Category: Get Balanced: Bookkeeping Made Easier

What Changes With the New Taxpayer First Act?

The Taxpayer First Act of 2019 is redesigning how the IRS works with taxpayers, even though it may take a while for many of the provisions to take effect.What Changes With the New Taxpayer First Act?

Some experts have highlighted the following aspects of the bill as especially important:

An independent appeals process. Taxpayers and small businesses will be able to challenge the IRS’ position without undertaking the cost and expenses of court. IRS Appeals will be an independent unit that grants taxpayers access to case files. Taxpayers will be able to protest if denied an appeal.

Innocent spouse treatment. The new law requires the U.S. Tax Court to take a fresh look at innocent spouse cases without taking previous decisions into account.

Modification of procedures for issuance of third-party summons. This is an important protection for taxpayers, especially small-business owners. It discourages the IRS from bypassing the taxpayer and contacting third parties — such as financial institutions — instead for information. The IRS should give taxpayers a meaningful opportunity to provide the information it is seeking prior to its contacting third parties. In practice, the IRS should provide the taxpayer with an understanding of what the issue is, what information is being requested and how the requested information relates to the issue.

Office of the National Taxpayer Advocate. The Taxpayer First Act has taken a strong approach with the Advocate’s issuance of Taxpayer Advocate Directives, which focus on systemic problems taxpayers deal with. Once they are issued by the Advocate, the IRS should comply within 90 days. The Advocate Annual Report will identify any TAD that is not honored by the IRS.

Credit card payments. The IRS is now allowed to directly accept credit and debit card payments for taxes; the taxpayer must pay any processing fees. The Act also requires the IRS to try to minimize processing fees when entering into contracts with the credit card companies.

Whistle blower reforms. The Act provides protections from retaliation and allows for better communication with whistle blowers about the status of their claims.

Cyber-security and identity protection. The IRS will now have to let taxpayers know whether it suspects there is evidence of identity theft. The Agency will explain to taxpayers how to file a report with police and how to protect themselves against additional harm resulting from the identity theft.

Taxpayer Act levels the playing field

Rep. Kevin Brady, R-Texas, ranking member of the Ways and Means Committee, was quoted as saying the Act “levels the playing field to ensure taxpayers have the same information as the agency, better protects our taxpayers’ information, and reins in past IRS abuses to guarantee families and local businesses never have to fear having their accounts and property seized without fair and due process.”

As with many new laws, it will take some time to see what specifically the effects are. The legal provisions are complex and will require interpretation over time. We’ll be keeping an eye on the developments.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different – so don’t go it alone! Contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.

Home office expense deduction for a self-employed taxpayer

Home office expense deduction for a self-employed taxpayerDoes your home office qualify for a tax deduction?

If you’re self-employed and work out of an office in your home and you satisfy certain strict rules, you will be entitled to favorable “home office” deductions. These deductions against your business income include the following:

  • Direct expenses of the home office – for example, the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
  • Indirect expenses of maintaining the office – for example, the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest and real estate taxes.

In addition, if this office is your “principal place of business” under the rules discussed below, the costs of traveling between it and other work locations in your business are deductible transportation expenses, rather than nondeductible commuting costs.

Tests to determine home office deductibility

You may deduct your home office expenses if you meet any of the three tests described below: (1) the principal place of business test, (2) the place for meeting patients, clients, or customers test, or (3) the separate structure test. You may also deduct the expenses of certain storage space if you qualify under the rules described further below.

  1. Principal place of business

You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.

  1. Home office used for meeting patients, clients, or customers

You’re entitled to home office deductions if you use this office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the office.

  1. Separate structures

You’re entitled to deductions for a home office, used exclusively and on a regular basis for business, if it is located in a separate unattached structure on the same property as your home – for instance, an unattached garage, artist’s studio, workshop, or office building.

Space for storing inventory or product samples

If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.

How much can you deduct?

The amount of your home office deduction is based on the amount of square footage allocated to your office space. There are two methods to choose from; Simplified Method and Regular Method.

Simplified Method

The simplified method for determining this deduction is straightforward: You receive a deduction of $5 per square foot, up to 300 square feet (the deduction can’t exceed $1,500).

Regular Method

You determine the deduction by figuring out the percentage of your home used for business. Then apply the resulting percentage to the total direct & indirect expenses discussed above.

To demonstrate, if your home is 2,000 square feet and your home office is 500 square feet, you use 25% of your home for business. You’re allowed to deduct 25% of the above-mentioned expenses against your income. The remaining 75% of qualified expenses carry over to Schedule A, if you itemize. These costs include property taxes and mortgage interest.

Someone with a larger office and higher expenses might benefit from the regular method of determining the home office deduction compared to the standard method.

We’ve got your back

At KRS, our CPAs can help you utilize the home office deduction to maximize potential tax savings. Give us a call at 201.655.7411 or email me at [email protected]

What You Need to Know to Deduct Medical Expenses

What You Need to Know to Deduct Medical ExpensesDeducting expenses for medical and dental care is easier when you know the rules

If you itemize your deductions for a taxable year on Form 1040, Schedule A Itemized Deductions, you may be able to deduct unreimbursed expenses you paid that year for medical and dental care for yourself, your spouse, and your dependents. You may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income in 2018 and 10% beginning in 2019.

What qualifies as a medical expense?

Qualifying costs, which include many items other than hospital and doctor bills, often amount to much larger figures than expected. Below are some items you should take into account in determining your medical expenses:

Health insurance premiums

The cost of health insurance is a medical expense. This item, by itself, can total thousands of dollars a year. Even if your employer provides you with health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included in medical expenses, subject to specific dollar limits based on age. However, pre-tax insurance premiums paid by an individual are not deductible medical expenses.

Transportation

The cost of getting to and from medical treatment is a deductible medical expense. This includes taxi fares, public transportation, or the cost of using your own car. Car costs can be calculated at 20¢ a mile for miles driven in 2019 (18¢ a mile for miles driven in 2018), plus tolls and parking. Alternatively, you can deduct your actual costs, such as for gas and oil (but not your general costs such as insurance, depreciation, or maintenance).

Therapists, nurses, etc.

The services of individuals other than doctors can qualify as long as the services relate to a medical condition and aren’t for general health. For example, costs of physical therapy after knee surgery would qualify, but not costs of a fitness counselor to tone you up. Amounts paid for certain long-term care services required by a chronically ill individual also qualify as deductible medical expenses.

Eyeglasses, hearing aids, dental work, psychotherapy, prescription drugs

Deductible medical expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling, and other ongoing expenses in connection with medical needs. Purely cosmetic expenses (e.g., a “nose job”) don’t qualify. Prescription drugs (including insulin) qualify, but over the counter items such as aspirin and vitamins don’t. Neither do amounts paid for operations or treatments that are illegal under federal law (such as marijuana), even if state or local law permits the procedure or drug.

Smoking-cessation programs

Amounts paid for participation in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible medical expenses. However, non-prescription nicotine gum and certain nicotine patches aren’t deductible.

Weight-loss programs

A weight-loss program is a deductible medical expense if undertaken as treatment for a disease diagnosed by a physician. The disease can be obesity itself or another disease, such as hypertension or heart disease, for which the doctor directs you to lose weight. It’s a good idea to get a written diagnosis before starting the program. Deductible expenses include fees paid to join the program and to attend periodic meetings. However, the cost of low-calorie food that you eat in place of your regular diet isn’t deductible.

Dependents and others

You can deduct the medical costs paid on behalf of dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as an elderly parent or grandparent, who would qualify as your dependent except that he has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them, regardless of who gets the dependency exemption.

We’ve got your back

At KRS, our CPAs can help you identify deductible medical expenses to maximize potential tax savings. Give us a call at 201.655.7411 or email me at [email protected]

Capital Gains and Losses: How Do They Work?

Selling a capital asset results in a gain or loss and impacts your income taxes.

How do capital gains and losses work?A capital gain is a profit made when you as an individual or business sell a capital asset — investments or real estate, for instance — for a higher cost than its purchase price. A capital loss is incurred when there’s a decrease in the capital asset value compared with its purchase price. Almost everything you own and use for personal or investment purposes is a capital asset: a home, personal-use items like furnishings, and collectibles.

A capital gain may be short term (one year or less) or long term (more than a year). The capital gain must be claimed on income taxes. While capital gains are generally associated with stocks and mutual funds due to their volatility, a capital gain can occur on any security sold for a higher price than the price that was paid for it. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but haven’t yet triggered a taxable event.

The profit you realize when you sell a capital asset at a profit is your gain over basis paid. Basis is often defined as the original price plus any related transaction costs; basis also may refer to capital improvements and cost of sale. Capital losses are used to offset capital gains of the same type: short-term losses are deducted against short-term gains, for example.

Capital gains and losses for businesses

A business may gain or lose money in two ways: It can make a profit on its sales activities or lose money by spending more than it brings in from sales. And, of course, it can gain or lose money based on its investments or sales of assets — items of value that the business owns.

Each type is taxed differently. Profits are taxed as ordinary income and at regular business or personal tax rates. Gains or losses on investments or the sale of assets are taxed as capital gains or losses, but it can depend on the type of business. When expensive equipment is involved, businesses have to consider depreciation, which takes into account the equipment’s declining value over its useful lifetime.

Capital gains and losses can come into play when a business writes off an asset, taking it off its balance sheet. That might be the case with accounts receivable when a debt is owed to the business but is unlikely ever to be paid.

Individual shareholders or business owners who sell their capital shares or owner’s equity in a business also incur capital gains or losses from those sales. Note the following distinction: Operating profits and losses result from the ongoing operations of the business; sometimes called net operating losses for tax purposes, they result from day-to-day operations.

We’ve got your back

Whether you’re buying or selling as an individual or as a business, be sure to keep track of your sales and discuss them with a qualified financial professional. The experts at KRS can help you determine whether you have a gain on loss and its tax implications. Contact managing partner Maria Rollins at [email protected] or 201.655.7411 for a complimentary initial consultation.

Audits, Reviews and Compilations: A Summary

Which financial statement overview you need from your CPA depends on your business and financing needs

Audits, Reviews and Compilations: A SummaryYou will want to prepare your financial statements in accordance with an accounting framework that’s appropriate for your business. Most of the time, you’ll opt for a CPA to produce your financial statements. Getting an accountant’s blessing is especially useful when you are applying for more credit from a bank.

Financial statements are intended to give you current information on your business’s financial standing so you can make more informed decisions. There are three levels of overview you can choose to take — compilation, review or audit — and what you select will have a lot to do with what your objective is.

The Compilation

According to guidance from the American Institute of CPAs, a compilation is suitable for use by lenders and other outside parties who may appreciate the business’s association with a CPA. There is no assurance here, but the CPA will read the financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in form and are free from obvious material misstatements.

It may be appropriate when a company is seeking only relatively minor levels of financing and may have significant collateral.

The Review

The next level is a review. According to the AICPA, the review is designed to provide lenders and other outside parties with a basic level of assurance on the accuracy of financial statements. The CPA performs analytical procedures, inquiries and other procedures to obtain limited assurance on the financial statements to provide a user with a level of comfort on their accuracy.

A review might be the right move for companies seeking larger levels of financing and have more complex credit needs.

The Audit

The highest level of assurance is an audit. The CPA performs procedures to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement, according to the AICPA. The CPA is required to obtain an understanding of your business’s internal control and to assess fraud risk. Your CPA is also required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures.

An audit is an annual requirement for publicly held companies and may be advisable for other companies seeking high levels of finance and opening themselves to outside investors.

Required Frequency

How often will you want your CPA to peruse your finances? Overviews can be done in any frequency that is useful to you and your business — monthly, quarterly or annually. Some folks say that your financial statements are more than snapshots of your business but can be seen as resources to tell you where your risks and opportunities are. Financial statements can help you identify and solve potential problems before they compromise the health of your business.

We’ve got your back

Rather than guessing at audit, reviews and compilations, why not let the experts at KRS CPAs help? Learn more about our accounting and assurance services, then contact managing partner Maria Rollins at [email protected] or 201.655.7411 for a complimentary initial consultation.

Put Your Children on Your Payroll and Reduce Taxes

One tax reduction strategy that most business owners do not take advantage of is putting their childrenPutting Your Children on Your Payroll on payroll.

This can help reduce the overall family tax bill and transfer assets to children without introducing gift tax implications.

As a business owner, you can deduct wages paid to children, while the child can offset those wages with their own standard deduction.  In addition to the standard deduction, you could setup pre-tax retirement accounts that would allow taxpayers to deduct more, while the child saves for retirement.

For partnerships and disregarded entities, if your child is under 18, the company does not have to pay employment taxes such as Social Security, Medicare and Workers’ Compensation Insurance. You can also avoid Unemployment taxes until the child turns 21. But for S-Corps and C-Corps, Social Security and Medicare taxes are paid regardless of age. These payroll taxes amount to 15.3% of wages earned, your share and child’s share.

Potential tax savings

With that in mind, let’s review a sample of potential tax savings. Starting in 2019, the standard deduction is $12,000 for single filers. The maximum contribution to a traditional IRA is $6,000 (if modified adjusted gross income is less than $64,000 for single filers in 2019). Additionally, taxpayers can draft a 401(k) plan that includes no age limitations, which will allow younger children to contribute $19,000 of pre-tax dollars to their 401(k). The example below illustrates the potential tax savings if the taxpayer’s entity is an S-Corporation.

Save taxes by putting your children on your payrollIf the entity is an LLC instead of an S-Corp, and your child is under 18, add back the payroll taxes of $5,585 to get your tax saving potential.

One other benefit you could produce is a safe harbor 401(k) plan or profit sharing/matching system that could increase your child’s retirement account and provides a deduction for your business. This strategy has plenty of scenarios to take into consideration which provide an opportunity to save even more money in taxes.

There are some rules you need to be aware of when using this strategy:

  • Keeping detailed employment records, including timely tracking of weekly hours and wages that correspond to services provided
  • Issuing paychecks as you would a normal employee (e.g., bi-weekly)
  • Documenting that the services are legitimate and considered ordinary and necessary for the business
  • Ensuring the services provided do not include typical household chores

If your child is not treated like any other employee in a similar position, the IRS could potentially deem their wages as not ordinary and necessary, and disallow them as a deductible expense.

We’ve got your back

At KRS, our CPAs can help you strategize setting your children up on payroll to maximize potential tax savings. Give us a call at 201.655.7411 or email me at [email protected]

Filing Taxes as a Married Couple

Filing Taxes as a Married CoupleIf you were married this past year, congratulations!

Getting married is a big step in your life and along with it comes many changes.  One change is filing taxes as a married couple for the first time. This advice can help you get started.

First, you must determine your filing status. Your status depends on your marital status on the last day of the year. If you were legally married as of December 31, you are considered to be married for the full year and must either file a Married Filing Joint or Married Filing Separate tax return.  Filing status is important for determining your standard deduction, whether you qualify for various deductions and credits, and the amount of tax is owed.

Filing Alternatives

If you choose to file a Married Filing Joint tax return, you must include all your and your spouse’s income, deductions, and credits on one tax return.  The standard deduction in 2018 for filing a Married Filing Joint tax return is $24,000. If you choose to file a Married Filing Separate tax return, each of you will report your respective income, deductions, and credits on separate tax returns.

The standard deduction for a Married Filing Separate tax return is $12,000 each. Married Filing Separate will rarely produce a lower tax liability. Most tax preparing software will provide you with an analysis on whether filing separately makes sense.  If using a self-preparing software or if you work with a tax preparer, be sure to ask which way produces a lower liability for your family.

When filing a separate tax return, there are some tax deductions that may be unavailable to you:

  • If you itemize your deductions, your spouse must also itemize their deductions.  You may not mix and match the itemized deduction and the standard deduction.
  • The Earned Income Credit is unavailable.
  • The Child and Dependent Care Credit is generally unavailable.
  • You cannot deduct interest paid on student loans.
  • Adoption Credit is generally not allowed.
  • Reduction of Child Tax Credit is unavailable.

Considerations for Working Couples

For couples who both work, both spouses will need to adjust the tax withholding from their paychecks.  One of the biggest mistakes of newlywed couples and taxes is the under withholding of income tax from their paychecks.  Because your income will be taxed together, this may push you into a higher tax bracket and when it’s time to file your tax return, there will be a surprise balance due.  Be sure to sit down with your spouse and properly fill out each of your Form W-4s Employee’s Withholding Allowance Certificate correctly.  Form W-4 worksheets are available to walk you through the process of matching tax due with withholdings.  The goal here is to match these as close as possible so that there is not a large balance due or large refund.  This way you have the most money in your pocket all year long.

Name and Address Changes

One other thing to keep in mind is filing with the correct names and addresses.  If there are any name changes, be sure to use the correct name on your married tax returns.  If there is an address change, you should change your address with the IRS by filing Form 8822 Change of Address and mailing it to the address on the form.  You should also update your address with your local post office.  If you have any children, be sure to include them as well on your tax return with their full name and social security number.  Retirement accounts and beneficiary information should also be updated accordingly if your spouse is the beneficiary.

Considerations for Home Sales

Planning on selling your home? Your taxable gain exclusion on your personal residence doubles from $250,000 to $500,000 once you are married.  This is only the case if you own the home and both you and your spouse have lived in the home the past 2 out of 5 years.  If you sold your home before you were married, the $250,000 would still apply.

Keeping these tips in mind can help make your first tax season together go a bit more smoothly.

Lance Aligo, CPA, MSA, is a senior accountant at KRS CPAs, LLC, Paramus, NJ.  You can reach him at [email protected] or 201-655-7411. Check out KRSCPAS.com for more tax tips, checklists, blogs, and other resources to help you succeed.

The IRS and Private Tax Debt Collection

To collect unpaid taxes, the IRS is turning to private companies.

IRS Using Debt Collection AgenciesThe growing backlog of debt has proved too much for the agency, which continues to use four debt collection companies to round up outstanding payments from taxpayers who’ve been contacted numerous times and still haven’t coughed up any cash.

The new private debt collection program originally started slowly, with just a few hundred taxpayers a week receiving mailings and subsequent calls. But now it’s in full swing, with thousands of people being contacted.

Taxpayers with long-overdue tax bills who’ve received several collection notices from the IRS through the mail are now being informed that their accounts have been transferred to private collectors. The collection agencies send letters of their own, clearly identifying themselves in all communications as working for the IRS.

Collectors Follow the Fair Debt Collections Practices Act

Of course, these new debt collectors need to follow the Fair Debt Collection Practices Act, which spells out when they can call, whom they can call, and what they can and cannot say. The IRS has told the collectors not to use robocalls to contact taxpayers.

The new private debt collection program comes straight from Congress, which required this action, noting that it’s a way to fund road improvement projects for the Fixing America’s Surface Transportation Act, which was passed in 2015.

The four collection agencies are CBE Group, ConServe, Performant and Pioneer Credit Recovery. These agencies explain how they work. For example, Performant notes on its website how they work and lists official government sites for more information.

Protecting Yourself from Scammers

A problem jumps into anyone’s mind: how to tell the official debt collectors from the scammers. The IRS has noted that the it is urging taxpayers to be on the lookout for scammers who might use this program as a cover to trick people. One sign is payment: Performant notes, for example, that it tells taxpayers to make checks out to the federal government, and not to the private agency.

So, how can taxpayers protect themselves from new scams? There are some simple ways to tell whether the call is legitimate or from a fraudster. It’s a scam if the caller does any of the following:

  • Is very aggressive or threatens you in any way with arrest or someone coming to your house.
  • Tries to pressure you to make immediate payment.
  • Asks for your credit or debit card information.
  • Requests payment via gift cards, including Amazon and iTunes, prepaid debit cards, or a wire transfer.

More information is available on the U.S. Treasury site.

We’ve got your back

Legitimate private debt collection firms will instruct taxpayers to send a check, made out to the U.S. Treasury, directly to the IRS. It’s always a good idea to check with us to keep up to date with the new program and the new scams that come from it. Of course, if you have an outstanding debt to the IRS, contact us immediately so we can help you with the process of paying the government what you owe. Don’t go it alone! Contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 for a complimentary initial consultation.

Medical and Dental Expenses: What Can You Deduct?

Can you deduct medical and dental expenses? That’s a complicated question.

Medical and Dental Expenses: What Can You Deduct?To start with, your deductions must exceed 7.5 percent of your adjusted gross income. And they have to fall into an IRS-approved category.

Deductible medical expenses may include, but aren’t limited to the following:

  • Payments of fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists and nontraditional medical practitioners.
  • Payments for inpatient hospital care or residential nursing home care, if the availability of medical care is the principal reason for being in the nursing home, including the cost of meals and lodging charged by the hospital or nursing home. However, if medical care isn’t the principal reason for the nursing home stay, then the deduction is limited to medical care costs only.
  • Payments for acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction, for participating in a smoking-cessation program, and for drugs to alleviate nicotine withdrawal that require a prescription.
  • Payments to participate in a weight-loss program for a specific disease or diseases diagnosed by a physician, including obesity; but not ordinarily payments for diet food items or the payment of health club dues.
  • Payments for insulin and payments for drugs that require a prescription.
  • Payments made for admission and transportation to a medical conference relating to a chronic disease that you, your spouse, or your dependents have (if the costs are primarily for and essential to necessary medical care). However, you may not deduct costs of meals and lodging while attending a medical conference.
  • Payments for false teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and for a guide dog or other service animal to assist the visually impaired or hearing-disabled person, or for a person with other physical disabilities.
  • Payments for transportation primarily for and essential to medical care that qualifies as medical expenses — payments of the actual fare for a taxi, bus, train, ambulance or for transportation by personal car to include the amount of your actual out-of-pocket expenses, gas, oil, etc. Standard mileage rate for medical expenses, plus the cost of tolls and parking apply as well.

Caveats for long-term care insurance

Payments for insurance policy premiums that cover medical care or for a qualified long-term care insurance policy are both deductible, but there are some caveats:

  • If you’re an employee, don’t include in medical expenses the portion of your premiums treated as paid by your employer under its sponsored group accident, health policy or qualified long-term care insurance policy.
  • Don’t include premiums that you paid under your employer-sponsored policy under a premium conversion policy (pre-tax), paid by an employer-sponsored health insurance plan (cafeteria plan), or any other medical and dental expenses unless the premiums are included in box 1 of your Form W-2, Wage and Tax Statement.

Only include medical expenses paid during the year and use the expenses only once on the return. Reduce your total deductible medical expenses by any reimbursement, whether you receive the reimbursement directly or it’s paid on your behalf to doctors, a hospital or other medical provider.

Finally, note that the threshold rises to 10 percent for 2019.

We’ve got your back

This is just a summary of a complicated series of rules.Rather than guessing at the IRS rules and requirements, why not let the KRS CPAs tax experts help? We will help you determine which expenses you can safely deduct. Contact us at 201.655.7411 to get started.

Time to Send Out Those 1099-Misc Forms

Time to Send Out Those 1099-Misc FormsWith tax season right around the corner, it’s time to start thinking about closing your books out for the year and preparing all your tax documents.

One of the required tax documents you may need to send out is the 1099-Misc. While this can be a tedious task, especially if you haven’t kept good records on your independent contractors, it is necessary to avoid penalties by the IRS. To help simplify things, here are the basics:

As a general rule, you must issue a Form 1099-Misc to each person to whom you have paid at least $600 in rents, services (included parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099-Misc for payments made for personal purposes.  You are required to issue 1099-Misc to report payments you made in the course of your trade or business. You’ll send this form to any individual, partnership, Limited Liability Company, Limited Partnership, or estate.

Some 1099 exceptions

There is a lengthy list of exceptions, but the most common one is payments to corporation. All payments made to a corporation do not typically require a 1099-Misc.  This means that if you make payments to a company that is incorporated or to an LLC that elects to be treated as a C-Corporation or S-Corporation, then this would not be reported on a 1099-Misc.  Unfortunately, this exception doesn’t apply to payments you made to an attorney.

Another exception is payments to vendors using a credit card or through a third-party payment network. You are not required to send a 1099-Misc for amounts paid electronically.  Instead, the credit card companies and payment companies will handle any required reporting.  Those electronic payment providers are required under certain circumstances to send out a different version of the 1099-Misc, called the 1099-K, instead.

Get those W-9s from vendors

To make the 1099 process easier, it is best practice for business owners to request a Form W-9 from any vendor you expect to pay more than $600 before you pay them.  Form W-9 will give you the vendor’s mailing information, Tax ID number, and also require the vendor to indicate if it is a corporation or not.  Having a completed W-9 will give you all the information to complete the 1099-Misc and save you a lot of headaches during tax season.

For the current year’s payments, businesses must send 1099-MISC to the recipients by January 31 of the following year.  Businesses also must send copies of each 1099-MISC sent to recipients to the IRS.  The deadline to the IRS is January 31.  This deadline applies to Form 1099-MISC when reporting non-employee compensation payment in Box 7.  Otherwise, paper filings must be filed with the IRS by February 28 and electronic filing by March 31. Also depending on the state law, businesses may also have to file the 1099s with the state.

We have your back

Rather than guessing at the IRS rules and requirements, why not let the KRS CPAs tax experts help? We will help you organize Form 1099 MISC recipient data and prepare all the necessary forms for you to submit. Contact Kelley DaCunha at [email protected] to get started.