Tax Day Filing Deadline Pushed OutPosted on April 15th, 2016
Marianne Kern, CPA
Kern & Associates CPA, P.A.
If you’re scrambling to finish your tax return by the end of the day today, relax. You’ve got a few more days to file. The usual April 15 filing deadline has been pushed to Monday, April 18 for 2016.
The reason is Emancipation Day, the day to commemorate the signing of the Emancipation Act by President Abraham Lincoln, and is celebrated in Washington, D.C. It is observed on April 16, which just so happens to fall on Saturday this year. Emancipation Day is a legal holiday in D.C. in which the IRS is closed. Since this year’s holiday is on a Saturday, it will be observed on the closest weekday, which falls on April 15, moving the tax deadline to the next Monday on April 18.
Taxpayers who need even more time to complete their federal returns can request an automatic six-month extension. The request must be filed by April 18. The six-month extension gives taxpayers until Oct. 17 to file their returns. The only catch is you must estimate your tax liability and pay any amount due when you request the extension.
Can Paying Taxes be a Good Problem?Posted on April 11th, 2016
Owner / President
Outsourced Accounting Department, Inc.
“I wish I knew where the money went! I didn’t take any more salary, but I’m paying a lot more in taxes.”
A client of mine recently asked me this very question, which is a question I often hear from small business owners. In most cases, it’s because they do not understand what “profit” really means since they are not seeing it accumulate in their personal bank account. And some felt like they were actually losing money, and thought they were fine because that would “save them on taxes.” So what are we really talking about here, and why is profit so important anyway since you just have to pay taxes on it?
And the answer is, your business cannot survive without profit. Think of it in terms of your personal financial situation. If your monthly mortgage payment is more than your monthly income, that shortfall has to come from somewhere. You either need to increase your income, reduce your expenses, or pay the shortfall out of your savings account – at least until your savings run out.
A business is no different. If it’s losing money, that shortfall has to come from somewhere, usually the owner, until (again) his or her savings run out, or by delaying payment to suppliers – until they cut you off. So if you are one of those who thinks losing money to save on taxes is a good thing, be prepared for a nasty surprise not too far down the road.
Understand, we’re not talking about foregoing legitimate tax deductions and paying more taxes than you should. Who wants to pay taxes, right? So how is it that your business can be profitable, but yet you’re not feeling the joy in the form of a growing cash balance? The short answer is that there is a huge difference between “profit” and “cash flow,” and between financial reporting for managing your business, and for tax purposes.
On the tax side, since most small businesses report taxes as an S-Corporation, let’s use that as an example. In an S-Corporation, the profit is not taxed directly on the company’s tax return, but rather, it is reported on the K-1 in the owner(s)’ personal tax return. The profit itself may not have actually been distributed to the owner, but nevertheless, it is still taxed there. And this is the first thing you must keep in mind.
So then you ask yourself the question, “Where’s the cash?” And the answer is, look on your company’s balance sheet. If it’s not in your operating account, then on the asset side, it’s in accounts receivable (uncollected sales), or it funded an increase in inventory or purchases of fixed assets, or to fund loans from the company to you, the owner; or, on the liability side, it was used to pay payables, or repay debt (including loans from you, the owner), or to fund shareholder distributions (again, you).
Next, look at your cash flow statement. At the very top is your profit (money flowing into the business) or loss (money flowing out of the business), followed by all of the changes in your balance sheet items, together which reflect all “sources and uses” of funds. And at the very end, is your ending cash balance shown on your balance sheet.
The bottom line is, if your business is truly profitable, somewhere along the line you benefited from it, because if you had NOT made a profit, you would never have been able to fund any of these business expenditures, and then it’s game over, you’re out of business.
So taxes are like any other business expense, a necessary evil. As your business grows and your profits increase, you have to pay more taxes as a percentage of your increased profit. It just has to be planned and reserved for, and where possible, minimized with legitimate tax reporting methods, but on your CPA’s tax return, NOT your books.
Are You at Risk of an IRS Audit?Posted on April 4th, 2016
Marianne Kern, CPA
Kern & Associates CPA, P.A.
Now that tax season is almost over, are you wondering if the return you just filed, or are about to file, could be at risk of an IRS audit? The IRS’s main goal in audits is to close the “tax gap” which is the difference between what the IRS expects to collect and what it actually collects. While it’s true that some returns are randomly selected for examination, most of the time the IRS has a reason for plucking a form 1040 out of the pile. Audits are generally triggered by a specific item or pattern of behavior on your tax return. The following is a brief checklist of items or behaviors that might trigger an audit.
Failing to Include a Form 1099 Income
Over 60% of under-reported individual income tax is related to business and self-employment income. The IRS matches forms 1099 in their records to the amounts on your return, so make sure those are correct.
Inflating Home Office Deductions
If you use part of your home for business, you’re entitled to deduct the related costs as a home office deduction. To qualify for the home office deduction, the IRS says you must use the part of your home attributable to business “exclusively and regularly for your trade or business.” Your home office must be your actual office and not used for other purposes. Most of your business deductions based on the size of your home office but do not overstate the size of your office.
Citing Too Many Losses on a Schedule C
Filing a Schedule C isn’t generally enough to trigger an audit, but taxpayers who file a Schedule C may be statistically more likely to face an audit because there is a temptation to overstate losses. The IRS assumes you’re in business to make money. Filing a loss year after year might make the IRS question your losses.
Claiming High Charitable Deductions
Charitable deductions are one of the most common deductions claimed on a personal income tax return. More than 90% of taxpayers who opt to itemize claim charitable deductions. Be sure to document your donations.
Using Too Many Round Numbers
Your tax return isn’t intended to be an estimate. You should report your actual items of income and losses, not approximations. If the IRS sees too many numbers that look like guesses, they may ask you for supporting documentation.
Reporting Rental Real Estate Losses When you Don’t Materially Participate
The IRS considers all rental real estate activities that aren’t performed by real estate professionals to be passive activities. That means expenses associated with rental real estate activities will be deductible only to the extent of rental income. However, if you’re considered to be in the business of renting real property because of your active involvement, you may be entitled to deduct rental real estate losses in full.
Citing Too Many Business-Related Deductions
A bona fide business expense must be both “ordinary and necessary in carrying on any trade or business.” If you have a lot of deductions that seem a bit out of the ordinary for your trade or business, you may call attention to your return. To claim a business-related deduction there should be a clear connection between your expenses and your business in order to take the deduction. Don’t try to make something fit that doesn’t qualify, and keep excellent records.
You should not pay more in taxes than you have to so don’t be afraid to take legitimate deductions on your return. But be careful, however, to report all income and expenses properly and keep good records.