The Facts About Penalty Relief For Taxpayers

Taxpayers who make an effort to comply with the law but are unable to meet their tax obligations due to circumstances beyond their control may qualify for relief from penalties.

If you’ve received a notice stating that the IRS assessed a penalty, the first step taxpayers should take is to check that the information in the notice is correct. Those who can resolve an issue in their notice may get relief from certain penalties, which include failing to:

  • File a tax return
  • Pay on time
  • Deposit certain taxes as required

There are several types of penalty relief:

1. Reasonable cause

This relief is based on all the facts and circumstances in a taxpayer’s situation. The IRS will consider this relief when the taxpayer can show they tried to meet their obligations but were unable to do so. Situations, when this could happen, include a house fire, natural disaster and a death in the immediate family.

2. Administrative Waiver and First Time Penalty Abatement

A taxpayer may qualify for relief from certain penalties if he or she:

  • Didn’t previously have to file a return or had no penalties for the three tax years prior to the tax year in which the IRS assessed a penalty.
  • Filed all currently required returns or filed an extension of time to file.
  • Paid, or arranged to pay, any tax due.

3. Statutory Exception

In certain situations, legislation may provide an exception to a penalty. Taxpayers who received incorrect written advice from the IRS may qualify for a statutory exception.

Taxpayers who received a notice or letter saying the IRS didn’t grant the request for penalty relief may appeal. If you have any questions about IRS penalties, please call.

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Tax Benefits of S-Corporations

As a small business owner, figuring out which form of business structure to use when you started was one of the most important decisions you had to make; however, it’s always a good idea to periodically revisit that decision as your business grows. For example, as a sole proprietor, you must pay a self-employment tax rate of 15% in addition to your individual tax rate; however, if you were to revise your business structure to become a corporation and elect S-Corporation status you could take advantage of a lower tax rate.

WHAT IS AN S-CORPORATION?

An S-Corporation (or S-Corp) is a regular corporation whose owners elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax (and sometimes state) purposes. That is, an S-corporation is a corporation or a limited liability company that’s made a Subchapter S election (so named after a chapter of the tax code). Rather than a business entity per se, it is a type of tax classification. Shareholders then report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates, which allows S-corporations to avoid double taxation on corporate income. S-corporations are, however, responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S-corporation status, the corporation must submit a Form 2553, Election by a Small Business Corporation to the IRS, signed by all the shareholders, and meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders. Shareholders may be individuals, certain trusts, and estates but may not be partnerships, corporations or non-resident alien shareholders.
  • Have no more than 100 shareholders
  • Have only one class of stock
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

WHAT ARE THE TAX ADVANTAGES OF AN S-CORP?

Personal Income and Employment Tax Savings

S-corporation owners can choose to receive both a salary and dividend payments from the corporation (i.e., distributions from earnings and profits that pass through the corporation to you as an owner, not as an employee in compensation for your services). Dividends are taxed at a lower rate than self-employment income, which lowers taxable income. S-corp owners also save on Social Security and Medicare taxes because their salary is less than it would be if they were operating a sole proprietorship, for instance.

The split between salary and dividends must be “reasonable” in the eyes of the IRS, however, e.g., paying self-employment tax on 50% or less of profits or a salary that is in line with similar businesses. Furthermore, some S-corp owners may be able to take advantage of the 20% deductions for pass-through entities as well, thanks to tax reform.

Losses are Deductible

As a corporation, profits and losses are allocated between the owners based on the percentage of ownership or number of shares held. If the S-corporation loses money, these losses are deductible on the shareholder’s individual tax return. For example, if you and another person are the owners and the corporation’s losses amount to $20,000, each shareholder is able to take $10,000 as a deduction on their tax return.

No Corporate Income Tax

Although S-corps are corporations, there is no corporate income tax because business income is passed through to the owners instead of being taxed at the corporate rate, thereby avoiding the double taxation issue, which occurs when dividend income is taxed at both the corporate level and at the shareholder level.

Less Risk of Audit

In 2014, S-corps faced an audit risk of just 0.42% compared to Schedule C filers with gross receipts of $100,000 who faced an audit rate of 2.3%. While still low, individuals filing Schedule C (Profit or Loss from Business) are at higher risk of being audited due to IRS concerns about small business owners underreporting income or taking deductions they shouldn’t be.

HELP IS JUST A PHONE CALL AWAY.

Whether you keep your existing structure or decide to change it to a different one, keep in mind that your decision should always be based on the specific needs and practices of the business. If you have any questions about electing S-Corporation status or are wondering whether it’s time to choose a different business entity altogether, don’t hesitate to call.

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Small Business Payroll Expenses

Federal law requires most employers to withhold federal taxes from their employees’ wages. Whether you’re a small business owner who’s just starting out or one who has been in business a while and is ready to hire an employee or two, here are five things you should know about withholding, reporting, and paying employment taxes.

1. Federal Income Tax. Small businesses first need to figure out how much tax to withhold. Small business employers can better understand the process by starting with an employee’s Form W-4 and the withholding tables described in Publication 15, Employer’s Tax Guide. Please call if you need help understanding withholding tables.

2. Social Security and Medicare Taxes. Most employers also withhold social security and Medicare taxes from employees’ wages and deposit them along with the employers’ matching share. In 2013, employers became responsible for withholding the Additional Medicare Tax on wages that exceed a threshold amount as well. There is no employer match for the Additional Medicare Tax, and certain types of wages and compensation are not subject to withholding.

3. Federal Unemployment (FUTA) Tax. Employers report and pay FUTA tax separately from other taxes. Employees do not pay this tax or have it withheld from their pay. Businesses pay FUTA taxes from their own funds.

4. Depositing Employment Taxes. Generally, employers pay employment taxes by making federal tax deposits through the Electronic Federal Tax Payment System (EFTPS). The amount of taxes withheld during a prior one-year period determines when to make the deposits. Publication 3151-A, The ABCs of FTDs: Resource Guide for Understanding Federal Tax Deposits and the IRS Tax Calendar for Businesses and Self-Employed are helpful tools.

Failure to make a timely deposit can mean being subject to a failure-to-deposit penalty of up to 15 percent. But the penalty can be waived if an employer has a history of filing required returns and making tax payments on time. Penalty relief is available, however. Please call the office for more information.

5. Reporting Employment Taxes. Generally, employers report wages and compensation paid to an employee by filing the required forms with the IRS. E-filing Forms 940, 941, 943, 944 and 945 is an easy, secure and accurate way to file employment tax forms. Employers filing quarterly tax returns with an estimated total of $1,000 or less for the calendar year may now request to file Form 944,Employer’s ANNUAL Federal Tax Return once a year instead. At the end of the year, the employer must provide employees with Form W-2, Wage and Tax Statement, to report wages, tips, and other compensation. Small businesses file Forms W-2 and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration and if required, state or local tax departments.

Questions about payroll taxes?

If you have any questions about payroll taxes, please contact the office.

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Five Tax Deductions That Disappeared in 2018

FIVE TAX DEDUCTIONS THAT DISAPPEARED IN 2018

Under tax reform, taxpayers who itemize should be aware that deductions they may have previously counted on to reduce their taxable income have disappeared in 2018.

1. Moving Expenses

Prior to tax reform (i.e., for tax years starting before January 1, 2018), taxpayers could deduct expenses related to moving for a job as long as the move met certain IRS criteria. However, for tax years 2018 through 2025, moving expenses are no longer deductible–unless you are a member of the Armed Forces on active duty who moves because of a military order.

2. Unreimbursed Job Expenses

For tax years starting in 2018 and expiring at the end of 2025, miscellaneous unreimbursed job-related expenses that exceed 2% of adjusted gross income (AGI) are no longer deductible on Schedule A (Form 1040). Examples of unreimbursed job-related expenses include union dues, continuing education, employer-required medical tests, regulatory and license fees (provided the employee was not reimbursed), and out-of-pocket expenses paid by an employee for uniforms, tools, and supplies.

3. Tax Preparation Fees

Tax preparation fees, which fall under miscellaneous fees on Schedule A of Form 1040 (also subject to the 2% floor), have been eliminated for tax years 2018 through 2025. Tax preparation fees include payments to accountants, tax prep firms, as well as the cost of tax preparation software.

4. Personal Exemptions

Repealed for tax years 2018 through 2025, the personal exemption enabled individual taxpayers to reduce taxable income ($4,050 in 2017). Each household dependent was able to take the deduction as well. While the standard deduction did increase significantly ($12,000 for individuals, $24,000 for married taxpayers filing jointly, $18,000 for heads of household) to compensate, some taxpayers may still lose out.

5. Subsidized Parking and Transit Reimbursements for Employers

Before tax reform, employees could take advantage of a perk offered by many employers whereby parking and transit pass costs (up to $255 per month in 2017) were reimbursed by their employers tax-free. These reimbursements were not included in the employee’s taxable income and were deductible to companies on their tax returns. However, for tax years starting in 2018, the employer deduction is no longer available.

If you have any questions about tax reform and how it affects your particular tax situation, don’t hesitate to call.

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TAX BREAKS FOR BUSINESSES HIRING NEW EMPLOYEES

If you’re thinking about hiring new employees this this year you won’t want to miss out on tax breaks available to businesses with employees.

1. PAYROLL TAX DEDUCTION FOR STARTUPS

As part of the Research & Development Tax Credit, for tax years 2016 and beyond, startup businesses (C-corps and S-corps) with little to no revenue that qualify for the research and development tax credit can apply the credit against employer-paid Social Security taxes instead of income tax owed. Sole proprietorships, as well as Partnerships, C-corps and S-corps with gross receipts of less than $5 million for the current year and with no gross receipts for the previous year, can take advantage of the credit. Up to $250,000 in payroll costs can be offset by the credit.

2. WORK OPPORTUNITY CREDIT

The Work Opportunity Tax Credit (WOTC) is a federal tax credit for employers that hire employees from the following targeted groups of individuals:

  • A member of a family that is a Qualified Food Stamp Recipient
  • A member of a family that is a Qualified Aid to Families with Dependent Children (AFDC) Recipient
  • Qualified Veterans
  • Qualified Ex-Felons, Pardoned, Paroled or Work Release Individuals
  • Vocational Rehabilitation Referrals
  • Qualified Summer Youths
  • Qualified Supplemental Security Income (SSI) Recipients
  • Qualified Individuals living within an Empowerment Zone or Rural Renewal Community
  • Long Term Family Assistance Recipient (TANF) (formerly known as Welfare to Work)

The tax credit (a maximum of $9,600) is taken as a general business credit (Form 3800, General Business Credit), and is applied against tax liability on business income. It is limited to the amount of the business income tax liability or social security tax owed. Normal carryback and carryforward rules apply.

For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.

Also, an employer must obtain certification that an individual is a member of the targeted group before the employer may claim the credit.

Note: The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) retroactively allows eligible employers to claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began or begins work for the employer after December 31, 2014 and before January 1, 2020.

For tax-exempt employers, the PATH Act retroactively allows them to claim the WOTC for qualified veterans who begin work for the employer after December 31, 2014, and before January 1, 2020.

3. DISABLED ACCESS CREDIT

Employers that hire disabled workers might also be able to take advantage of two additional tax credits in addition to the WOTC.

The Disabled Access Credit is a non-refundable credit for small businesses that incur expenditures for the purpose of providing access to persons with disabilities. An eligible small business is one that earned $1 million or less or had no more than 30 full-time employees in the previous year; they may take the credit each, and every year they incur access expenditures. Eligible expenditures include amounts paid or incurred to:

1. Remove barriers that prevent a business from being accessible to or usable by individuals with disabilities;2. Provide qualified interpreters or other methods of making audio materials available to hearing-impaired individuals;

3. Provide qualified readers, taped texts, and other methods of making visual materials available to individuals with visual impairments; or

4. Acquire or modify equipment or devices for individuals with disabilities.

4. ARCHITECTURAL BARRIER REMOVAL TAX DEDUCTION

The Architectural Barrier Removal Tax Deduction encourages businesses of any size to remove architectural and transportation barriers to the mobility of persons with disabilities and the elderly. Businesses may claim a deduction of up to $15,000 a year for qualified expenses for items that normally must be capitalized. Businesses claim the deduction by listing it as a separate expense on their income tax return.

Businesses may use the Disabled Tax Credit and the Architectural/Transportation Tax Deduction together in the same tax year if the expenses meet the requirements of both sections. To use both, the deduction is equal to the difference between the total expenditures and the amount of the credit claimed.

5. STATE TAX CREDITS

Many states use tax credits and deductions as incentives for hiring and job growth. Employers are eligible for these credits and deductions when they create new jobs and hire employees that meet certain requirements. Examples include the New Employment Credit (NEC) in California, the Kentucky Small Business Tax Credit, and Empire Zone Tax Credits in New York.

6. FICA TIP TAX CREDIT

Certain food and beverage establishments can claim a credit for social security and Medicare taxes paid or incurred by the employer on certain employees’ tips. The credit is part of the general business credit. To take advantage of this credit, restaurant managers must complete IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. If the restaurant employs more than 10 tipped employees, then IRS Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tipsis used to report tips and determine allocated tips for tipped employees. The credit is not refundable (there must be taxable income); however, unused FICA credits may be carried back one year or carried forward up to 20 years.

QUESTIONS?

If you’re a business owner and are wondering what tax breaks your business qualifies for, don’t hesitate to call the office and speak to a tax and accounting professional you can trust.

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Seasonal Employees and Taxes

Many businesses hire part-time or full-time workers, especially in the summer. These types of employees are referred to as seasonal workers, which the IRS defines as an employee who performs labor or services on a seasonal basis (i.e., six months or less). Examples of this kind of work include retail workers employed exclusively during holiday seasons, sports events, or during the harvest or commercial fishing season. Part-time and seasonal employees are subject to the same tax withholding rules that apply to other employees.

All taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck; however, Form W-4 worksheets filled out by many employees do not distinguish between part-year jobs and full-year jobs. Taxpayers (including students–more about this topic below) with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability.

CHANGES TO WITHHOLDING UNDER TAX REFORM

The Tax Cuts and Jobs Act made changes to the tax law, including increasing the standard deduction, eliminating personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions and changing the tax rates and brackets starting in 2018.

Many taxpayers working part-time or who have seasonal jobs may not be aware of the changes in tax law that could affect their paycheck–and their 2018 tax returns when they file next year. Of note is that any changes a part-year employee makes to their withholding amount has a more significant impact on their paycheck than it does for employees who work year-round.

As such, now is a good time to perform a “paycheck check-up” using the Withholding Calculator, a special tool on the IRS website that can help taxpayers with part-year employment estimate their income, credits, adjustments, and deductions more accurately. It also checks to see whether a taxpayer is having the correct amount of tax withheld for their financial situation.

Using the withholding calculator

  • First, the calculator asks about the dates of a taxpayer’s employment and accounts for a part-year employee’s shorter employment rather than assuming that their weekly tax withholding amount would be applied to a full year.
  • Next, the calculator makes recommendations for part-year employees accordingly. If a taxpayer has more than one part-year job, the Withholding Calculator can account for this as well.

Taxpayers should have a completed 2017 tax return available and will also need their most recent pay stub before using the Withholding Calculator.

Calculator results depend on the accuracy of information entered. If a taxpayer’s personal circumstances change during the year, they should return to the calculator to check whether their withholding should be adjusted. For taxpayers who work for only part of the year, it’s best to do a “paycheck check-up” early in their employment period, so their tax withholding is most accurate from the start.

The Withholding Calculator does not request personally-identifiable information, such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, taxpayers should watch out for tax scams, especially via email or phone and be especially alert to cybercriminals impersonating the IRS. Remember, the IRS does not send emails related to the calculator or the information entered.

If you need to adjust your withholding

If the calculator results indicate a change in withholding amount, the employee should complete a new Form W-4 and should submit it to their employer as soon as possible. Employees with a change in personal circumstances that reduces the number of withholding allowances should submit a new Form W-4 with corrected withholding allowances to their employer within 10 days of the change.

As a general rule, the fewer withholding allowances an employee enters on the Form W-4, the higher their tax withholding will be. Entering “0” or “1” on line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.

STUDENTS WITH INCOME FROM A SUMMER JOB

If your child is a student with a summer job, the income your child earns over the summer is considered taxable income. For example, if your child is working as a waiter or a camp counselor, they may receive tips as part of their summer income. All tip income is taxable and is, therefore, subject to federal income tax.

Many students take on odd jobs over the summer to make extra cash. If this is your child’s situation, keep in mind that earnings received from self-employment are also subject to income tax. This includes income from odd jobs such as babysitting and lawn mowing. If your child has net earnings of $400 or more from self-employment, they also have to pay self-employment tax. Church employee income of $108.28 or more must also pay self-employment tax. This tax pays for benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed just as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax; however, special rules apply to services performed as a newspaper carrier or distributor. As a direct seller, your child is treated as being self-employed for federal tax purposes if the following conditions are met:

  • Your child is in the business of delivering newspapers.
  • All pay for these services directly relates to sales rather than to the number of hours worked.
  • Delivery services are performed under a written contract which states that your child will not be treated as an employee for federal tax purposes.

If your child participates in advanced training as an ROTC student and receives a subsistence allowance it is not taxable. Active duty pay, for example, pay received during a summer advanced camp, is taxable, however.

HELP IS JUST A PHONE CALL AWAY.

As a seasonal or part-time worker, you may not be required to file a federal or state return if the wages you earn at a part-time or seasonal job are less than the standard deduction; however, if you work more than one job, you may end up owing tax. As you can see, seasonal and part-time workers have unique tax situations. If you have any questions about your tax situation, please call.

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Using a Car for Business: New Rules Under TCJA

Many of the tax provisions under tax reform were favorable to small business owners including those relating to using a car for business. Here’s what you need to know.

1. Section 179 Expense Deduction

If you bought a new car in 2018 and use it more 50 percent for business use, you can take advantage of the Section 179 expense deduction when you file your 2018 tax return. Under Section 179 you can immediately deduct (rather than depreciating) the cost of certain property in the year it is placed in service. In 2018, the Section 179 expense deduction increases to a maximum deduction of $1 million of the first $2,500,000 million of qualifying equipment placed in service during the current tax year. It is indexed to inflation for tax years after 2018.

For sport utility vehicles (defined as four-wheeled passenger automobiles between 6,000 and 14,000 pounds), however, the maximum deduction is $25,000 (also indexed for inflation). Certain exceptions may apply, however such as a seating capacity of more than nine persons behind the driver’s seat. Vehicles weighing more than 14,000 pounds are typically considered “work vehicles” and would not be used for personal reasons. As such, there is no expense deduction limit.

2. Luxury Auto Depreciation Allowance

For luxury passenger automobiles placed in service after December 31, 2017, the amount of allowable depreciation increases to a maximum of $10,000. The deduction increases to $16,000 for the second year, then decreases to $9,600 for the third year and $5,760 for the fourth year and for years beyond. These dollar amounts are indexed for inflation. Deductions are based on a percentage of business use; i.e., a business owner whose business use of the vehicle is 100 percent can take a larger deduction than one whose business use of a car is only 50 percent.

3. Additional First-Year Bonus Depreciation for Passenger Vehicles

For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017, and remains in effect for tax years through December 31, 2022. When combined with the increased depreciation allowance above, the deduction amounts to as much as $18,000.

4. 100 Percent First-Year Bonus Depreciation for Heavy Vehicles

For tax purposes, pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds are treated as transportation equipment instead of passenger vehicles. Heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100 percent first-year bonus depreciation deduction as well, if business-related use exceeds 50 percent. These deductions are based on percentage of business use and vehicles used less than 50 percent for business are required to depreciate the vehicle cost over a period of six years.

5. Deductions Eliminated for Unreimbursed Expenses for Business use of a Car

Under tax reform miscellaneous itemized expenses were repealed. As such starting in 2018, if you are an employee who is required to use your own vehicle for business-related use and are not reimbursed for these expenses by your employer you are no longer able to claim a deduction for unreimbursed expenses for business use of a car on your tax return.

Questions?

If you have any questions about business use of a car, don’t hesitate to call the office.

 

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