Frequently Asked Questions
Q: Why is my refund different than the amount on the tax return I filed?
All or part of your refund may have been used (offset) to pay off past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or other federal nontax debts, such as student loans. To find out if you may have an offset or if you have questions about an offset, contact the agency to which you owe the debt [if you know which agency].
The IRS may have changed your refund amount because they made changes to your tax return. You’ll get a notice explaining the changes. Where’s My Refund? will reflect the reasons for the refund offset when it relates to a change in your tax return.
Q: Are Business & Personal Taxes the same?
The Tax Code allows you to report business activity on your personal return using a Schedule C or on a separate business return. Either way you’re providing a “Business” return. When you use a Schedule C there are significant limitations on deductions and a greatly increased audit risk. For those reason, we strongly recommend using a separate business return to report the business activity. The ability to reduce the tax liability is greatly improved and the audit risk is also much lower.
Q: Can you share the impact of the new depreciation rules? What does that mean and what is the impact? What’s the Depreciable Life?
A: Under the new Tax Cuts and Jobs Act (effective for the 2018 tax year) the bonus depreciation rules have been loosened. Among other things, the change allows for 100% bonus depreciation for assets placed in service between September 27, 2017 and January 1, 2023. These include all vehicles and most other assets with an “asset life” (the depreciable life of the asset) of 20 years or less. For example, if you purchased an auto for $50,000 on January 1, 2018 and used it for business purposes, you could use the normal depreciation life of 5 years and deduct $10,000 each year for five years as depreciation expense. Or you could apply the new bonus option and deduct the entire purchase price ($50,000) in the first year of use. Here’s a link to the IRS website showing more detail:https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act.
Q: Can I claim medical expenses for my dependent(s)?
A: Medical expenses can be claimed on Schedule A of the personal return if it’s for a dependent (parents can qualify as dependents but have to meet certain tests). See this link for details: https://www.irs.gov/faqs/irs-procedures/for-caregivers
However, if the expenses are not paid for a dependent or meet the tests described above, it may be possible to claim the expense as “Community Outreach” on a business return so long as the good will resulting from the expense has some reasonable relation to the business purpose.
Q: How do extensions work for personal and business taxes?
A: If you need more time to complete your tax return, a tax extension is an easy way to get it.
If you don’t have all of the documentation you need to meet the standard tax filing deadline of April 15 (can vary based on day of the week) for your personal return, or if you just need a little more time to get your return submitted, a tax extension can get you more time to file. This is the same for business returns. The standard deadline to file business returns is March 15 (can vary based on day of the week). A tax extension gives you an additional six months to file. This means you need to file by September 15 (can vary) for your personal return and October 15 (can vary) for your business return.
BUT, most importantly, a tax extension does not change the tax payment deadline. It simply gives you more time to file your return. Any tax liability is still due by the deadline. Any unpaid balance that remains after the deadline can accrue interest and penalties — even if you’ve filed for an extension and even if you didn’t realize that you would end up owing the IRS money.
Q: How much should I withhold from my paycheck?
A: Determining how many allowances to claim when setting up (or modifying) your payroll information with your employer, Form W-4 provides a simple worksheet that will help you to determine the right number to claim. Keep in mind that the worksheet is somewhat simplistic in that it assumes the primary source of income is your W-2 wage. If you have investment income or other business interests that provide income (or losses) you’ll want to factor these in as well. Start with the Form W-4 worksheet, and if your financial situation involves more than W-2 wages, we can provide a tax estimate based on the income you expect during the upcoming tax year.
Q: What can be done if you believe someone has stolen your identity and may file a fraudulent tax return?
A: If your private information has been stolen or compromised, you can request an Identity Protection
PIN (IP PIN) from the IRS (and we recommend that you do so) as soon as you become aware that your information has been stolen. This pin will be required in order to process your tax return from that point forward and will assist in protecting your identity with the IRS. The website with instructions on how to request an IP PIN is as follows: https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.
Q: I’m an S-Corp – Do I need to pay myself a wage?
A: YES! While there are a few exceptions, the short answer is a simple, and resounding YES! When you make the S-Election, you get a number of tax benefits. But one important requirement to retain this election is that the owner/operator of the business must draw a reasonable W-2 wage. We recommend that you do so monthly (at least quarterly) and that it be “reasonable” given the services you’re providing the business (so for full-time work in the business, minimum wage would be the starting point). If your business isn’t profitable then the wage requirement is excused for the year. But in any case where the business shows a profit you should be paying yourself a W-2 wage from some of those profits.
What happens if you don’t? The risk of IRS scrutiny of your returns goes up and the IRS may revoke your S-Election status back to the beginning when it went into effect – which means that all those profits that were not subject to self-employment tax from past years may now be reclassified as self-employment income and your TAX BILL GOES UP A LOT! From our perspective, the increased scrutiny alone is not worth the risk. And the added potential cost of substantially increasing your tax owed (along with the interest and penalties that brings) are another important reason to make sure you’re paying yourself a W-2 wage.
Q: What are “Adjusting Journal Entries,” sometimes called “General Journal Entries” or “General Journal Adjustments”?
A: A company’s financial records are intended to track all transactions and provide company management with the ability to manage the business. The tax return information on the other hand is strictly used for tax reporting consistent with tax law and is often very different that the generally accepted accounting principles applied when maintaining the company’s books. And in many cases, complete financial information is not included in the tax return because it is not required by law and is to the taxpayer’s detriment to provide it. We recommend that the company’s accounting records be maintained as the primary source of financial information and that you do NOT attempt to adjust these financial records to match the tax return information. Although they are related, they serve very different purposes.
Q: When should 1099-Misc be issued?
A: 1099-Misc should be issued to Non-W-2 providers of services, including sole-proprietors, partnerships (including LLC’s that have elected to be taxed as partnerships), and independent contractors. However, you are not required to issue 1099-Misc forms to corporations, including “S” and “C” corporations.
Q: What is the deadline to contribute to my retirement plan?
A: IRA/ROTH/401K – The day your tax return is due – usually April 15th. If you filed an extension, then you have until October 15th. SEP – the tax deadline of the employer (check with them).
Q: What’s the difference between a Pass-Through entity and a Disregarded entity?
A: There’s an important, but subtle difference between a Pass-Through entity and a Disregarded entity.
An entity that exists and has been filed with the state can elect to be “disregarded” for tax purposes. Which means that it does not file a separate tax return and all its operations are reported directly on the owner’s personal tax return, usually via Schedule C, E or F. However, the same entity can elect to be treated as a Partnership or S-Corporation, in which case it does file its own separate tax return, then passes the resulting profits or losses on to the owner(s) on form K-1. The owner(s) then report this final information of profits or loss passed to them from the entity on their personal return but no other business information is reflected there. That’s why this type of entity tax reporting is referred to as a “pass-through” entity – it files a return, but doesn’t pay tax, just passes the final information on to the owner.
Q: If I file an extension does that mean I can wait to pay my taxes?
A: No, an “extension” is a request for more time to file your return, not an extension of time to pay your taxes. Taxes are due April 15th, no matter what.
Q: My state doesn’t have a state income tax. Am I required still required to file a tax return for my business?
A: In some cases, Yes. Some states that don’t have an income tax, still require that your business file a tax return. For example, Texas for example, has no state income tax, but still requires businesses to file a Franchise Tax Report. When you register your business with the state, you should be notified of any reporting requirements.
Q: What is the deadline to contribute to my retirement plan?
A: IRA/ROTH/401K – The day your tax return is due (without extensions) – usually April 15th. SEP – the tax deadline of the employer (check with them).
Q: How much can I contribute to my IRA, 401K, or SEP?
A: This amount changes each year. For 2018, the limits are as follows: IRA: $5,500 per person ($6,500 if age 50 or older). 401K: $18,500 per person ($24,500 if age 50 or older). SEP: $55,000 per person.
Q: Should I lease or purchase a vehicle?
A: The summary is – do what makes the most sense for your business. The bottom line is that who owns the vehicle is not as important as who’s paying the bill. Have your business pay the bill. If it’s purchased in your name, but the business pays the bill, then the expenses can usually be claimed on the business return. If you determine that you’d prefer the vehicle be owned by the business, then that’s fine. But again, make sure the business is paying the bill. And keep in mind that insurance on business owned vehicles is more expensive than vehicles owned by individuals.
And when it comes to buying vs leasing vs financing, the same advice applies. Do what makes financial sense for the business, but you’ll want whatever cash expenditures occur to come from the business. Let your overall business strategy shape what happens. It rarely makes sense to do or not do something just because it makes tax sense if it also doesn’t make business sense.
Q: What are the penalties for early retirement plan withdrawals?
A: Funds from any retirement account may be withdrawn early without a penalty if certain exceptions apply (like $10K for a first-time home purchase, significant medical expenses, etc. – but all exceptions are VERY limiting so don’t count on one applying) OR when the person reaches age 59-1/2. The penalty is 10% of the amount withdrawn PLUS income tax is paid on the amount withdrawn. If money is withdrawn, it can be returned (or redirected to a different retirement account) within 60 days of withdrawal and the penalty won’t apply. But one day past this deadline and the 10% automatically kicks in. Bottom line – if you’re planning to put money in a retirement account – don’t plan on pulling it out until you reach age 59-1/2 or for the special purposes (first-time home purchase, etc.). Otherwise, you’ll end up paying penalties and tax that far outweigh the benefit of making the contribution.
Q: What is considered a business expense/deduction?
A: According to Section 162 of the tax code, a business deduction is anything that’s Ordinary, Necessary and Reasonably Related to the Production of Income.
“Ordinary” refers to those expenses that are typical for your industry. If you’re in the real estate profession where it’s typical to provide “house warming” incentives as a means of securing ongoing client loyalty, then “incentives” would be an ordinary expense. However, if you’re in a profession where bribes and gratuitous gestures are considered unethical then expenses for “incentives” would be viewed in a far more skeptical light.
“Necessary” expenses are those that support the operation of your business and potentially result in income. Be careful not to apply the personal budgeting concept of “wants” vs. “needs” with needs being equivalent to necessary items in business because this would be an “apples to oranges” comparison. A want in a personal budget (like internet, travel, etc.) would very likely be necessary in a business context. But make sure that the business expense is truly applicable to your business.
“Reasonably Related” speaks to the necessity that an expense be connected to producing income. And here the tax courts have provided some clarity. In doing so, the court introduces a concept that is embodied in the term “inherently personal.” When an expense is inherently personal in nature, it is generally NOT considered a business expense, even though it’s tangentially related to the production of income. Groceries, used for yourself and your family in your own home, are a good example. Even though you can’t work if you’re starved, the food you eat (and the basic cleaning supplies, light bulbs, A/C filters, etc.) is considered inherently personal in nature because it is primarily related to your personal wellbeing, not the production of income. However, groceries you purchase to host a client appreciation event at your residence would clearly be reasonably related to the business. So, in this area, it’s often easiest to determine what’s reasonably related to the production of income but considering what the primary purpose of the expense would be.
Q: How do I pay my taxes?
A: If you owe federal tax, the IRS offers many easy ways to pay. Make sure you pay by the April 15th deadline, even if you get an extension of time to file your tax return. You can get an automatic extension of time to file when you make an electronic payment by April 15th. Here are some of the ways to pay your tax:
- Use Direct Pay.IRS Direct Pay offers taxpayers a free, secure and easy way to pay. You can schedule a payment in advance to pay your tax directly from your checking or savings account. You don’t need to register, write a check or find a mailbox. Direct Pay gives you instant confirmation after you make a payment.
- Pay by Debit or Credit Card.Choose a payment processor to make a tax payment online, by phone or by mobile device. It’s safe and secure. The payment processor will charge a processing fee. The fees vary by service provider and may be tax deductible. No part of the fee goes to the IRS.
- Use IRS2Go.IRS2Go is a free app that you can use to make a payment with Direct Pay and by debit or credit card. Simply download IRS2Go from Google Play, the Apple App Store or Amazon.
- Pay When You E-file.If you file your federal tax return electronically, you can schedule a payment at the time that you file. You can pay directly from your bank account using Electronic Funds Withdrawal. You choose the date and amount of the payment, and as long as it is on or before April 18, it will be on time. Some software that you use to e-file also allows you to pay by debit or credit card with a processing fee.
- Choose Other Options to Pay.The IRS offers other ways to pay:
- Use the Electronic Federal Tax Payment System to pay your taxes online or by phone. This free system provides security, ease and accuracy. To enroll or for more information, call 888-555-4477 or visit gov.
- Pay by Check or Money Order. Make the check, money order or cashier’s check payable to the U.S. Treasury. Do not staple, clip or attach your payment to the tax form. Include your name, address, daytime phone number and Social Security number or Employer Identification Number on the front of the payment. Use the SSN shown first if it’s a joint return. Also include the tax year and related tax form or notice number. Do not send cash through the mail.
- Can’t Pay Now?If you are unable to pay in full, you have options:
- Apply for an online payment agreementto pay your tax liability over time. Use the IRS.gov tool to set up a direct debit installment agreement. With a direct debit plan there is no need to write a check and mail it each month.
- Owe more than you can afford? An offer in compromise may allow you to settle for less than the full amount you owe. It may be an option for you if you can’t pay your full tax liability. It may also be an option if paying in full creates a financial hardship. Not everyone qualifies. Use the Offer in Compromise Pre-Qualifier tool to see if you are eligible for an OIC.
In short, remember to pay your tax bill on time. If you are suffering a financial hardship, the IRS is willing to work with you.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights.
Q: How do I figure out my estimated tax payments?
A: Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES (PDF), to figure estimated tax.
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year’s federal tax return as a guide. You can use the worksheet in Form 1040-ES(PDF) to figure your estimated tax. You need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties. If you need assistance, feel free to contact us for help.
Q: Who qualifies as a dependent?
A: First, you should be aware that in 2018 the laws associated dependents and related deductions changed significantly so be aware that the overall system of exemptions is different for 2018 moving forward. Understanding that, the general rules for dependents are as follows:
A dependent is a person other than the taxpayer or spouse who entitles the taxpayer to claim a dependency exemption (under prior law).
Under prior law, each dependency exemption decreases income subject to tax by the exemption amount. A taxpayer cannot claim a dependency exemption for a person who can be claimed as a dependent on another tax return. The term “dependent” means a “qualifying child” or a “qualifying relative.”
- To claim a dependency exemption for a qualifying child, ALL of the qualifying child dependency tests must be met:
- Dependent Taxpayer Test
- Joint Return Test
- Citizen or Resident Test
- Relationship Test
- Age Test
- Residency Test
- Support Test
- To claim a dependency exemption for a qualifying relative, the person must meet the following tests:
- Dependent Taxpayer Test
- Joint Return Test
- Citizen or Resident Test
- Not a Qualifying Child Test
- Member of Household or Relationship Test
- Gross Income Test
- Support Test
These tests can be found here: https://www.irs.gov/publications/p503
Q: Do I need to keep records?
A: Yes! What records you need for your business should be shaped by the needs of your business (not the IRS). If you need detailed records of inventory or customer receivables, then keep them. And retain them if they’re relevant. If you need little IT information, then don’t establish an elaborate system for logging everything.
The records the IRS requires may nor may not be the same as your business needs. As a minimum, the IRS requires date, amount and description for each transaction. In addition, expenses such as meals and entertainment, travel and auto expense require more detailed logs. If you intend to claim these items, make sure you have the records to support them. For tax purposes, you should retain records for at least four years after the due date of the return. And yes, you can keep the records digitally.
Q: Is bookkeeping important?
A: Yes. Very important! Financial reports provide you a way to know how your business is doing at a detailed level and the bookkeeping activity is what provides the detail for these financial reports. This information is also what’s used to prepare your taxes and answer questions the IRS may have about your taxes. So without bookkeeping records, none of this would be possible.
Software and internet packages make it easy to track and categorize financial records. Much of what used to be handled by a bookkeeper and/or accountant can now be easily handled by software.
Remember that the purpose of accounting software is to simplify the recordkeeping tasks of running a business. Look for software that does what you need and does it easily and efficiently. In most cases, you’ll need some type of program that allows you to track each expense, categorize it by expense type (office expense, travel, marketing, etc.) and include some form of description/explanation to provide the details of the transaction. Then you’ll need the ability to create a report on a regular basis that summarizes this information.
There are many additional options available in the various software packages. But get these only if you need them. If you have inventory and need a system for tracking it, you’ll also want to look for inventory management features. If you have accounts payable or accounts receivable, then these features could be important. If you want to handle payroll yourself then you’ll be looking for a program with payroll and payroll tax features. Bottom line – look for the features you need, but tracking your finances is very important so put a system in place and use it consistently.
Q: Should my 1099 Income be reported to me personally or to my business?
A: If you receive income from a 1099, then you’ll want to report that income under your “EIN” or tax ID number, not your social security number. If you end up with a 1099 that’s reported to you personally (to your social security number) then it can still be properly reported on your taxes, but the ideal is to have the 1099 information reported to your business.
Q: I have rental properties, where should I report those?
A: In almost every situation, it is ideal to report rental properties on a business return, not your personal return (Schedule E).
Q: What programs are out there to keep track of my business expenses/deductions?
A: There are a lot of great apps and programs for tracking expenses/deductions.
Here are a few we suggest.
- Com: This is a free online system that allows you to link your bank accounts to Mint, download the transactions on a regular basis, categorize them and add comments. Then at the end of the day, week, month, year or any other period, you can run a report which shows your income and expenses by category. It’s a simple application that will meet the needs of many small businesses.
- QuickBooks: This is an inexpensive, but full-blown accounting solution with all the options ranging from payroll to inventory/item management and job costing. Also available in standalone or online versions, it can easily link to your bank account, provide reminders for a host of accounting tasks, and by subscribing to other various fee-based (but generally very reasonably priced) services, you can add lots of additional flexibility and automation. The program cost ranges on the level of sophistication and users, but you can generally get what you need for $350 to $500. You’ll want to subscribe to the maintenance option, so you get periodic updates and support. Our current businesses use QuickBooks as do many of our clients and it’s been an excellent solution.
- MileIQ: MileIQ is an automatic mileage tracker that takes the hassle out of keeping a mileage log. It’s very helpful for logging your business drives!
The MileIQ app runs in the background on your iOS or Android phone and logs every drive automatically. You “swipe” each drive to classify it as business or personal, and MileIQ calculates the value of your deductible mileage. You can add details like parking, tolls, purpose and vehicle and have a complete, accurate mileage log without lots of work! Your log gets synced to the cloud, so you can get to it any time, even years down the road.
Q: What should you know about filing prior year returns?
A: Regarding filing returns to start the Statute of Limitations clock – as a general rule, the law allows the IRS to audit any return up to three years back from the date it’s filed. Once the three years are past, the IRS can’t question the return. But if the return is never filed, the 3-year clock doesn’t ever start. So we strongly recommend that whenever there is any meaningful activity, carry-forward capital loss, etc. that the return be filed even if there isn’t a refund. So if these returns aren’t filed then the IRS can question them anytime they want and this could have a significant impact on any future years.
Q: Is there a time limit for capital losses?
A: These types of losses can carry forward until they’re used. There is NO time limit.
Q: What amount of my state refund is taxable?
A: The state refund is only taxable to the extent that it exceeded the sales tax deduction. This carry forward amount is calculated on what is called the “Refunds Worksheet” that can be found in your return.
Q: What can I do if I am still waiting on (or didn’t receive) a 1099 from a company that I worked for?
A: We just need the amount to report it. The 1099 isn’t necessary SO LONG as we have the proper, accurate amount.
Q: Can you talk to my financial advisor about my tax returns and tax information?
A: Yes, of course. BUT, we do need a signed 3rd party waiver from you to discuss your matters with the advisor. This also goes for anyone other than you.
Q: Should I set up a pre-tax retirement account to make a contribution?
A: Yes, if adding to retirement is consistent with your overall financial objectives, it will definitely also help your tax strategy.
Q: I think my business needs to sign up for Transaction Privilege Tax. How do I go about this?
A: Please know that the Consolidated TPT application online has all forms of ID’s and taxation (sales tax, use tax, etc. along with payroll tax, etc.) All you need is the payroll withholding component and the unemployment account number for your payroll.
Q: I owe taxes for a previous year, but I am getting a refund for the current year. What should I do?
A: You can just pay the difference. When you’re entitled to a refund, the IRS will first check to see if there are any amounts due for prior years and apply the refund to those years, then send you the difference if there’s any left. So if you owe for prior years, and are entitled to a refund that doesn’t completely cover the prior year balances, you can just pay the difference. Keep in mind that the IRS also charges penalties and interest on prior balances so the amount you pay may not exactly cover the difference. But the IRS should notify you if there are still outstanding amounts on your tax account once the refund has been applied to the old balances.
Q: Can you provide general information regarding retirement plans?
A: Note that a good investment/financial advisor is very knowledgeable on this front and should be able to guide you in the specifics of using retirement accounts (along with a variety of other investment vehicles) in order to accomplish your financial objectives.
Here are some general concepts:
The TOTAL of all contributions you can make to ALL retirement plans annually is currently $55,000.
Your max allowable annual contribution to any type of IRA is $6,500 (including the catch-up amounts). You and your spouse may be able to make contributions of this amount from your earnings so long as you have ordinary income enough to cover the amount.
Your max allowable annual contribution to any type of 401K plan is $24,000 (again, including the catch-up amounts). You an each also make contributions to your own plans. These contributions are generally made as pre-tax deductions from your W-2 wages. Your employer can also make contributions to your 401K (and match the ones you’ve made) depending on the “rules” of the plan you establish.
Your max contribution to your SEP is limited to 25% of your W-2 wages or $55,000 annually, whichever is SMALLER. In order to increase your SEP contribution, you’d have to increase your W-2 wages and that doesn’t always make sense because doing so also increases your self-employment tax.
Please consider the above as general information and not a specific recommendation. It is imperative that you set your financial objectives first, then work with your investment/financial advisor to set a strategic plan that will assist you in accomplishing those objectives. Your tax strategy, and retirement strategy should all be set in the context of your overall financial objectives and strategy. Making contributions to retirement accounts, increasing wages, etc. are all decisions that make sense (or don’t make sense) when evaluated in the context of your financial strategy.
Q: Should I use a Schedule C? Schedule E?
A: There are a lot of options when it comes to reporting income and expenses. Schedule C’s and Schedule E’s are the most familiar to taxpayers (and many tax preparers). But, beware. These forms are considered “suspect” by the IRS and are subject to verification and a potential audit when it’s reported by an individual taxpayer. In fact, your audit risk when you use a Schedule C or E is much higher than when the same information is reported on a separate business return. So if you have business income and expenses or rental properties, report the information on a separate business return, not a schedule C or E if at all possible.
Q: How long should I save or hold on to my tax documents?
A: We recommend you keep your records for at least five years, and possibly longer (up to seven) if you reported a loss from worthless securities or bad debt. The IRS has three years from the date the return was filed to review a return for adjustments. You have the same amount of time to amend and request a refund. Depending on the state you live in, you may have as long as four years from the date of filing. So to be safe, plan on saving records for at least five years. And as noted above, if you had losses from worthless securities or bad debts then you’ll want to save your records for at least seven years. And digital records of the information are acceptable. Scanned copies in pdf format are preferred.
Here’s a link from the IRS regarding their recommendation: https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records