Summer Strategies to Reduce Your Tax Bill
Now that 2021 is more than half-way in the books, it is time to make sure you are track with your taxes and to kick your tax planning into high gear! Included in this month’s newsletter are several ideas to help you reduce your tax bill.
Also, we continue to be surprised that many business owners just assume that they do not qualify for the Employee Retention Credit. This credit offers up to $33,000 per employee for pandemic relief and stimulus. The employee retention credit has the potential to provide eligible employers with huge and immediate cash infusions. If you are a business owner, it is important to see if you qualify!
Plus, the IRS is turning up the heat on small business audits. In this newsletter, we provide you with some common business audit issues and vital document practices information. Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.
If You Are on Extension, Tax Returns Are Due Soon
The tax filing deadlines for extended 2020 tax returns are fast approaching. The deadlines are:
Pass-through entities (S-Corp, LLC, Partnerships): Due September 15, 2021
Individuals: Due October 15, 2021
C-Corporations: Due October 15, 2021
Moskowitz LLP Must Receive Your Tax Documents No Later Than August 15, 2021
Please note that if an extension was filed, the deadline to file your 2020 individual income tax return is October 15, 2021. To prepare your 2020 income tax returns in time to meet this deadline, please provide us with your 2020 source documents no later than August 15, 2021.
We have completed as much work as possible up to this point, but absent you supplying the missing information necessary to complete your returns, we will be unable to effectively represent you in these matters.
The 5 Biggest Misconceptions About Employee Retention Credit
We continue to be surprised by the number of employers who assume they do not qualify for the Employee Retention Credit (ERC). The Employee Retention Credit is a refundable tax credit for employers that was put into law through the CARES Act. This credit is used to offset employment taxes paid by an employer to offer relief due to the coronavirus pandemic.
The Employee Retention Credit is an incentive for employers to keep employees on staff. This credit helps offset employer costs while preserving jobs. The credit is claimed on quarterly tax returns and provides immediate relief to employers by reducing employment tax deposits. In some cases, employers may be eligible to request an advance from the IRS.
The 5 Most Common Reasons Why Employers Have Not Taken Advantage of ERC:
- I assumed that I wouldn’t qualify because my only payroll is my owners’ payroll
- I assumed that I wouldn’t qualify because my income wasn’t down by 50%
- I assumed that I wouldn’t qualify because I took a PPP loan
- I assumed that if I qualified, my payroll service/ CPA/ tax preparer would have told me that I qualified and sent me the paperwork
- I assumed that I wouldn’t qualify because my business didn’t close
What Business Owners Should Do
Do not assume that you do not qualify. Schedule a brief call with us today and we can help you determine your eligibility.
Moskowitz LLP helps many businesses claim these payroll-based tax incentives. With the help of our experienced tax professionals, you can apply for the ERC and potentially qualify for other incentives. We will also help you meet record-keeping needs applicable to the ERC, PPP forgiveness, and other credits.
Steve Moskowitz and Moskowitz LLP appreciate the sweat and tears that go into building a business, and we want you to benefit from the tax laws. These tax breaks were enacted with you in mind. Your clients and employees are counting on you to claim what is yours.
Ideas to Lower Your 2021 Tax Bill
Now is the time to begin tax planning for your 2021 Return. Here are some ideas:
- Contribute to retirement accounts. Tally up all your 2021 contributions to retirement accounts so far, and estimate how much more you can stash away between now and December 31. We can help you maximize your contributions or set up plans that allow may allow for greater contributions.
- Contribute directly to a charity.If you do not have enough qualified expenses in order to itemize your deductions, you can still donate to your favorite charity and cut your tax bill. For 2021, you can reduce your taxable income by up to $300 if you are single and $600 if you’re married by donating to your favorite charity.
- Consider a donor-advised fund. With a 2021 standard deduction of $12,550 if you are single and $25,100 if you are married, you may not be able to claim your charitable donations as a tax deduction if the total of your annual donations is below these dollar amounts. As an alternative, consider donating multiple years-worth of contributions to a donor-advised fund if you have the available cash so you can exceed the standard deduction this year. Then make your cash contributions from the donor-advised fund to your favorite charities over the next three years.
- Take a look at your withholdings, Year to Date. We recommend that you be sure to check your withholding each year. And remember, a mid-year withholding change may have a different full-year impact in the current year. Also, if you had a major life change, such as marriage, the birth of a child, adoption or bought a home you should consult your employer or tax advisor.
Small Business IRS Audit Mistakes
In late 2020, the IRS announced that it will increase tax audits of small businesses by 50% in 2021. Here are several mistakes to avoid if you do get audited by Uncle Sam.
- Missing income. A long history of investigating has led IRS auditors to focus on under-reported income. If you’re a business that handles cash, expect greater scrutiny from the IRS. The same is true if you generate miscellaneous income that’s reported to the IRS on 1099 forms. Be proactive by tracking and documenting all income from whatever source. Invoices, sales receipts, profit and loss statements, bank records—all can be used to substantiate income amounts.
- Higher than normal business losses. Some small businesses struggle in the early years before becoming profitable. If your company’s bottom line never improves, the IRS may view your enterprise as a hobby and subsequently disallow certain deductions. As a general rule, you must earn a profit in three of the past five years to be considered a legitimate business.
- Deductions lacking substantiation. Do you really use your home office exclusively for business? Does your company earn only $50,000 a year but claim charitable donations of $10,000? Do you write off auto expenses for your only car? The key to satisfying auditors is having clear and unequivocal documentation. They want source documents such as mileage logs that match the amount claimed on your tax return and clearly show a business purpose. If you can’t locate a specific record, look for alternative ways to support your tax return filings. In some cases, a vendor or landlord might have copies of pertinent records.
- No expense reports. If you use your credit card for business, create an expense report with account numbers and attach it to each statement. Then attach copies of the bills that support the charges. This is an easy place to blend in personal expenses with business expenses and auditors know it.
- Treating the auditor as an enemy. Auditors have a job to do, and it’s in your best interest to make their task as painless as possible. Try to maintain an attitude of professional courtesy. If you’re called to their office, show up on time and dress professionally. If they come to your place of business, instruct staff to answer questions honestly and completely.
Please call if you either need help preparing for an upcoming IRS audit or would like to know how to audit-proof your financial records.
As always, should you have any questions or concerns regarding your tax situation, please feel free to call.
Does Your Business Have A Buy-Sell Agreement?
If you retire, become disabled or pass away unexpectedly, you’ll want to have the means to transfer your business interests. A buy-sell agreement lets you plan for many contingencies over which you would otherwise have little control. Here are some of the advantages of having a buy-sell agreement:
- Provides a framework for dealing with owner disputes and ensures a smooth transition of control and power to the owner’s successor.
- Facilitates estate planning objectives and can help minimize certain estate taxes. Can be structured to take advantage of favorable redemption rules upon death.
- Forces shareholders to deal with liquidity issues and addresses how a possible buyout would be funded.
- Helps prevent loss of tax benefits, especially for S corporations in which transferred stock could lead to termination of the S election. It can disallow the transfer of shares without the consent of the owners.
What you Should do
Here are several ideas to consider when putting together your own buy-sell agreement.
- Develop it early. Create the framework of a buy-sell agreement well before you need it. Even if you need to amend the buy-sell agreement in the future, you will have at least have the framework of the agreement ready to go.
- Agree to the valuation method. You should agree to how the price of the business is determined. Who will conduct the valuation? Which valuation method will be used? You could also consider allowing an independent valuation expert to determine the most appropriate method to value the business.
- Involve your entire team of trusted advisors. There are many moving parts to a buy-sell agreement, so be sure to involve your entire team of trusted advisors, including your attorney, tax accountant, and a third-party valuation professional, while crafting the agreement.
Something as valuable as the ownership and management of a small business should not be left to chance. The agreement needs to satisfy all parties involved, including the IRS requirements for tax purposes. Please call for assistance in drafting a buy-sell agreement or in updating your current buy-sell agreement.
Upcoming Webinar: IRS Enforcement Policies of ‘Operation Hidden Treasure’ Thursday August 26, at 12pm PST
This is a webinar for anyone who has cryptocurrency transactions or mining operations. We will update you on recent IRS initiatives to identify Unreported Crypto transactions, how to handle IRS Tax Audits involving cryptocurrency, tax minimizing techniques to consider, and other tax planning opportunities.
This webinar will walk you through how the IRS approaches taxation when it comes to crypto, explain what constitutes a taxable event and provide tangible examples to guide you. It also touches on some emerging issues in the space including how to account for staking rewards, interest earned from lending activities, and even NFTs!