If you haven’t converted to cloud-based accounting, it’s likely that COVID-19 may prompt you to make the switch. With more and more businesses and industries operating virtually, cloud access and real-time data has become more important than ever for making the best business decisions possible in uncertain times. With so much up in the air, you don’t want to be caught with a static accounting system that cannot keep up and provide the answers you need.
If you’re on the fence, we’ve put together the top 11 benefits of cloud-based accounting and the real-time data it provides.
1. Drill down on business performance – Real-time data through cloud-based accounting allows you to drill down on the key components of your business’s performance. You can get global or granular on factors such as location, project, customer, vendor, or department and see how each part is impacting your business in real-time. Additionally, you can use snapshots of your cash flow, revenue, expenses, and more to see how they compare year-over-year and how they are measuring up to your goals for this year.
2. Make better data-driven, real-time decisions – You’ve likely experience that last year’s or even last month’s data is irrelevant during these uncertain times. With real-time data, you can see clearly what’s holding you back now, or what’s working, and adjust accordingly. Without the real, hard data, these decisions can feel like a guessing game with a wait-and-see outcome, which is something most businesses cannot afford right now.
3. Make accurate predictions and forecasts – This accurate, up-to-date data allows you to feel more confident in the forecasting for the future your business. You have the facts in front of you to make more strategic predictions over the course of the year. Through the real-time data and historical facts, you can assess past performance, identify trends, and set goals and plans, making adjustments as needed along the way.
4. Automate processes – More and more, businesses are focused on automation, and there’s no better place to start than with your accounting. With cloud-based solutions, you can create automated workflows that handle much of the busy work for you like invoicing and paying vendors. This all funnels back into your real-time data so you can stay on top of your revenue and expenses.
5. Mitigate fraud and reduce errors – Mistakes and fraudulent activity can be more quickly and easily identified when you can see the transactions in real-time. The simplification of the software means less memorization of accounting practices, formulas, and Excel shortcuts – all of which can contribute to errors. And, the automatic reconciliation can help you detect fraud early. Being able to take timely action on errors and fraud can save your business big in the long run.
6. Simplify your reporting and EOY – Have you ever scrambled when a stakeholder asked for an up-to-date report on your business? Cloud-based accounting allows you to present an accurate, timely report in no time, simplifying the process for you and your stakeholders. Additionally, you avoid the end-of-year rush because you’ve been entering your information and tracking all year long, so tax bills aren’t as much of a surprise.
7. Simplify GST compliance – If you have general sales tax to track and monitor, you know it can be a challenge to assemble and file your GST returns. Cloud-based accounting tracks and applies GST automatically for you and allows you to pull a quick report when you’re ready to file.
8. Get access from anywhere – One of the best benefits of cloud-based accounting is that you can access your data from anywhere at any time. In the age of COVID-19 and working from home, this is especially beneficial for you and your team so everyone can stay on track and on task.
9. Collaborate with your accountant – Cloud-based accounting has simplified the transfer process of client information to accountant and saved both sides time and energy in equal measure. Gone are the days of having to download everything to a CD or flash drive and delivering it to your accountant. Now, you can collaborate together virtually and trust you’re both on the same page.
10. Simplify your technology – Cloud-based accounting eliminates hard downloads across multiple computers and saves your IT department (or you) the headache of making sure everyone is up-to-date across the company. Thanks to online hosting, IT doesn’t have to worry about updating the software either, so they can focus on other projects.
11. Get the tech support you need – Most cloud-based accounting platforms offer regular tech support to help you any hour of the day. You’ll also have access to forums of thousands of other users so you can discuss issues and share best practices. Keeping your program up and running and optimized contributes to better real-time data.
For assistance with choosing the right cloud-based accounting platform for your business, contact us today.
The unprecedented global pandemic and record unemployment has resulted in a dramatic drop in interest rates. Many people focus on the Fed rate and mortgage rates, and rightfully so, but for some, the focal point should be on the historically low IRS interest rates.
The IRS posts various interest rates, generally on a monthly basis. The Applicable Federal Rate (“AFR”) and the Internal Revenue Code Section 7520 Rate (“7520 Rate”) are among the most important. Many tax strategies are a function of calculations driven by the AFR and 7520 rates. Some strategies work best in high rate environments while other work best in low rate environments. Accordingly, any time the IRS rates dramatically rise or fall, we should take notice and consider tax planning.
The May 2020 IRS Rates include:
Short-Term AFR: 0.25%
Mid-Term AFR: 0.58%
Long-Term AFR: 1.15%
7520 Rate: 0.80%
These rates are exceptionally low. To provide some context for comparison, the May 2019 Rates were: Short-Term AFR 2.39%, Mid-Term AFR 2.37%, and Long Term AFR 2.74%. Viewing this from a historical perspective, the May 2019 rates were low in their own right, but clearly the rates today, just one year later, are materially lower.
The remainder of this paper outlines three strategies that work particularly well in low interest rate environments. Although we have elected to highlight three strategies specifically, low interest rate tax strategies are not limited to just these three. Accordingly, we encourage you to contact our office to discuss your specific set of circumstances.
Charitable Lead Trusts
A Charitable Lead Trust (“CLT”) is a split interest trust, meaning there are two categories of beneficiaries: (1) a current beneficiary and (2) a remainder beneficiary. The current beneficiary receives distributions from the CLT for a period of time (the “Term”) and must be a charitable organization, such as a public charity, a church, most schools and universities, and even a private foundation operated by the donor. The remainder beneficiary receives all the assets remaining in the CLT after the Term expires and is generally the donor or the donor’s children. Depending on the design of the CLT, the donor may receive an income tax deduction in the tax year the CLT is established in an amount equal to the present value of all payments that will go to charity during the CLT’s term. Accordingly, it can generate a substantial income tax deduction for gifts that have not yet gone to the charity. This gives the donor the ability to continue investing and growing the CLT assets, thereby ultimately benefiting the donor who will receive the assets back upon expiration of the CLT term.
Why CLTs during low interest rates?
The donor’s income tax deduction is a present-value calculation. We take the sum of all scheduled future charitable distributions and discount that number to present value using a calculation based on the 7520 Rate. The lower the 7520 Rate, the lower the discount. The lower the discount, the greater the deduction. Accordingly, in today’s environment, all other factors being exactly the same (i.e. same growth rate, same amount to charity, etc.), a CLT today will generate a significantly higher income tax deduction, than the same CLT when interest rates are higher.
Grantor Retained Annuity Trusts
Grantor Retained Annuity Trusts (“GRATs”) are estate planning trusts that provide a tremendous opportunity to transfer wealth from one generation (“Generation 1”) to the next (“Generation 2”), often without incurring gift or estate taxes. GRATs are established with Generation 1 assets for a period of time (the “Term”). During the Term, the GRAT makes distributions to Generation 1. At the end of the Term, if designed properly, the assets remaining in the GRAT transfer to Generation 2 free of gift, estate, or transfer taxes. Many individuals will establish a series of GRATs in order to provide necessary lifetime cash flow to Generation 1.
Why GRATs during low interest rates?
Payments made from the GRAT to Generation 1 are based on the IRS rates. The donor makes the “bet” that the assets inside the GRAT will grow at a rate higher than the IRS rates. Lower rates mean a lower hurdle, a lower hurdle means more wealth can transfer to Generation 2 tax-free.
Sales to Intentionally Defective Grantor Trusts
Intentionally Defective Grantor Trusts (“IDGTs”), are irrevocable estate planning trusts that are generally utilized by high net worth business owners and those with assets likely to significantly increase in value (such as stock and real estate). The IDGT will purchase the asset from the individual primarily in exchange for a promissory note (there are no income taxes due on the sale because the IDGT is disregarded for income tax purposes). The IDGT will make installment payments to the individual for the term of the promissory note. The assets in the IDGT are outside of the individual’s estate, therefore any growth in the asset from the time it is sold remains outside of the individual’s estate for estate tax purposes.
Why IDGTs during low interest rates?
Similar to any traditional lending arrangement, the IDGT promissory note must yield interest. Because this is a related-party transaction, the IRS mandates a certain minimum interest rate, which is based on the AFR. The lower the AFR, the lower the required monthly payments, and thus more taxable wealth remains outside of the Grantor’s estate.
Don’t let this exceptionally low interest rate environment get away. Please contact your Heritage financial advisor, CPA, or attorney to schedule a planning session.
This article has been edited by Hamilton Tharp LLP. This article originally appeared on the HWM newsletter.
When the Tax Cut and Jobs Act went into effect in January 2018, many taxpayers stopped itemizing their returns. The reality, however, is that unique tax situations require a unique approach, and there may be some room for improvement in yours. Now that 2020 is in full focus, it is a great time to look at your giving strategy. If you are not sure you made the most of your charitable deductions in 2019, consider these incentives when setting your charitable contribution plan in 2020.
Although taxpayers that fall just below the standard threshold no longer need to itemize, those who hover around a higher tax bracket or well-exceed the standard deduction threshold should consider their situation with a professional to determine if they could benefit from a better plan. Consider the following incentives,
- Tax Reform removed the Pease limitation for itemized
deductions and increased the amount of cash that can be contributed to public
charities from 50% to 60% of adjusted gross income (AGI). For the tax years January
1, 2018, through December 31, 2025, taxpayers can claim 100% of their allowable
- Taxpayers whose income falls short of the
standard deduction threshold one year but exceeds it in other years could
consider a bunching strategy. This allows those who fall below the deduction
threshold to maximize the tax benefits of giving every other or every third
- Donor-Advised Funds (DAF) are another excellent
way for taxpayers to claim a larger deduction. It works like this; the itemized
donor gives an initial, more substantial gift to a donor-advised fund and
receives the allowable tax deduction. The contribution grows tax-free and
serves as a charitable fund from which the taxpayer can recommend gifts to
charity in subsequent years. These recommendations do not qualify as additional
deductions, leaving the taxpayer to take the standard deduction in those years.
- Under the new tax law, donors can still take an
income tax deduction on the full fair market value of appreciated assets they
gift to charity. This scenario is a win-win for taxpayers and charities.
- Taxpayers 70.5 years of age and older can
request a distribution of up to $100,000 per year directly from their IRAs to
charity. This gift helps satisfy annual required distributions and is removed from the
donor’s taxable income.
Deciding which charity to support in 2020?
The key to making your donations count is ensuring the organization you choose is an eligible charity. The Tax-Exempt Organization Search engine and the Interactive Tax Assistant on IRS.gov can help you choose organizations eligible to receive tax-deductible charitable contributions.
If you’re worried that making a large gift this year will harm your estate after 2025, you can rest assured. In November 2019, the Treasury Department and IRS issued final regulations confirming that taxpayers who make significant contributions between 2018 and 2025 can take advantage of the increased gift and estate tax exclusion amounts without concern over losing the benefit in 2026 and beyond.
The professionals in our office are well-versed in charitable contribution strategies, call us today to discuss how to make sure your donations count in 2020.
The Internal Revenue Service (IRS) recently debuted a new Form W-4 to the public. The new design aims to simplify the withholding system, replacing complicated worksheets with questions designed for the layman. The hope is that the form will help employees report more accurate amounts, allowing the IRS a better assessment of taxes paid.
One thing you might notice on the new Form is the absence of the word, allowance. The title of Form W-4 is now the Employee’s Withholding Certificate.
To help further your understanding of the redesign and its
impact on employers, we have provided clarification around frequently asked questions
regarding Form W-4 below.
- Current employees are not required to submit a
new Form W-4. Employers will continue to compute withholding based on the
information from the employee’s most recently submitted Form W-4. However,
employees that wish to adjust their withholding must use the redesigned form.
- Employees hired after 2019 that fail to submit a
Form W-4 will be treated as a single filer with no other adjustments. Beginning
in 2020, all new employees must use the redesigned form.
- Employers will not necessarily need two systems
to compute payroll. The same set of withholding tables will be used for both
sets of forms. If employers prefer to use a single system based on the new 2020
Form, they can enter zero or leave blank information that does not translate
between the two forms.
- Employers that wish to ask their employees to
convert to the newly designed Form can make the request, but they cannot
require them to submit a new Form or penalize them for not conforming.
As a reminder, the new forms go into effect in tax year 2020. Additional guidance is expected regarding payroll calculations needed based on the data fields on the new and old forms, as well as guidance surrounding employees that fail to submit a Form W-4 after 2019. If you have any questions about the new form, please give the professionals in our office a call today.
View the new Form W-4.
The United States saw some of the most sweeping changes in
December 2017 with the passing of the Tax Cuts and Jobs Act (TCJA). Many of the amendments to the Internal
Revenue Code are temporary in nature, set to expire at the end of 2025. For
example, the basic exclusion amount (BEA), which doubled from $5 million to $10
million prior to being adjusted for inflation, will return to pre-2018 levels when
the TCJA is set to expire. One major concern, raised by public comments, is
what will happen to individuals taking advantage of the increased gift and
estate tax exclusion amounts when the exclusion amounts drop to pre-2018
levels? Will they be adversely impacted?
For example, what would happen if a taxpayer chose to gift
their entire $11.4 million (adjusted for inflation) lifetime exclusion amount
during the TCJA? Rather than using up their basic exclusion amount at their
time of death, a taxpayer may choose to use their basic exclusion amount during
their lifetime by making large gifts.
Any unused portion would be used to offset or possibly eliminate estate
taxes when a taxpayer perishes.
Those concerns were laid to rest last month when the Treasury Department and the Internal Revenue Service issued final regulations confirming that individuals who plan to take advantage of the TCJA-increased basic exclusion amount will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. The final regulations also provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.
For 2019, the inflation-adjusted BEA is $11.4 million. If you
are considering making a large gift within the next few years it is important
to understand how these changes will impact your personal or business
operations. The professionals in our office can answer your questions, call us
Americans share at least one dilemma when it comes to
retirement planning. From the worker to the employer to the policymaker,
everyone is living longer. On May 23, 2019, the House passed the Setting
Every Community Up for Retirement Enhancement (SECURE) Act. This legislation,
receiving almost unanimous bipartisan support, offers the most significant
shift to retirement plans and opportunities since the Pension Protection Act of
2006. In the bill, there are over 25 changes and provisions that expressly aim
to encourage retirement savings among all workers. This bill, along with the
Senate’s Retirement Enhancement Securities Act (RESA), addresses the apparent
need for a worker’s wealth to run (and finish) the race with them. These
documents may face modification before being signed into law, but one thing is
clear: change is coming. Below we have prepared a synopsis of the changes that
present the most opportunity.
Pooled Employer Plans
Many businesses are without affiliation and are too small to
offer a savings retirement plan on their own. The new bill will reduce
fiduciary responsibility and lower the overall costs associated with providing
401(k) plans by expanding the option to run multi-employer plans through a plan
administrator. Sec. 106 goes a step further to incentivize smaller businesses
to offer a retirement savings plan. The Act introduces a $500 tax credit for
automatic enrollment into their retirement plan.
The SECURE Act eases the liability concern over offering
annuities. Most businesses have shied away from annuity providers because of
their inherent risk. Section 204 updates safe harbor provisions, thus opening
the door for employees to take advantage of converting their 401(k) balances to
a pension-like payout plan. Another provision of the bill will allow workers to
transfer a defunct annuity contract to an IRA while maintaining contributions.
The only criticism on this update is the broad guidelines surrounding annuity
providers. Some fear that ambiguity will lead to insurance companies offering
Required Minimum Distribution (RMD) Age
The current law requires that most individuals begin
withdrawing a minimum distribution from their retirement savings at the age of
70.5. Six-months-past-70 has invited an unnecessary amount of confusion since
its inception in the Tax Reform Act of 1986. The SECURE Act seeks to simplify
matters by raising the RMD age to 72. If the RESA Act passes in the Senate, the
age requirement will be raised even higher to 75.
One of the most confounding retirement rules is the age
limitation on IRA contributions, currently set at 70.5. The SECURE Act repeals
the age limitation for traditional IRA contributions.
Benefit to Parents
Section 113 removes the 10 percent penalty tax from qualified
early retirement plan withdrawals. Parents will be able to take an aggregate
amount of $5,000 within one year of the adoption or birth of a child, penalty
free. Section 302 expands section 529 plans by allowing withdrawals of as much
as $10,000 for repayments of some student loans.
Currently, beneficiaries of inherited retirement plans like
401(k), traditional IRAs, and Roth IRAs can spread the distributions until
their dying breath. The new revenue provisions (Section 401) changes the rules,
requiring most beneficiaries to distribute the account over a 10-year period
and pay any taxes due. The tax-generating change will accelerate the depletion
of many inherited accounts but will not affect surviving spouses and minor
Another administrative improvement provided in the Act
requires employers to provide a lifetime income disclosure once every 12
months. The disclosures are meant to show the amount of monthly payments the
participant or beneficiary would receive based on the total accrued benefit.
Under the current law, the unearned income of children would
be taxed at their parent’s marginal tax rate. Section 501 repeals the “kiddie
tax” measures that were added by the 2017 Tax Act. The new provision states
that unearned income of children would not be taxed at trust rates. Taxpayers can
retroactively elect to not pay the taxes. The bill benefits many Americans,
including families of deceased active-duty service members, survivors of first
responders, children who receive certain tribal payments, and college students
Other changes proposed in bill include increased penalties
for failures to file and the portability of lifetime income options. The SECURE
Act is as likely to pass as it is to undergo slight modifications. We will keep
an eye on the state of the bill and keep you abreast of its status. In the
meantime, our professionals are standing by to answer your questions and
address your concerns.
What does your tax return say about your financial situation?
The fact is, the paperwork you file each year offers excellent information
about how you are managing your money—and highlights areas where it might be
wise to make changes in your financial habits. If you have questions about your
financial situation, we can help. Our firm is made up of highly qualified and
educated professionals who serve as trusted business advisors to clients all
Whether you are concerned about budgeting; saving for
college, retirement or another goal; understanding your investments, cutting
your tax bite, starting a business, or managing your debt, you can turn to us
for objective answers to all your tax and financial questions.
Help You Address the Issues that Keep You Up at Night
Where will your business be in five years? Would strategic budget cuts improve your company’s health? Are there ways you can boost revenue? If you are nearing retirement, do you have a buyer or successor in the wings? These are the kinds of questions that keep many business owners up at night. Fortunately, we can help you find financial peace.
Be Confident that You’re Making Tax-Advantageous Decisions
It’s tough to be proactive when tax laws are constantly changing. But it can be done! Our experienced team of CPAs can help you navigate the tax complexities affecting your business.
We review financial situations and develop creative
strategies to minimize tax liabilities so you can meet your financial goals.
Contact one of our professionals today.
Catch Kim Spinardi, CPA, Michael Frost, and Ralph Nelson, JD, CPA discussing the new tax laws and how working with one firm that can handle your tax, financial planning and investing needs may be your greatest asset.
To watch, click here!
Hamilton Tharp, LLP is proud to have been asked to be a part of this discussion on Real Talk San Diego’s “Your Wealth Hour” segment!
Department and the Internal Revenue Service recently issued final regulations
and guidance addressing implementation of the new qualified business income
(QBI) deduction (section 199A deduction). The guidance is an attempt to
simplify this complicated deduction.Although
one of the more complex changes in TCJA, this deduction has the potential to
cut tax bills by up to one-fourth for eligible businesses. Below we have highlighted
the major takeaways from the 247-page document released by the IRS last month.
If you are unfamiliar
with this new deduction, which was created by the Tax Cuts and Jobs Act (TCJA),
it allows entrepreneurs,
self-employed individuals, and certain investors to deduct 20 percent of their
business income from their taxable income. This is considered a
“below-the-line” deduction, meaning it will not reduce your adjusted gross
for this deduction depends on whether your business is considered a specified
trade or business and is above or below the required threshold. The structure
of your business also determines eligibility. Eligible structures include trust
and estates, individuals, partnerships, s corporations and sole proprietors. The
QBI deduction is not available for wage income or business income earned by a C
Calculating the QBI
deduction also depends on whether a business is considered a “specified
service.” A Specified Service Trade or Business (SSTB) includes services in the
fields of health, law, accounting, actuarial science, performing arts,
consulting, athletics, financial services, brokerage services, or businesses in
which the principal asset is the reputation of one or more employee
(endorsements or appearance fees). It is important to note that the rules
change if your business is not considered a specified service.
Understanding the Final Ruling Around 199A
Below we have listed
the most pertinent details issued last month by the IRS:
- Confirmation: Income from originating and
selling mortgages is eligible for the deduction. Shareholders of mutual funds
with real estate investment trust investments also qualify for the deduction.
- Confirmation: Individual REIT investors
through mutual funds qualify for the deduction.
- Confirmation: If companies have limited
income (less than 10 percent) from ineligible activities, the company can still
get a full deduction on all its profits.
- Clarification: Organizations are prohibited
from splitting their firms into different entities to lower their tax bills; however,
if companies have income that qualifies and some that do not, they are
permitted to delineate those activities to receive the deduction on the
- Clarification: Businesses can maximize their
deduction by allowing companies to combine at the entity level or the owner
- Clarification: New proposed regulations for
taxpayers that hold interests in regulated investment companies (RICs),
charitable remainder trusts, and split-interest trusts.
Safe Harbor for Rental Real Estate Enterprises
Also included in the final regulations, the IRS issued a
proposed revenue procedure that provides a safe harbor for rental real estate
enterprises to be considered a trade or business and qualify for the deduction.
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
According to Notice 2019-7, a rental real estate enterprise
will be treated as a trade or business if the following requirements are
satisfied during the tax year:
- Separate books and records are maintained to reflect income and
expenses for each rental real estate enterprise;
- Real estate rental owners, or someone they hire, spend at least
250 hours a year on the business and keeps a record of their activities.
- The taxpayer maintains contemporaneous records, including time
reports, logs, or similar documents, regarding the hours of all services
performed; description of all services performed; dates on which such services
were performed; and who performed the services.
There are exceptions
and exclusions to consider, including:
- Rental services do not include financial or investment management
- Real estate used by the taxpayer as a resident for any part of the
year is not eligible for this safe harbor.
- Real estate rented or leased under a triple net lease is not
eligible for this safe harbor.
While this deduction will make the rules more manageable for
some businesses, these rules will require more planning and additional
complexities for others, including larger pass-through entities.
There are still many questions left unanswered, such as:
- Can publicly-traded partnership investments held through a mutual
fund qualify for the deduction?
- How much of a deduction is available to taxpayers with multiple
trades and businesses that exist within the same entity?
The deduction is available for tax years beginning after December 31, 2017, and before January 1, 2026. There is speculation whether a future Congress will uphold individual provisions. To discuss your future options regarding the QBI deduction and your eligibility to take advantage of the real estate safe harbor, contact our office.
Tax audit. These two simple words are enough to strike fear and loathing into the hearts of many business owners. But, in reality, the Internal Revenue Service (IRS) won’t arbitrarily make your company the subject of an audit investigation. In fact, according to IRS.gov, out of the 196 million returns filed in 2016, only 1.1 million (0.5%) came under examination in 2017. You are more likely to be summoned for jury duty (1 in 10) this year.
Unless you’re operating below
the board or completely ignoring best practices, you have little to fear.
However, even the most prudent sometimes miss a step. From managing the filing
cabinet to the people who hold the keys, ensuring your business doesn’t catch
unnecessary attention from the government comes down to good habits. Here are a
few ways you can minimize the likelihood that you’ll be audited or ensure a
more positive experience should you be audited.
- Handle audit triggers with care. The IRS has an accrual system when it comes to audit points. If you take deductions or file taxes as an independent contractor, you are at an increased risk for an audit.
- Home office deduction: Under the new tax law, employees who work from home are no longer able to take itemized deductions. However, if you are self-employed, you can still claim the home office deduction on your Schedule C. Be sure to follow IRS guidelines when claiming this deduction.
- Charitable deduction: Lost your receipt for the dresser you donated last spring? You might want to reconsider claiming it as a charitable deduction. New rules require taxpayers to retain records for donated property with a value of $250 or more. For 2019, consider taking pictures of everything you donate to document the condition to prove its condition and value.
- Mileage deduction: This is a hotly contested area within the tax community. Many people take advantage of this deduction but a high percentage abuse the system, making this area a top audit trigger. Thankfully, leveraging technology can help. You can easily document mileage using GPS history to support your mileage claims.
- 1099 Income: If you have more than two clients, the IRS might focus in on your business. The key to ensuring your 1099 income doesn’t trigger an audit is to keep your records both complete and compartmentalized, meaning, don’t intermingle bank accounts.
- Schedule Cs: The IRS will throw up a red flag if a profitable gig worker doesn’t file a Schedule C. If you are self-employed and are making a profit, you should be filing a Schedule C. Conversely, the IRS will also discriminate against losses claimed on a Schedule C from businesses that are actually considered a hobby.
best practices. When it
comes to filing your small business tax return, several items might cause
scrutiny. Here are some ways you can avoid a second glance from an IRS
proprietors take more heat than LLCs. Registering as an LLC or corporate entity
not only gives you more credibility, it also reduces your risk for audit and increases
tax saving opportunities.
your tax returns the respect they require. Cross every t, dot every i, check it
twice, and file on time. Be sure to report all the information required –
incomplete tax returns, along with unreported income, is a surefire way to
invite an audit. If you know you will not be able to file on time, request the
extension. It is much better to anticipate the inevitable than incur avoidable
attention (and fees!).
your business losses. Failing to classify business losses correctly could force
the IRS’s hand. The best way to file losses is under the umbrella of a formal
business entity like an LLC or corporation. In addition, while start-ups often
experience fits and starts, if your business cannot show three years of
profitability within a five-year window, the IRS will claim your net losses
have outweighed your profits and will move to audit.
If the IRS contacts you about an audit, CPAs advise that you don’t panic. Remember, you are not going on trial, you’re simply being asked to verify some of the claims you made on your tax return. It’s best to remain calm and cooperative when dealing with the IRS.
It’s also a good idea to contact your local CPA for advice and assistance in case you are audited. He or she can help you understand the process and work with you to try to achieve the best resolution.