of a particular asset, they are referring to the original value of the asset, prior to any depreciation.

2. Gross Profit

If you own a business, gross profit indicates just how much money your business made prior to the deduction of expenses. To calculate this, the cost of any goods sold is subtracted from your company's revenue over a certain period of time.

3. Income Statement

Your income statement, which may also be referred to as the profit and loss statement by your CPA, is a comprehensive financial statement that contains all revenues, profits, and expenses over a given period of time. The top of the report will display the revenue your business earned, which will be followed by all expenses that have been subtracted. At the bottom, your company's net income will be shown.

4. Liquidity

Should you be needing quick cash, your CPA may be talking to you about liquidity, which refers to how quickly an asset can be converted into cash. As an example, stocks have a greater liquidity than real estate, since stocks can be sold much quicker and thus be liquidated into immediate cash.

5. Trial Balance

If you are discussing your trial balance, this is the listing of all accounts contained in your general ledger. Each account listed will have either a debit or credit balance, and all debits must be equal to all the credits in the trial balance.

6. General Ledger

Used to prepare all of your financial statements, the general ledger is the complete record of all financial transactions conducted by a business. Needless to say, this needs to be quite accurate.

7. Working Capital

As a business owner, expect your CPA to be discussing working capital with you quite often. When this term is used, it refers to the amount of cash you need to fund the daily operations of your business. To arrive at this figure, your CPA adds together your inventory and accounts receivable, then subtracts your accounts payable.

8. Cost of Sales

If you have sold goods or services during a specific accounting period, then you will also have what is known as cost of sales, which is the costs that are associated with producing whatever goods or services you sold.

9. Return on Investment

In many instances, your CPA will refer to the return on investment, or ROI, when discussing how much profit your business made within a certain accounting period. However, it is also used when discussing the financial returns on other aspects of business. As an example, if you spent $5,000 on a marketing campaign and it produced $10,000 in profits for your company, your CPA would tell you the ROI is 50%.

10. Accounting Period

No matter the type of business, it has a specified accounting period. Thus, when your CPA refers to this, it means the timeframe in which your company's financial activities are tracked. This can be done monthly, quarterly, or annually, with most businesses choosing the monthly option. However, even if your business uses monthly reports, your CPA may recommend you also take advantage of quarterly or annually reports.

11. Allocation

While confusing to many people, allocation is actually quite simple once explained to you by your CPA. In its simplest terms, allocation is when funds are assigned to certain accounting periods or accounts. As an example, some operating costs such as insurance may be allocated over a period of several months, while certain administrative costs may be allocated over various departments.

12. Cash Flow

Should your CPA start talking to you about how much money is coming in and going out from your business, they are talking to you about cash flow. To arrive at this figure, your CPA will subtract the ending cash balance from your beginning cash balance. If the result is a positive number, you have more cash coming in than going out, which is always a good thing.

13. Variable Costs

When you have costs that fluctuate due to the volume of sales, you have what are known as variable costs. Since these are expenses that are incurred so that products can be produced for sale, it often refers to additional costs linked to raw materials.

14. Liabilities

If a company has a debt it has not yet paid, it is referred to as a liability. With most businesses, this term will reference such debts as loans, payroll, and accounts payable.

15. Business Entity

Last but not least, business entity means the legal structure of your business, with the most common being partnerships, sole proprietorships, and limited liability corporations (LLC).

Since it is so important for you to know all you can about your finances, having a better understanding of various financial terms regularly used by your CPA will help you out in many ways. Of course, should you have any questions during your meeting or at any other time, never hesitate to contact your CPA. By doing so, you'll get much-needed peace of mind.

If there is one thing you as a taxpayer want to avoid, it is being audited by the IRS. While the chances of it are usually very slim, there are certain red flags that do get the attention of IRS officials now and then. Whether it is tax returns for individuals or those connected to a business, an IRS audit will be very detailed, time-consuming, and could potentially lead to criminal charges being filed against you, depending of course on the alleged violations. Rather than have these circumstances occur, it is always best to work closely with your CPA so that you will be aware of these nine red flags that can trigger an audit.

1. Reporting Incorrect Taxable Income

Whether you are a full-time employee or self-employed, reporting an incorrect taxable income will get the attention of the IRS. Since the agency receives copies of whatever W-2 and 1099 forms you receive, it will know exactly how much income you earned. When a discrepancy occurs on your tax return, expect the IRS to start asking questions.

2. Large Donations, Small Income

While making large donations to various charities is always a great thing to do, it will be a red flag to the IRS if you are doing so while reporting a very small income. Since these two things are generally not compatible, you should keep all receipts associated with your charitable donations, and also work with your CPA to ensure you follow IRS guidelines for your donations.

3. Deducting High Business Expenses

If you are a business owner or perhaps a salesperson who regularly takes clients to dinner to finalize important deals, expect the IRS to carefully scrutinize the business expenses you claim as deductions on your tax return. While it is acceptable for you to deduct as much as 50% of the cost of a reasonably-priced business dinner, doing so over and over for large amounts will always be a red flag to the IRS.

4. I Use My Car for Business

One of the oldest red flags for potential audits, stating that you use your car for business purposes will likely have the IRS asking you many questions along the way. To prove your tax return is correct, you should keep detailed records of your mileage as well as dates and times for when you used your car for business. If you can, also write down your starting and ending destinations, since these can lend more credibility to your deductions.

5. Nothing but Round Numbers

While your CPA would love to see a perfect world where everything wound up equaling nice, round numbers, they know that's not how the world works. Unfortunately, the IRS knows this as well, which is why when you always submit tax returns that contain figures such as these, you ensure the red flag rises at the IRS office. In these situations, the IRS will probably think you are either pulling figures out of thin air, or at the least are keeping horrible records of your transactions. To avoid an audit, provide your CPA with all available receipts, since this will let them use the actual numbers on your forms.

6. Your Business Always Loses Money

While it is not unusual for a business owner to report their business lost money now and then, doing so year in and year out will garner the attention of IRS agents. Thus, if you have a full-time business and have reported on your tax returns that your business has lost money for at least three of the past five years, you can probably expect to be audited. To make sure all goes well in the end, have as much documentation as needed to show your business has simply hit a rough patch, and is usually profitable.

7. Unforced Errors

Hey, mistakes happen, even on tax returns. Depending on the type of form you are using when filing, how many deductions you may be claiming, and so forth, it's always possible to make an unforced error on your tax return. From claiming an incorrect tax credit to filing under the wrong status, these types of errors may get you more attention from the IRS than you anticipated. Fortunately, if you work with a CPA when filing your taxes, they can carefully check your returns with your records to ensure no mistakes are made prior to filing.

8. The Home Office

Should you simply have a computer positioned on a desk in your home, this does not constitute an official home office in the eyes of the IRS. However, this doesn't stop people from trying to abuse this deduction each and every year. To be in the clear when claiming a home office, you need to have an area of your home that is used for the majority of your work and for little if any personal use. Should questions arise, listen to the advice of your CPA.

9. Dramatic Change in Your Income

In today's topsy-turvy world, it is of course always possible you could have a dramatic change in your income, either for the better or for the worse. If this should occur and the IRS starts taking a look at your previous tax returns, it may want some answers from you as to what has transpired. This is especially likely if you have made large cash deposits into your bank account recently, so be prepared for additional scrutiny. To protect yourself, keep all records and documentation related to your change in income, and also discuss your situation with a CPA you know and trust.

While most people assume an IRS audit automatically means large fines and possibly criminal penalties will follow, this happens far less often than is realized. Instead, having the proper documentation and being honest about any mistakes or discrepancies will usually help to clear up the matter. By doing so and hiring a CPA who is experienced in these matters, tax season can be one filled with relaxation rather than apprehension.

When the time comes and you decide to hire someone to work for you as a housekeeper, nanny, caregiver, or similar job at your home, it’s vital that you understand the tax implications associated with such arrangements.  While some people who are employers in these situations don’t pay attention to the tax side of things, this is a mistake that may lead to stiff penalties from the IRS.  Rather than create this situation for yourself, here is what you need to know when hiring household help.

Employee or Self-Employed?

To begin with, you should determine whether the person who will be working in your home is legally defined as an employee or as a self-employed individual.  In general, if the worker you hire controls how their work is done or is provided to you by an agency, yet still has control over how the work is done, they are not your employee.  However, if you hire someone and still maintain control over their daily actions while on the job, you more than likely have yourself an employee in the eyes of the IRS. 

Providing Equipment and Supplies 

Along with the question of who maintains control over the job duties, determining who provides various equipment and supplies also makes a difference.  As an example, if you hire a person to be a nanny and perform light housework, who follows your specific instructions about their duties and uses equipment and supplies you provide, they may be considered to be your employee.  However, if you hire someone to perform lawn care services who uses their own equipment and supplies, they are probably not your employee.

Employment Eligibility Verification

Whether you hire an employee temporarily, have them live-in at your home, or they work for you on a long-term live-out basis, you are responsible for verifying they are either a U.S. citizen or an alien who is legally allowed to work in the United States (unless you hire through an agency).  To do so, you and your worker must complete Form I-9, USCIS Employment Eligibility Verification.  Once your worker fills out their part of the form and you verify their documents, you complete the employer part of the form.  Upon doing so, do not send the form to USCIS.  Instead, keep it for your records. 

Severe Consequences

While Form I-9 may not sound terribly important to you, it is, in fact very important.  Under U.S. law, it is illegal for any person or company to knowingly hire or continue to employ any person who is not legally authorized to work in the United States.  If you do so and are caught by authorities, you could face severe penalties from the IRS and possibly even face criminal charges.

Employment Taxes

When you have any type of household employee, you may be required to withhold both Medicare and Social Security taxes, as well as federal unemployment taxes.  Under current regulations, if you paid your employee cash wages exceeding $2,200 in 2020, you are required to withhold and pay Medicare and Social Security taxes.  In addition, if you paid at least $1,000 in cash wages to your employee during any quarter of the calendar year in either 2019 or 2020, you are required to also pay the federal unemployment tax.  Should none of these apply to you, it is possible you may still be required to pay state unemployment taxes. Consult with your CPA for details. 

Social Security and Medicare Taxes

As for Social Security and Medicare taxes, you as an employer are required to pay in not only your share as the employer, but also your employee's share of the taxes.  Currently, as the employer, your share totals 7.65 percent, which is broken down into 6.2 for Social Security and 1.45 for Medicare.  The amount is the same for your employee, so keep this in mind when paying the taxes.  While you have the option of either withholding your employee's share from their wages or paying it directly out of your own funds, you should not count wages you pay to your spouse, your parent, or any child you have who is under age 21 as Social Security and Medicare wages. 

Exceptions to the Rule

As with many tax-related matters, there are of course exceptions to the rule regarding the payment of Social Security and Medicare taxes with regard to payments made to a parent or an employee who is under age 18 at some point during the course of the year.  Regarding a parent, these wages should be counted if they care for your child and the child is under age 18 or suffers from a physical or mental condition requiring personal care from an adult.  In addition, you can only count these wages if you are divorced and have yet to remarry, are widowed or a widower, or are married but have a spouse whose mental or physical condition prevents them from providing childcare.  As for employees less than 18 years of age, wages should only be counted if this job is their primary occupation, which would not be considered the case if the person you employ is a student. 

Maximum Taxable Earnings

Should the Social Security and Medicare wages of your employee reach $137,700 during 2020, any wages paid the remainder of the year should not be counted as Social Security wages when figuring the Social Security tax.  However, wages should continue to be counted toward the figuring of Medicare taxes.  Also, be aware that meals and lodging provided by you at your home to your employee for your convenience and as a condition of their employment are never counted as wages in these situations. 

Needless to say, the tax issues involved when hiring household help can be complex and confusing.  To make sure you don’t make costly mistakes along the way, it is best to consult with a CPA who can advise you on how to proceed in these matters.  In doing so, both you and your employees or contract workers can have peace of mind.

With the recent coronavirus outbreak, discussions of paid leave, and states of emergency, more attention has been paid to sick time and paid time off than ever before. If you’re a small business owner with just a few employees, you might not have an official sick time policy. Or, you might not have paid much attention to tracking employees’ time off, relying on the honor system.

A lot has changed in the past few weeks. With a focus on self-isolation and quarantine, you might have realized that it’s time to look at your policies on sick time and absences. 

What Does the Law Say about PTO?

The Fair Labor Standards Act governs small businesses labor policies. While companies with fifty or more employees must offer up to 12 weeks of unpaid leave to some employees, there’s no requirement to give them paid time off or vacation. It’s up to the employer’s discretion.

However, state and local laws may mandate sick time - such as in the city of Minneapolis, which requires that employers offer sick and safe paid time off for part-time employees. Always check the laws with your local labor department when writing human resources policies. 

Even though there is not a legal requirement to offer PTO, many businesses know that PTO attracts qualified workers, keeps them motivated and engaged, and protects the health of their overall workforce. Offering sick days and vacation time is just good business, which is why employees have come to expect it. 

When you first started, you might not have written formalized policies. But, if you grow, they will become necessary. 

What Should go Into a PTO Policy?

Given that it’s up to your discretion how much PTO to offer employees, as long as you are in compliance with state and local laws, you can formulate your own PTO policy. In it, you should include information on who receives paid time off, how hours accrue, and how many hours employees are eligible to receive annually. 

Here are a few questions that your policy should answer so that you know how to account for the PTO your employees earn and use properly.

Who Receives PTO, and When?

A comprehensive PTO policy should first address who’s eligible for PTO. 

Will you only offer it to salaried employees, or will hourly workers be eligible? Then, ask yourself when they can take the PTO and if they need supervisor approval. If your business would be severely disrupted if all four hourly workers took the same day off, you might want to require supervisor oversight and approval of PTO requests. 

When they take PTO also relates to years or months of service. Will you only allow a new employee to start taking time off after they’ve been with you for six months? 

How Will Hours Accrue?

Do you want to track accrued PTO by hours worked or years of service? Does a new employee receive all their PTO benefits on their start date? If they earn PTO as they work, you’ll have to track hours. For some businesses, this doesn’t make sense. 

Does Vacation Time Carry Over?

Will vacation time carry over? This is one of the biggest questions, from an accounting perspective, that you must answer. If employees can carry over accrued vacation, you will carry that liability on the books from year to year. It adds a layer of complication to closing the books at year-end. 

Will you pay out employees for unused time off? 

If an employee quits and hasn’t used five hours of vacation time, will you pay them for those hours? Again, this has accounting and cashflow implications. Accrued PTO is a liability on your Balance Sheet, so it’s important to track it accurately. And adding an extra ten hours of pay to a last paycheck could harm your ability to pay suppliers one week. 

What about Longer Absences?

If you have decided to revisit your sick leave policy in the light of coronavirus, consider the following; will you allow employees to work from home? If an employee goes negative on sick time or PTO, how will you handle it? It’s important to answer these questions before they become an issue. 

Accounting for Sick Time

Accrued PTO is a liability on your balance sheet. As employees earn hours, you must increase this liability. 

For example, if you have a policy where they earn one hour for every eight hours worked, at the end of a 40 hour week, you would record 5 more hours of PTO in your liability account. Proper time tracking is essential, both for accruing and using PTO.

When an employee takes a sick day or goes on vacation, it reduces the liability. Note that you only need to record a liability if the employee earns the vacation time in one period but defers using it until another - if they use it as they earn it, it rolls into compensation. 

When booking accruals, you can factor in anticipated forfeitures. Many PTO policies state that employees must have been with the company for a certain time to take vacation. If you’ve been dealing with a high turnover rate and PTO forfeitures, then it wouldn’t make sense to book 100% of the vacation that new employees accrue. Your accountant can help calculate a forfeiture rate.

Small or large - no matter your company size, there are many variables you must consider when formulating a PTO policy. Paid time off and sick leave impacts everyone in your organization, and also has a financial impact. It will appear on your balance sheet and affect your cash flow. 

A documented sick time and PTO policy, fairly applied to all employees, protects you from lawsuits, and helps your business keep running smoothly. 

Getting a divorce can be one of the most stressful times in your life. In addition to the emotional toll, it costs, on average, $15,500. As you split your assets, including cars, homes, and retirement accounts, don’t forget to think about the financial implication of your custody decree.

There are financial considerations related to your children that go beyond child support and that you would be wise to include them. From everything to the federal dependent tax credit to your daughter’s piano lessons, here’s what you should think about when it comes to kids, divorce, and taxes.

Child Tax Credit

The child tax credit allows you to claim an annual credit for any dependents in your home. It can be up to $2,000 per child and $500 per qualifying dependent. For many families, this is a big help on their tax return. Once your divorce has been finalized, however, you’ll be filing singly. So, who takes the child tax credit on their taxes?

For simplicity’s sake, most couples with 50/50 custody agree to trade the deduction off every other year. The father gets the deduction in odd years, the mother in even years, for example. If, however, custody is not 50/50, the parent who has more time also usually gets the deduction.

In some instances, if there is a large income discrepancy, the parent who makes a significantly higher income could cut a deal with the other parent. In order to keep the child tax credit every year, they may offer more money in the settlement or higher alimony payment.

Another thing to consider is whether or not the deduction should be tied to child support. If it’s an odd year and the father gets the dependent care deduction, but he’s behind or hasn’t paid child support, you can put in your decree that the mother can take it that year. Discuss all options with your lawyer before agreeing to a plan.

Daycare or Afterschool Care

If your children are young, and still in daycare, or need before and after school care, don’t forget to include these costs and their associated deduction in your decree. While the expenses can be split evenly, in some states (such as Minnesota), they’re often divided up by either the parent’s income levels or custody time. If your ex makes significantly more than you do, they’ll pay more for daycare.

The federal government does allow you to deduct either daycare or before and after school care expenses. Your deduction amount will be a percentage of the total, and that percentage is based upon your income. If you live in a state with income taxes, talk to your accountant about both limits and deductibility of daycare and afterschool care. It varies by state and could depend upon your income.

And don’t forget about the summer! While overnight camps aren’t tax-deductible, summer day camps for children under the age of 13 that allow you to work can be deducted.

Extracurricular Activities

Even if you’ve been splitting costs amicably during the divorce, it’s a good idea to put everything in writing. If your son loves his swimming lessons, ask your lawyer to include in the decree that he’s allowed to continue them for as long as he wants. Also, include any other sports, or other opportunities, you want your children to experience.

This language can be broad, such as “one additional afterschool activity,” if your child hasn’t chosen a sport yet. But it should provide for both continuing or starting new activities and cover who will pay for them. It’s an unfortunate reality that some parents choose to become petty about money once they’ve split. A good co-parenting relationship can change once your ex-spouse remarries, and they could decide to stop splitting bills they once paid without argument.

Negotiate to add clauses about extracurricular activities, transporting your kids to them, and who will pay. If you’re concerned about the cost, you can set a cap on quarterly or annual expenditures. The IRS considers extracurricular activities to be personal expenses, and will not allow you to deduct them. But it’s still not something to overlook for your own peace of mind.

Further Education

While you can’t always get the other party to agree to who will pay for college or education beyond high school, it’s good to think about adding it to your decree. Some parents decide to split the costs 50/50, others agree to split three ways between the parents and the child. Either parent can deduct up to $4,000 of higher education tuition and fees, so it’s something else to address with your lawyer.

The Final Decree

Divorce is a complicated, messy business. Depending upon your children’s ages, you might have to live with the final decree for years to come. Talk with your lawyer and your accountant about every financial aspect of raising your children that you should include. Going back to court to address an omission can be quite expensive.

Tax laws also change, as do deduction limits and percentages. While you can’t predict what the government will do in the future, you can have your lawyer draft language which leaves room to re-negotiate at certain milestones. You can tie reassessments to kindergarten, high school, college, or other times when it might make sense to revisit your original agreement.