Tax Tips for Businesses

IRS Tips for the Home Office Deduction

IRS Tips for the Home Office Deduction

Taxpayers who use their home for business may be able to deduct expenses for the business use of it. Qualified persons can claim the deduction whether they rent or own their home. Use the simplified method or the regular method to claim a deduction.

Here are six tips to keep in mind about the home office deduction:

  1. Regular and Exclusive Use. Generally, taxpayers must use a part of their home regularly and exclusively for business purposes. The part of a home used for business must also be:
  • A principal place of business, or
  • A place where taxpayers meet clients or customers in the normal course of business, or
  • A separate structure not attached to the home. Examples could include a garage or a studio.
  1. Simplified Option. To use the simplified option, multiply the allowable square footage of the office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save time because it simplifies how to figure and claim the deduction. It will also make it easier to keep records. The rules for claiming a home office deduction remain the same.
  2. Regular Method. This method includes certain costs paid for a home. For example, part of the rent for rented homes may qualify. For homeowners, part of the mortgage interest, taxes and utilities paid may qualify. The amount deducted usually depends on the percentage of the home used for business.
  3. Deduction Limit. If the gross income from the business use of a home is less than expenses, the deduction for some expenses may be limited.
  4. Self-Employed. Taxpayers who are self-employed and choose the regular method should use Form 8829, Expenses for Business Use of Your Home, to figure the amount to deduct. Claim the deduction using either method on Schedule C, Profit or Loss from Business. See the Schedule C instructions for how to report the deduction.
  5. Employees. Employees must meet additional rules to claim the deduction. For example, business use must also be for the convenience of the employer. If qualified, claim the deduction on Schedule A, Itemized Deductions. This deduction is available on form 2106 for calendar year 2017. With the passing of the Tax Cuts and Jobs Act of 2017, this deduction is eliminated. It will not be available on your calendar year 2018 tax return.

 

Information from IRS Tax Tip 2017-41 was used in this blog post.

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Things to Know about Taxes and Starting a Business

Four Things to Know about Taxes and Starting a Business

New business owners have tax-related things to do before launching their companies. IRS.gov has resources to help. Here are some items to consider before scheduling a ribbon-cutting event.

Choose a business structure

When starting a business, an owner must decide what type of entity it will be. This type determines which tax forms a business needs to file. Owners can learn about business structures at IRS.gov. The most common forms of businesses are:

Determine business tax responsibilities 

The type of business someone operates determines what taxes they need to pay and how to pay them. There are the five general types of business taxes.

  • Income tax – All businesses except partnerships must file an annual income tax return. They must pay income tax as they earn or receive income during the year.
  • Estimated taxes – If the amount of income tax withheld from a taxpayer’s salary or pension is not enough, or if the taxpayer receives income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, they may have to make estimated tax payments.
  • Self-employment tax – This is a Social Security and Medicare tax. It applies primarily to individuals who work for themselves.
  • Employment taxes – These are taxes an employer pays or sends to the IRS for its employees. These include unemployment tax, income tax withholding, Social Security, and Medicare taxes.
  • Excise tax – These taxes apply to businesses that:
    • Manufacture or sell certain products
    • Operate certain kinds of businesses
    • Use various kinds of equipment, facilities, or products
    • Receive payment for services

Choose a tax year accounting period

Businesses typically figure their taxable income based on a tax year of 12 consecutive months. A tax year is an annual accounting period for keeping records and reporting income and expenses. The options are:

  • Calendar year: Jan. 1 to Dec. 31.
  • Fiscal year:12 consecutive months ending on the last day of any month except December.

Set up recordkeeping processes

Being organized helps businesses owners be prepared for other tasks. Good recordkeeping helps a business monitor progress. It also helps prepare financial statements and tax returns. See IRS.gov for recordkeeping tips.

Information from IRS Tax Tip 2017-67 was used in this blog post. Please contact the professionals at Fox Peterson for a free, no obligation initial consultation regarding your new business.

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2016 Year-End Letter

2016 Year-End Letter

2016 is coming to an end and it will soon be time to file income taxes. We look forward to seeing you again as we assist you with your income tax preparation. We have compiled a list of planning tips and suggestions in our year-end letter and recommend that you take some time to read through it. Feel free to contact us with any questions you have. There is still time to set up an appointment for year-end tax planning.Fox Logo

For your copy of the 2016 Year End Letter, Click Here.

We appreciate your business and wish you all the best for the Holidays this year!

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Capital Gains and Losses – Helpful Facts

Capital Gains and Losses – Helpful Facts

When you sell a capital asset, the sale normally results in a capital gain or loss. A capital asset includes most property you own for personal use or own as an investment. Here are helpful facts that you should know about capital gains and losses:

1. Capital Assets.  Capital assets include property such as your home or car, investment-propertyas well as investment property, such as stocks and bonds.

2. Gains and Losses.  A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

3. Net Investment Income Tax.  You must include all capital gains in your income and you may be subject to the Net Investment Income Tax if your income is above certain amounts. The rate of this tax is 3.8 percent.

4. Deductible Losses.  You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.

5. Limit on Losses.  If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

6. Carryover Losses.  If your total net capital loss is more than the limit gains-vs-lossesyou can deduct, you can carry it over to next year’s tax return.

7. Long and Short Term.  Capital gains and losses are treated as either long-term or short-term, depending on how long you held the property. If you held it for one year or less, the gain or loss is short-term.

8. Net Capital Gain.  If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.

9. Tax Rate.  The tax rate on a net capital gain usually depends on your income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gain.

Contact the professionals at Fox Peterson for additional help regarding capital gains and losses.

Information from IRS tax tip 2016-33 was used in this post.

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June Tax Tips – Avoid an Audit

Tips to Help AVOID AN AUDIT

In 2014, the IRS audited less than 1% of individual income tax returns filed for the 2013 tax year. That’s fewer than in the past and may reflect lower agency funding and manpower. Still, it amounted to more than 1.2 million audited returns – about three out of four examined by mail and the rest involving personal interviews.

Although the prospect of an IRS audit may seem daunting, many queries can be resolved simply by providing additional information or clarification. Some audits result in no change or even a tax refund. Even so, most people would prefer not to receive a letter from the Internal Revenue Service. Here are some tips to keep in mind when filing your return.

Check your math and personal information. The IRS sent out more than 2 million math-error notices in 2014. Although a math error may not lead to an audit, it can call attention to your return. The same is true for entering incorrect personal information, such as the wrong Social Security number, or forgetting to sign your return.

File forms on time. Not surprisingly, missing a filing deadline often leads to a letter from the IRS (though not necessarily an audit). Remember that even if you file an extension, you must pay all tax due by the regular filing deadline or you will be charged interest.

Report all income. Other sources of income not reported on a W-2 form might include investment income, interest, royalties, rent, compensation as an independent contractor, forgiven debt, alimony, tips, gambling winnings, heath insurance reimbursements (for expenses deducted in a previous year), and proceeds from sales on online sites such as eBay. Many types of income are reported to the IRS by the payer (typically on a 1099 form), but even if income is not reported by the payer, you should include it on your tax return.

Use good judgment when taking deductions. Take all deductions allowed by law, but keep in mind that certain deductions tend to raise a red flag. Among the most common are home-office deductions, vehicle expense deductions, and high value charitable contributions. Follow all legal requirements and keep necessary records. If you claim self-employment business expenses, be sure you understand IRS regulations distinguishing a business from a hobby. And remember that there are more rigorous record-keeping requirements for higher-value charitable deductions

Find a good tax preparer. It’s generally wise to consult with a tax professional before taking specific action related to your taxes. The professionals at Fox Peterson are fully qualified to assist you with all your personal and business income tax and accounting needs.

Tax Penalty Relief. If you miss the April 18 tax return filing deadline this year and face penalties for late filing and late payment, see whether you quality for this one-time waiver before paying the fines. Under the IRS’s “first time abate” program, the IRS will waive the penalties for those who pay the tax due (or arrange to pay via installments) and who have complied with filing and payment obligations for the previous three years. The forgiveness isn’t automatic. You have to ask for it, either with a written note when you file your return or a written or telephone appeal after you receive a penalty notice.

Taking extra care when preparing your return may reduce your chances of an audit or other query from the IRS. The professionals at Fox Peterson are prepared to help you every step of the way.

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Protect Your Computer Online

Protect Your Computer Online

The Internal Revenue Service, the states and the tax industry urge you to be safe online and remind you to take important steps to help protect yourself against identity theft.

Scammers, hackers and identity thieves are looking to steal your personal information – and your money. But there are simple steps you can take to help protect yourself, like keeping your computer software up-to-date and giving out your personal information only when you have a good reason.

We all have a role to play to protect your tax account. There are just a few easy and practical steps you can take to protect yourself as you conduct your personal business online.

Here are some best practices you can follow to protect your tax and financial information:

  1. Understand and Use Security Software.  Security software helps protect your computer against the digital threats which are prevalent online. Generally, your operating system will include security software or you can access free security software from well-known companies or Internet providers. Other options may have an annual licensing fee and offer more features. Essential tools include a firewall, virus/malware protection and file encryption if you keep sensitive financial/tax documents on your computer. Security suites often come with firewall, anti-virus and anti-spam, parental controls and privacy protection. File encryption to protect your saved documents may have to be purchased separately. Do not buy security software offered as an unexpected pop-up ad on your computer or email! It’s likely from a scammer.Security Lock
  2. Allow Security Software to Update Automatically. Set your security software to update automatically. Malware – malicious software – evolves constantly and your security software suite is updated routinely to keep pace.
  3. Look for the “S” for encrypted “https” websites. When shopping or banking online, always look to see that the site uses encryption to protect your information. Look for https at the beginning of the web address. The “s” is for secure. Unencrypted sites begin with an http address. Additionally, make sure the https carries through on all pages, not just the sign-on page.
  4. Use Strong Passwords. Use passwords of at least 10 to 12 characters, mixing letters, numbers and special characters. Don’t use your name, birthdate or common words. Don’t use the same password for several accounts. Keep your password list in a secure place or use a password manager. Don’t share your password with anyone. Calls, texts or emails pretending to be from legitimate companies or the IRS asking you to update your accounts or seeking personal financial information are generally scams.
  5. Secure your wireless network.  A wireless network sends a signal through the air that allows you to connect to the Internet. If your home or business wi-fi is unsecured it also allows any computer within range to access your wireless and steal information from your computer. Criminals also can use your wireless to send spam or commit crimes that would be traced back to your account. Always encrypt your wireless. Generally, you must turn on this feature and create a password.
  6. Be cautious when using public wireless networks. Public wi-fi hotspots are convenient but often not secure. Tax or financial Information you send though websites or mobile apps may be accessed by someone else. If a public Wi-Fi hotspot does not require a password, it probably is not secure. If you are transmitting sensitive information, look for the “s” in https in the website address to ensure that the information will be secure.
  7. Avoid phishing attempts. Never reply to emails, texts or pop-up messages asking for your personal, tax or financial information. One common trick by criminals is to impersonate a business such as your financial institution, tax software provider or the IRS, asking you to update your account and providing a link. Never click on links even if they seem to be from organizations you trust. Go directly to the organization’s website. Legitimate businesses don’t ask you to send sensitive information through unsecured channels.

Information from IRS Security Awareness Tax Tips was used in this blog post

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2015 Tax Organizer

2015 Tax Organizer

The 2015 Fox Peterson tax organizer is now available in two forms. You can A) go to our resources page and fill out the organizer(s) that apply to you and submit them directly to your tax preparer or B) click here to download and print the PDF version.

A customized organizer is also available. Please email or call your tax preparer to request yours.Fox Logo

These resources are meant to be used as a tool to help taxpayers prepare for the upcoming tax season.

As always, if you have any questions you can call Fox Peterson at 480-898-7640

Happy new year!

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Reasonable Compensation

What is Reasonable Compensation for a shareholder-employee of an S Corporation?

The IRS requires that S corporations “pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee.” Fox Peterson can help you determine what your compensation should be in accordance with IRS guidelines. On the IRS website under the heading of “S Corporation Compensation and Medical Issues”, the IRS states “The key to establishing reasonable compensation is determining what the shareholder-employee did for the S Corporation”.

So what factors determine what “reasonable compensation” is for a shareholder-employee? First we look at the source of the S Corporation’s gross receipts. Gross receipts are typically broken into the following three major sources:

  1. Services of shareholderReasonable Compensation Shake
  2. Services of non-shareholder employees
  3. Capital and equipment

If most of the income and profits are from the personal services of the shareholder, then most of the profit distribution should be allocated as compensation. If the majority of gross receipts and profits come from non-shareholder employees or capital and equipment, then a lower amount of the profit distribution can be allocated as compensation.

IRS auditors are also instructed that the “shareholder employee should also be compensated for administrative work performed for the other income producing employees or assets.” For example, a manager may not directly produce gross receipts, but he assists the other employees or assets which are producing the day-to-day gross receipts.

Some factors in determining reasonable compensation:

  1. Training and experienceReasonable Compensation Training
  2. Duties and responsibilities
  3. Time and effort devoted to the business
  4. Dividend history
  5. Payments to non-shareholder employees
  6. Timing and manner of paying bonuses to key people
  7. What comparable businesses pay for similar services
  8. Compensation agreements
  9. The use of a formula to determine compensation.

Lastly, the total of reasonable compensation cannot exceed the amount received by the shareholder either directly or indirectly. Accordingly, if the taxpayer only receives $10,000 from the S Corp during the year, the maximum “reasonable compensation” issue is limited to $10,000.

Contact the professionals at Fox Peterson for help in determining what reasonable compensation is for your S Corporation.

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Additional Medicare Tax

Additional Medicare Tax

Some taxpayers may be liable for an Additional Medicare Tax if your income exceeds certain limits. Here are six things that you should know about this tax:

  • Tax Rate.  The Additional Medicare Tax rate is 0.9 percent.
  • Income Subject to Tax.  The tax applies to the amount of certain income that is more than a threshold amount. The types of income include your Medicare wages, self-employment income and Medicare Taxrailroad retirement (RRTA) compensation. You must combine your wages and self-employment income to figure the tax.
  • Threshold Amount.  You base your threshold amount on your filing status. If you are married and file a joint return, you must combine your spouse’s wages, compensation, or self-employment income with yours. Use the combined total to determine if your income exceeds your threshold. The threshold amounts are:
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow(er) with dependent child $200,000
  • Withholding / Estimated Tax.  Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year. If you are self-employed you should include this tax when you figure your estimated tax liability.
  • Underpayment of Estimated Tax.  If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty.

If you owe this tax, file Form 8959, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.

Information from IRS Tax Tip 2015-41 was used in this blog.

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Tips for Filing an Amended Return

Have you found that you made an error on your federal tax return? If so, you may need to file an amended return. Here are ten tips that can help you file.

1.    Tax form to amend your return.  Use Form 1040X, 1040XAmended U.S. Individual Income Tax Return, to correct your tax return. You must file a paper Form 1040X; it can’t be e-filed.

2.    Amend to correct errors.  You should file an amended tax return to correct errors or make changes to your original tax return. For example, you should amend to change your filing status, or to correct your income, deductions or credits.

3.    Don’t amend for math errors, missing forms.  You normally don’t need to file an amended return to correct math errors. The IRS will automatically correct those for you. Also, do not file an amended return if you forgot to attach tax forms, such as a Form W-2 or a schedule. The IRS will mail you a request for them in most cases.

4.    Most taxpayers don’t need to amend to correct Form 1095-A, Health Insurance Marketplace Statement, errors.  Eligible taxpayers who filed a 2014 tax return and claimed a premium tax credit using incorrect information from either the federally-facilitated or a state-based Health Insurance Marketplace, generally do not have to file an amended return regardless of the nature of the error, even if additional taxes would be owed. The IRS may contact you to ask for a copy of your corrected Form 1095-A to verify the information.

5.    Time limit to claim a refund.  You usually have three years from the date you filed your original tax return to file Form 1040X to claim a refund. You can file it within two years from the date you paid the tax, if that date is later. That means the last day for most people to file a 2011 claim for a refund is April 15, 2015. See the Form 1040X instructions for special rules that apply to some claims.

6.    When to file for second refund.  If you are due a 1040 crumpledrefund from your original return, wait to get that refund before filing Form 1040X to claim an additional refund. Amended returns take up to 16 weeks to process. You may spend your original refund while you wait for any additional refund.

7.    Track your amended return.  You can track the status of your amended tax return three weeks after you file with ‘Where’s My Amended Return?’ This tool is on IRS.gov or by phone at 866-464-2050. It is available in English and in Spanish. The tool can track the status of an amended return for the current year and up to three years back. To use ‘Where’s My Amended Return?’ enter your taxpayer identification number, which is usually your Social Security number. You will also enter your date of birth and zip code. If you have filed amended returns for multiple years, you can check each year one at a time.
Information from IRS Tax Tip 2015-64 was used in this blog post.

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