Tag: IRS

IRS Clarifies Deductible Expenses

Updated IRS rules offer guidance for deductible expenses which may have been murky as a result of the Tax Cuts and Jobs Act

IRS provides guidance on deductible expensesThe rules being updated involve using optional standard mileage rates when figuring the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes, among other issues.

The full details are available in Revenue Procedure 2019-46 and Revenue Procedure 2019-48.

There are more succinct rules to substantiate the amount of an employee’s ordinary and necessary travel expenses reimbursed by an employer using the optional standard mileage rates. But know that you’re not required to use this method and that you may substantiate your actual allowable expenses, provided you maintain adequate records.

Miscellaneous itemized deductions clarified

The TCJA suspended the miscellaneous itemized deduction for most employees with unreimbursed business expenses, including the costs of operating an automobile for business purposes. However, self-employed individuals and certain employees, armed forces reservists, qualifying state or local government officials, educators, and performing artists may continue to deduct unreimbursed business expenses during the suspension.

The TCJA also suspended the deduction for moving expenses. However, this suspension doesn’t apply to a member of the armed forces on active duty who moves pursuant to a military order and incident to a permanent change of station.

Entertainment vs. food & beverage expenses

The IRS has also made it clear that the TCJA amended prior rules to disallow a deduction for expenses for entertainment, amusement or recreation paid for or incurred after Dec. 31, 2017. Otherwise allowable meal expenses remain deductible if the food and beverages are purchased separately from the entertainment, or if the cost of the food and beverages is stated separately from the cost of the entertainment.

More resources from KRS

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What To Know About Getting a Tax Refund

Is your tax refund slow in arriving in your mailbox or bank account? One of these may be the culprit.

What To Know About Getting a Tax RefundIn a recent statement, the IRS noted that most taxpayers are issued refunds by the IRS in fewer than 21 days. If yours takes a bit longer, here are six things that may be affecting the timing of your refund:

  • Security reviews—The IRS and its partners continue to strengthen security reviews to help protect against identity theft and refund fraud. Your tax return may be receiving additional review, which makes processing your refund take a bit longer.
  • Errors—It can take longer for the IRS to process a tax return that has errors. Fortunately, electronic filing has reduced the number of errors, which are more common in paper returns.
  • Incomplete returns—Here again, electronic returns make the most sense. It takes longer to process an incomplete return. The IRS contacts a taxpayer by mail when more info is needed to process the return.
  • Earned income tax credit or additional child tax credit—If you claim the earned income tax credit (EITC) or additional child tax credit (ACTC) before mid-February, the IRS cannot issue refunds as quickly as others. The law requires the IRS to hold the entire refund. This includes the portion of the refund not associated with EITC or ACTC.
  • Your bank or other financial institutions may not post your refund immediately—It can take time for banks or other financial institutions to post a refund to a taxpayer’s account.
  • Refund checks by mail—It can take even longer for a taxpayer to receive a refund check by mail. Direct deposit is a better bet.

The IRS Explains

In an unusually poetic statement, the IRS explains that “tax returns, like snowflakes and thumbprints, are unique and individual. So too, is each taxpayer’s refund.” So keep this in mind. Fortunately, you can track your refund status online by entering your Social Security number and other key information.

KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources to help you succeed. Check it out today!

Adjusting Your Income Tax Withholding

Adjusting Your Income Tax WithholdingWhen should you revise your tax withholding?

If you receive a large refund from the IRS when filing your income tax return, or owe the IRS a substantial amount when filing, you should consider adjusting your income tax withholding.

Your income tax withholding is based on the number of allowances you claim on your Form W-4, Employee’s Withholding Allowance Certificate. This form is typically filled out when you first start a job with your employer. This determines the amount of income tax that comes out of your paycheck each pay period.

If your withholding is too high, you are, in effect, giving the IRS an interest free loan. Although the overpaid tax will be refunded when you file your return, it would have been better for you to have access to these funds throughout the year. In this case, you should reduce the amount your employer withholds to increase your pay in your paycheck.

Do you owe the IRS too much?

On the other end, there are taxpayers who owe the IRS large balances when filing their taxes. Yes, they have access to their money all year long, but they will have to pay this back on April 15th. Most of the time, this repayment comes with tacked-on interest and penalties from the IRS.

It is your responsibility to change your withholding with your employer. At any time, you can provide them with an updated Form W-4 and adjust your withholding.

When to review your withholding

You should check your withholding anytime there is a significant financial change in your life, including the following:

– You getting married, divorced, or having children.
– Increase or decrease in working wages.
– You or your spouse start or stop working, start a second job.
– Changes in deductions such as: buying house, paying for child care, medical expenses.

It is never too late to change your withholding for the current year. If you believe that you may be substantially over or under withheld, you can make the necessary adjustments to correct that. This is one of the more complex issues that a taxpayer faces.

We’ve got your back.

If you think your situation calls for a withholding adjustment, please contact us today. Contact KRS manager Lance Aligo, CPA, MAS at [email protected]  or 201-655-7411.

How to Value Your Business

This overview can help you understand the approaches, methods and factors important to valuing your business

How to Value Your BusinessRevenue Ruling 59-60 was issued by the IRS to “outline and review in general the approach, methods and factors to be considered in valuing the shares of the capital stock of closely held corporations for estate and gift tax purposes.”  This revenue ruling is regarded as the foundation of modern business valuation, and although issued sixty years ago, the approach, methods and factors set forth therein are still used in every business valuation, including valuations of business entities other than corporations.

Revenue Ruling 59-60 lists the following eight fundamental factors that require careful analysis in each case.

  1. The nature of the business and the history of the enterprise from its inception.
  2. The economic outlook in general and the condition and outlook of the specific industry in particular.
  3. The book value of the stock and the financial condition of the business.
  4. The earning capacity of the company.
  5. The dividend paying capacity.
  6. Whether or not the enterprise has goodwill or other intangible value.
  7. Sales of the stock and the size of the block to be valued.
  8. The market price of stocks of corporations involved in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over the counter.

Approaches to valuing a business

The three basic approaches in valuing a business are the asset approach, the income approach, and the market approach.  The factors listed above include the analysis required to value a business under each of these approaches.

Asset approach

Under the asset approach, the value of the business is the value of the net tangible assets.  This method does not consider goodwill or other intangible assets and is most commonly used in the valuation of real estate entities.  This method may also be applicable to unprofitable businesses and those in or close to liquidation.

Market approach

The market approach consists of two methods, the guideline public company method and transaction method.  Under the guideline public company method, the financial attributes of the subject company including but not limited to sales, earnings, cash flow, total assets, net book value are compared to the same attributes of publicly traded companies in the same or similar industries, and with fairly complex analysis, the value of the subject company is determined by comparison to the stock price of the publicly traded company.  This method is generally not applicable to small businesses because they are not usually comparable to publicly traded companies, even those in the same industry.

Under the transaction method, the value of the subject company is determined based on analysis of and comparison to the financial attributes of similar companies that have sold in private transactions.  This method is used when there are enough comparable transactions, and enough financial information about these transactions is available.

Income approach

Under the income approach, a measure of income (generally normalized cash flow) is capitalized or discounted to estimate the value of the company.  Capitalization is used for historical cash flow; discounting is used for projected cash flow.  The capitalization rate is based on risk, that is, the risk that the expected cash flow will not be realized.  Common closely held business risks considered in this process include customer or supplier concentration or diversification, depth of the management team, product obsolescence, prospective competition, and the state of the industry in which the company participates.

Learning more about business valuation

This is a ten-thousand-foot view of business valuation.  Future posts will provide detailed information of things discussed here.  Many of the factors considered are controllable, and factors reducing business value can often be improved.  Those who are considering the future sale of a business and want to maximize its value should start thinking about this now.  If you wait until you are ready to sell, that is usually too late.  The first step is to understand the current value of the business, and what are the factors driving that value.  After that, the valuation can be periodically updated, which will be a gauge of progress in increasing value.

Visit our business valuation page to learn more about our business valuation services and  contact us if you want to discuss planning the future of your business.

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.

Does Your Rental Real Estate Activity Qualify for the QBI Deduction?

Knowing the requirements for Qualified Business Income (QBI) deductions can help you save taxes on your rental real estate

Does Your Rental Real Estate Activity Qualify for the QBI Deduction?The IRS recently issued guidance on the 20% tax deduction for Qualified Business Income (QBI) and rental real estate activity. Here’s what you need to know:

If all the general requirements (which vary based on your level of taxable income) are met, the deduction can be claimed for a rental real estate activity – but only if the activity rises to the level of being a trade or business. An activity is generally considered to be a trade or business if it is regular, continuous, and considerable.

The IRS safe harbor

Because determining whether a rental real estate enterprise meets those criteria can be difficult, the IRS has provided a safe harbor under which such an enterprise will be treated as a trade or business for purposes of the QBI deduction (IRS Notice 2019-7). For this purpose, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties. Commercial and residential real estate may not be part of the same enterprise.

Under the safe harbor, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year for a rental real estate enterprise:

  • Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
  • 250 or more hours of rental services are performed annually with respect to the rental enterprise. Note that these hours of service do not have to be performed by you personally.
  • The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, for: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement does not apply to the 2018 tax year.

Rental services defined

For purposes of the safe harbor, rental services include:

  • Advertising to rent or lease the real estate
  • Negotiating and executing leases
  • Verifying information contained in prospective tenant applications
  • Collection of rent
  • Daily operation, maintenance, and repair of the property
  • Management of the real estate
  • Purchase of materials
  • Supervision of employees and independent contractors

Real estate not eligible for safe harbor

Some types of rental real estate are not eligible for the safe harbor. Real estate used by the taxpayer (including an owner or beneficiary of passthrough entity) as a residence for any part of the year is generally not eligible for the safe harbor, nor is real estate rented or leased under a triple net lease.

To qualify for the real estate safe harbor in 2019, it is important for you to maintain contemporaneous records starting with the 2019 tax year. I have listed above the information which needs to be tracked as part of the 250 hours of rental services above.

We’ve got your back

As the real estate tax guy, I’m here to assist you in all your real estate accounting matters. If you have questions about the QBI deduction as it applies to your rental real estate, you can reach me at [email protected] or 201.655.7411.

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.

How to Handle Bad Debt and Taxes

When can you use bad debt to reduce business income?

How to Handle Bad Debt and Taxes Even when you take the customer to court and you still don’t get your money, there’s a way to make lemonade from this lemon of a customer.

If your business has already shown this amount as income for tax purposes, you may be able to reduce your business income by the amount of the bad debt. Look at bad debt as an uncollectible account—a receivable owed by a customer, client or patient that you are not able to collect.

Bad debt may be written off at the end of the year if it is determined that the debt is in fact uncollectible.

According to the IRS, bad debt includes:

  • Loans to clients and suppliers
  • Credit sales to customers
  • Business loan guarantees

How do you write off bad debt?

Your business uses the accrual accounting method, showing income when you have billed it, not when you collect it.

If your business operates on a cash accounting basis, you can’t deduct bad debt because you don’t record income until you’ve received the payment. If you don’t get the money, there’s no tax benefit to recording bad debt. You only record the sale when you receive the money from the customer.

Under accrual accounting, manually take the bad debt out of your sales records before you prepare your business tax return.

You must wait until the end of the year, just in case someone pays.

  • Prepare an accounts receivable aging report, which shows all the money owed to you by all your customers, how much is owed and how long the amount has been outstanding.
  • Total all bad debt for the year, listing all customers who have not paid during the year. Only make this determination at the end of the year and only if you’ve made every effort to collect the money owed to your business.
  • Include the bad debt total on your business tax return. If you file business taxes on Schedule C, you can deduct the amount of all bad debt. Each type of business tax return has a place to enter bad debt expenses.

It makes sense in any kind of business—no income recorded, no bad debt.

Collection efforts are important

A business bad debt often originates as a result of credit sales to customers for goods sold or services provided. The best documentation is likely to be a detailed record of collection efforts, indicating you made every effort a reasonable person would in order to collect a debt.

Take some solace by claiming a bad business debt deduction on your tax return. Not exactly a guarantee because you need to show that the debt is worthless, but it’s good to know there may be some relief.

We’ve got your back

The tax experts at KRS can help you with important accounting issues such as bad debt. Contact us today at 201.655.7411. And did you know that KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources? Check it out today!