Four common tax errors that can be costly for small businesses

A small business owner often wears many different hats. They might have to wear their boss hat one day, and the employee hat the next. When tax season comes around, it might be their tax hat.
 
They may think of doing their taxes as just another item to quickly cross off their to-do list. However, this approach could leave taxpayers open to mistakes when filing and paying taxes.
 
Accidentally failing to comply with tax laws, violating tax codes, or filling out forms incorrectly can leave taxpayers and their businesses open to possible penalties. The IRS encourages small businesses to explore using a reputable tax preparer. Filing electronically can also help avoid common errors.
 
Being aware of common mistakes can also help tame the stress of tax time. Here are a few mistakes small business owners should avoid:
 
Underpaying estimated taxes
Business owners should generally make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. If they don’t pay enough tax through withholding and estimated tax payments, they may be charged a penalty.
 
Depositing employment taxes
Business owners with employees are expected to deposit taxes they withhold, plus the employer’s share of those taxes, through electronic fund transfers. If those taxes are not deposited correctly and on time, the business owner may be charged a penalty.
 
Filing late
Just like individual returns, business tax returns must be filed in a timely manner. To avoid late filing penalties, taxpayers should be aware of all tax requirements for their type of business the filing deadlines.
 
Not separating business and personal expenses
It can be tempting to use one credit card for all expenses especially if the business is a sole proprietorship. Doing so can make it very hard to tell legitimate business expenses from personal ones. This could cause errors when claiming deductions and become a problem if the taxpayer or their business is ever audited.

Home office deduction benefits eligible small business owners

Small business owners may qualify for a home office deduction that will help them save money on their taxes, and benefit their bottom line. Taxpayers can take this deduction if they use a portion of their home exclusively, and on a regular basis, for any of the following:

  • As the taxpayer’s main place of business.
  • As a place of business where the taxpayer meets patients, clients or customers. The taxpayer must meet these people in the normal course of business.
  • If it is a separate structure that is not attached to the taxpayer’s home. The taxpayer must use this structure in connection with their business
  • A place where the taxpayer stores inventory or samples. This place must be the sole, fixed location of their business.
  • Under certain circumstances, the structure where the taxpayer provides day care services.

Deductible expenses for business use of a home include:

  • Real estate taxes
  • Mortgage interest
  • Rent
  • Casualty losses
  • Utilities
  • Insurance
  • Depreciation
  • Repairs and Maintenance

Certain expenses are limited to the net income of the business. These are known as allocable expenses. They include things such as utilities, insurance, and depreciation.  While allocable expenses cannot create a business loss, they can be carried forward to the next year. If the taxpayer carries them forward, the expenses are subject to the same limitation rules.

There are two options for figuring and claiming the home office deduction.

Regular method
This method requires dividing the above expenses of operating the home between personal and business use. Self-employed taxpayers file Form 1040, Schedule C, and compute this deduction on Form 8829.

Simplified method
The simplified method reduces the paperwork and recordkeeping for small businesses. The simplified method has a set rate of $5 a square foot for business use of the home. The maximum deduction allowed is based on up to 300 square feet.

There are special rules for certain business owners:

Tips on How to Handle an IRS Letter or Notice

The IRS mails millions of letters every year to taxpayers for a variety of reasons. Keep the following suggestions in mind on how to best handle a letter or notice from the IRS:

  1. Do not panic. Simply responding will take care of most IRS letters and notices.
  2. Do not ignore the letter. Most IRS notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes specific instructions on what to do. Read the letter carefully; some notices or letters require a response by a specific date.
  3. Respond timely. A notice may likely be about changes to a taxpayer’s account, taxes owed or a payment request. Sometimes a notice may ask for more information about a specific issue or item on a tax return. A timely response could minimize additional interest and penalty charges.
  4. If a notice indicates a changed or corrected tax return, review the information and compare it with your original return. If the taxpayer agrees, they should note the corrections on their copy of the tax return for their records. There is usually no need to reply to a notice unless specifically instructed to do so, or to make a payment.
  5. Taxpayers must respond to a notice they do not agree with. They should mail a letter explaining why they disagree to the address on the contact stub at the bottom of the notice. Include information and documents for the IRS to consider and allow at least 30 days for a response.
  6. There is no need to call the IRS or make an appointment at a taxpayer assistance center for most notices. If a call seems necessary, use the phone number in the upper right-hand corner of the notice. Be sure to have a copy of the related tax return and notice when calling.
  7. Always keep copies of any notices received with tax records.
  8.  The IRS and its authorized private collection agency will send letters and notices by mail. The IRS will not demand payment a certain way, such as prepaid debit or credit card. Taxpayers have several payment options for taxes owed.
  9. Give Jones & Associates, LLC a call and let us help you with the notice.

Here’s how the IRS contacts taxpayers

Everyone should know how the IRS contacts taxpayers. This will help people avoid becoming a victim of scammers who pretend to be from the IRS with a goal of stealing personal information.
Here are some facts about how the IRS communicates with taxpayers:

  • The IRS doesn’t normally initiate contact with taxpayers by email.
  • The agency does not send text messages or contact people through social media.
  • When the IRS needs to contact a taxpayer, the first contact is normally by letter delivered by the U.S. Postal Service.  Fraudsters will send fake documents through the mail, and in some cases will claim they already notified a taxpayer by U.S. mail.
  • Depending on the situation, IRS employees may first call or visit with a taxpayer. In some instances, the IRS sends a letter or written notice to a taxpayer in advance, but not always.
  • IRS revenue agents or tax compliance officers may call a taxpayer or tax professional after mailing a notice to confirm an appointment or to discuss items for a scheduled audit.
  • Private debt collectors can call taxpayers for the collection of certain outstanding inactive tax liabilities, but only after the taxpayer and their representative have received written notice.
  • IRS revenue officers and agents routinely make unannounced visits to a taxpayer’s home or place of business to discuss taxes owed, delinquent tax returns or a business falling behind on payroll tax deposits. IRS revenue officers will request payment of taxes owed by the taxpayer. However, taxpayers should remember that payment will never be requested to a source other than the U.S. Treasury.
  • When visited by someone from the IRS, the taxpayers should always ask for credentials. IRS representatives can always provide two forms of official credentials: a pocket commission and a Personal Identity Verification Credential.

Taxpayers Should do an End-of-Year Withholding Check-up

As the end of the year approaches, the IRS encourages taxpayers to consider a tax withholding checkup. When taxpayers take a close look to make sure the right amount of tax is withheld now, they can avoid an unexpected tax bill next year.

Here are five examples of taxpayers who would benefit from a withholding check-up:

  • Taxpayers who received large tax refunds in past years
    When a taxpayer has too much tax withheld from their paycheck, they pay too much tax during the year. They can change their withholding to have money upfront rather than waiting for a bigger refund.
  • Taxpayers who owed taxes in years past
    Taxpayers with too little tax withheld might owe money. Under-withholding can lead to both a tax bill and an additional penalty.
  • People with a second job
    This includes people who work in the sharing or ‘gig’ economy. Taxpayers who work more than one job should check the total amount of taxes they have withheld and make adjustments as necessary. This will ensure their withholding covers the total amount of the taxes they owe, based on their combined income from all their jobs.
  • Taxpayers who make estimated tax payments
    Some taxpayers make quarterly estimated tax payments throughout the year. This includes self-employed individuals, partners, and S corporation shareholders.  If these taxpayers also work for an employer, they can often forgo making these quarterly payments by instead having more tax taken out of their pay.
  • People with a new job
    Taxpayers who start a new job should check their withholding to make sure they are having enough taxes withheld. Their total withholding should cover the income tax owed from their new and old jobs combined.

To make sure their employer withholds the right amount of tax, employees can adjust their Form W-4, Employee’s Withholding Allowance Certificate. In many cases, this is all they need to do. The employer uses the form to figure the amount of federal income tax to be withheld from pay. This takes time, so taxpayers should make adjustments as soon as possible so the changes can take affect during the final pay periods of 2017.

How to Know if the Knock on Your Door is Actually Someone from the IRS

 

Every Halloween, children knock on doors pretending they are everything from superheroes to movie stars. Scammers, on the other hand, don’t leave their impersonations to one day. They can happen any time of the year.

People can avoid taking the bait and falling victim to a scam by knowing how and when the IRS does contact a taxpayer in person. This can help someone determine whether an individual is truly an IRS employee.

Here are eight things to know about in-person contacts from the IRS.

  • The IRS initiates most contacts through regular mail delivered by the United States Postal Service.
  • There are special circumstances when the IRS will come to a home or business. This includes:
    • When a taxpayer has an overdue tax bill
    • When the IRS needs to secure a delinquent tax return or a delinquent employment tax payment
    • To tour a business as part of an audit
    • As part of a criminal investigation
  • Revenue officers are IRS employees who work cases that involve an amount owed by a taxpayer or a delinquent tax return. Generally, home or business visits are unannounced.
  • IRS revenue officers carry two forms of official identification.  Both forms of ID have serial numbers. Taxpayers can ask to see both IDs.
  • The IRS can assign certain cases to private debt collectors. The IRS does this only after giving written notice to the taxpayer and any appointed representative. Private collection agencies will never visit a taxpayer at their home or business.
  • The IRS will not ask that a taxpayer makes a payment to anyone other than the U.S. Department of the Treasury.
  • IRS employees conducting audits may call taxpayers to set up appointments, but not without having first notified them by mail. Therefore, by the time the IRS visits a taxpayer at home, the taxpayer would be well aware of the audit.
  • IRS criminal investigators may visit a taxpayer’s home or business unannounced while conducting an investigation. However, these are federal law enforcement agents and they will not demand any sort of payment.

Taxpayers who believe they were visited by someone impersonating the IRS can visit IRS.gov for information about how to report it.

Moving Expenses May Be Deductible

Taxpayers may be able to deduct certain expenses of moving to a new home because they started or changed job locations. Use Form 3903, Moving Expenses, to claim the moving expense deduction when filing a federal tax return.

Home means the taxpayer’s main home. It does not include a seasonal home or other homes owned or kept up by the taxpayer or family members. Eligible taxpayers can deduct the reasonable expenses of moving household goods and personal effects and of traveling from the former home to the new home.

Reasonable expenses may include the cost of lodging while traveling to the new home. The unreimbursed cost of packing, shipping, storing and insuring household goods in transit may also be deductible.

Who Can Deduct Moving Expenses?

  1. The move must closely relate to the start of work. Generally, taxpayers can consider moving expenses within one year of the date they start work at a new job location.
  2. The distance test. A new main job location must be at least 50 miles farther from the employee’s former home than the previous job location. For example, if the old job was three miles from the old home, the new job must be at least 53 miles from the old home. A first job must be at least 50 miles from the employee’s former home.
  3. The time test. After the move, the employee must work full-time at the new job for at least 39 weeks in the first year. Those self-employed must work full-time at least 78 weeks during the first two years at the new job site.

Different rules may apply for members of the Armed Forces or a retiree or survivor moving to the United States.

Here are a few more moving expense tips from the IRS:

  • Reimbursed expenses. If an employer reimburses the employee for the cost of a move, that payment may need to be included as income. The employee would report any taxable amount on their tax return in the year of the payment.
  • Nondeductible expenses. Any part of the purchase price of a new home, the cost of selling a home, the cost of entering into or breaking a lease, meals while in transit, car tags and driver’s license costs are some of the items not deductible.
  • Recordkeeping. It is important that taxpayers maintain an accurate record of expenses paid to move. Save items such as receipts, bills, canceled checks, credit card statements, and mileage logs. Also, taxpayers should save statements of reimbursement from their employer.
  • Address Change. After any move, update the address with the IRS and the U.S. Post Office. To notify the IRS file Form 8822, Change of Address.

Eight Tips to Protect Taxpayers from Identity Theft

Identity theft happens when someone steals personal information for financial gain. Tax-related identity theft happens when someone uses another person’s stolen Social Security number (SSN) or Employer Identification Number (EIN) to file a tax return to obtain a fraudulent refund.

Many people first find out they are victims of identity theft when they submit their tax returns. That’s because the IRS lets them know someone else already used their SSN to file.

The IRS continues to work hard to stop identity theft with a strategy of prevention, detection and victim assistance. So far, the agency has stopped millions of dollars from getting into the hands of thieves.

Check out these eight tips on how to protect against identity theft:

  1. Taxes. Security. Together. The IRS, the states and the tax industry need everyone’s help. The IRS launched The Taxes. Security. Together. awareness campaign in 2015 to inform people about ways to protect their personal, tax and financial data. Learn more at www.IRS.gov/TaxesSecurityTogether.
  2. Protect Personal and Financial Records. Taxpayers should not carry their Social Security card in their wallet or purse. They should only provide their Social Security number if it’s necessary. Protect personal information at home and protect personal computers with anti-spam and anti-virus software. Routinely change passwords for online accounts.
  3. Don’t Fall for Scams. Criminals often try to impersonate banks, credit card companies and even the IRS hoping to steal personal data. Learn to recognize and avoid those fake communications. Also, the IRS will not call a taxpayer threatening a lawsuit, arrest or to demand immediate payment. Beware of threatening phone calls from someone claiming to be from the IRS.
  4. Report Tax-Related ID Theft. Here’s what taxpayers should do if they cannot e-file their return because someone already filed using their SSN:
  • File a tax return by paper and pay any taxes owed.
  • File an IRS Form 14039, Identity Theft Affidavit. Print the form and mail or fax it according to the instructions. Include it with the paper tax return and/or attach a police report describing the theft if available.
  • File a report with the Federal Trade Commission using the FTC Complaint Assistant.
  • Contact Social Security Administration at www.ssa.gov and type in “identity theft” in the search box.
  • Contact financial institutions to report the alleged identity theft.
  • Contact one of the three credit bureaus so they can place a fraud alert or credit freeze on the affected account.
  • Check with the applicable state tax agency to see if there are additional steps to take at the state level.
  1. IRS Letters. If the IRS identifies a suspicious tax return with a taxpayer’s stolen SSN, that taxpayer may receive a letter asking them verify their identity by calling a special number or visiting an IRS Taxpayer Assistance Center.
  2. IP PIN. If a taxpayer is a confirmed ID theft victim, the IRS may issue them an IP PIN. The IP PIN is a unique six-digit number that the taxpayer uses to e-file their tax return. Each year, they will receive an IRS letter with a new IP PIN.
  3. Report Suspicious Activity. If taxpayers suspect or know of an individual or business that is committing tax fraud, they can visit IRS.gov and follow the chart on How to Report Suspected Tax Fraud Activity.
  4. Service Options. Information about tax-related identity theft is available online. The IRS has a special section on IRS.gov devoted to identity theft and information for victims to obtain assistance.

For more on this Topic, see the Taxpayer Guide to Identity Theft.

Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Tips to Keep in Mind on Income Taxes and Selling a Home

Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home.

Below are tips to keep in mind when selling a home:

Ownership and Use. To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:

  • Owned the home for at least two years
  • Lived in the home as their main home for at least two years    Gain.  If there is a gain from the sale of their main home, the homeowner may be able to exclude up to $250,000 of the gain from income or $500,000 on a joint return in most cases. Homeowners who can exclude all of the gain do not need to report the sale on their tax return

Loss.  A main home that sells for lower than purchased is not deductible.

Reporting a Sale.  Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.

Possible Exceptions.  There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others. More information is available in Publication 523, Selling Your Home.

Worksheets.  Worksheets are included in Publication 523, Selling Your Home, to help you figure the:

  • Adjusted basis of the home sold
  • Gain (or loss) on the sale
  • Gain that can be excluded

Items to Keep In Mind:

  • Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must paid on the gain from selling any other home.
  • Taxpayers who used the first-time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account Look-up to get account information such as the total amount of your credit or your repayment amount.
  • Work-related moving expenses might be deductible, see Publication 521, Moving Expenses.
  • Taxpayers moving after the sale of their home should update their address with the IRS and the U.S. Postal Service by filing Form 8822, Change of Address.
  • Taxpayers who purchased health coverage through the Health Insurance Marketplace should notify the Marketplace when moving out of the area covered by the current Marketplace plan.

Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Need More Time to Pay Taxes?

All taxpayers should file on time, even if they can’t pay what they owe. This saves them from potentially paying a failure to file penalty. Taxes are due by the original due date of the return.

Here are four tips for those who can’t pay their taxes in full by the April 18 due date:

  1. File on time and pay as much as possible. Pay online, by phone, with your mobile device using the IRS2Go app, or by check or money order. Visit IRS.gov for electronic payment options.
  2. Get a loan or use a credit card to pay the tax. The interest and fees charged by a bank or credit card company may be less than IRS interest and penalties. For credit card options, see IRS.gov.
  3. Use the Online Payment Agreement tool.  Don’t wait for the IRS to send a bill before seeking a payment plan. The best way is to use the Online Payment Agreement tool on IRS.gov. Taxpayers can also file Form 9465, Installment Agreement Request, with their tax return. Set up a direct debit agreement. With this type of payment plan, there is no need to send a check each month.
  4. Don’t ignore a tax bill.  If so, the IRS may take collection action. Contact the IRS right away by calling the phone number on your bill to talk about options. The IRS will work with taxpayers suffering financial hardship.

Remember to file on time. Pay as much as possible by April 18, 2017, and pay the rest as soon as possible to reduce the interest and penalties. Find out more about the IRS collection process on IRS.gov.