Starting your own business can be an exciting prospect, but there is more to it than simply writing a business plan. Also, if you expect to have employees, there are a variety of federal and state forms and applications that you need to complete to get your business up and running. That's where a tax professional can help. With this in mind, let's take a look at what you need to know before you start a new business.
The first decision you need to make is determining which business entity you will use because the type of business structure you choose determines what taxes you need to pay and how to pay them, as well as which income tax return you file. The most common types of business entities are:
Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing you must do since many other forms require it. The IRS issues EINs to employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes.
An EIN is used to identify a business. Most businesses need one of these numbers. A business with an EIN needs to keep the business mailing address, location, and responsible party up to date. IRS regulations require EIN holders to report changes in the responsible party within 60 days. They do this by completing Form 8822-B, Change of Address or Responsible Party, and mailing it to the address on the form.
Even if you already have an EIN as a sole proprietor, for example, if you start a new business with a different business entity, you will need to apply for a new EIN.
The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks, and you can apply for one EIN per day. There is no cost to apply.
A tax year is defined as an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either calendar year or fiscal year defined as follows:
Once you have your EIN, you need to fill out forms to establish an account with the state for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable). Business taxes include income tax, self-employment tax, employment tax, and excise tax. Generally, the type of tax your business pays depends on the type of business structure. Keep in mind that you may also need to make estimated tax payments.
Payroll reporting and recordkeeping can be very time-consuming and costly. Also, keep in mind that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:
As an employer with employees, you may have certain healthcare requirements you need to comply with as well. If so, you should know about the Small Business Health Care Tax Credit, which helps small businesses (fewer than 25 employees who work full-time, or a combination of full-time and part-time) pay for health care coverage they offer their employees. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities. It is available to eligible employers for two consecutive taxable years.
If you have any questions or need help setting up a payroll and accounting system for your new business, help is just a phone call away.
Whether you've invested in Bitcoin and sold it at a profit or loss or received it for services performed, you'll need to report it on your tax return. Here's what you should know:
Prior to 2014, there was no IRS guidance and many people did not understand that selling virtual currency was a reportable transaction. They may have found themselves with a hefty tax bill -- money they were hard-pressed to come up with at tax time. Others were unaware that they needed to report their transactions at all or failed to do so because it seemed too complicated.
In October 2019, the IRS expanded their guidance to include two additional pieces of information that help taxpayers understand their reporting and tax obligations concerning their virtual currency transactions. This expanded guidance included answers to common questions regarding the tax treatment of a cryptocurrency hard fork and a set of FAQs that addressed virtual currency transactions for those who hold virtual currency as a capital asset.
More recently, taxpayers may have noticed a checkbox at the top of Form 1040, Schedule 1, Additional Income and Adjustments to Income when preparing their 2019 tax return. Looking ahead, taxpayers should look for a cryptocurrency question on the front page of their 2020 Form 1040.
Virtual Currency - a digital representation of value, other than a representation of the U.S. dollar or foreign currency ("real currency"), that functions as a unit of account, a store of value, and a medium of exchange.
Cryptocurrency - a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.
Hard Fork - when a single cryptocurrency splits in two. This may result in the creation of a new cryptocurrency on a new distributed ledger such as blockchain in addition to the legacy cryptocurrency on the legacy distributed ledger (e.g., blockchain).
Virtual currency, as generally defined, functions in the same manner as a country's traditional currency. An IRS memorandum issued in August 2020, reiterated that convertible virtual currency is "property" for federal tax purposes and that its receipt in exchange for performing services is considered gross income including receiving convertible virtual currency in exchange for performing a microtask through a crowdsourcing platform in exchange for performing a service.
The same general tax principles that apply to property transactions also apply to transactions using virtual currency such as:
The good news is that if you failed to report income from virtual currency transactions on your income tax return, it's not too late. Even though the due date for filing your income tax return has passed, taxpayers can still report income by filing Form 1040X, Amended U.S. Individual Income Tax Return within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. For tax year 2019, taxpayers may file an electronic Form 1040-X.
Taxpayers should also be aware that forgetting, not knowing, or generally pleading ignorance about reporting income from these types of transactions on your tax return is not viewed favorably by the IRS. Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.
Taxpayers who do not report transactions involving virtual currency or who reported them incorrectly may when appropriate, be liable for tax, penalties, and interest. In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.
If you have any questions about virtual currency and your taxes, don't hesitate to contact the office.
While taking money out of a retirement fund before age 59 1/2 is usually not recommended, in certain cases, it may be unavoidable, especially during times of economic crisis. If you need cash and have a retirement fund you can tap, here's what you need to know.
When retirement plans such as the 401(k) were introduced, company pensions were still the norm. Today, however, very few companies offer pensions anymore and most people rely entirely on social security and whatever savings they've accumulated in their retirement account to get them through their golden years.
For many people, retirement accounts are their most significant source of cash, but because they were created to help you save money for your retirement years, withdrawals before retirement age (59 1/2) are discouraged. In fact, early withdrawals from traditional and Roth IRAs are subject to an additional 10 percent tax, unless an exception applies. Exceptions to the additional 10 percent tax apply for early distributions include the following:
Due to the coronavirus pandemic, there is additional relief for taxpayers experiencing economic hardships. The Coronavirus Aid, Relief, and Economic Security (CARES) Act helps eligible taxpayers in need by providing favorable tax treatment for withdrawals from retirement plans and IRAs and allowing certain retirement plans to offer expanded loan options.
Coronavirus-related withdrawals or loans can only be made to an individual (or the individual's spouse) if they are diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention or a test authorized under the Federal Food, Drug, and Cosmetics Act.
The individual must also experience adverse financial consequences as a result of the following conditions:
Quarantine. The individual, individual's spouse or a member of the individual's household (someone who shares the principal residence) is quarantined, furloughed, laid off, has work hours reduced, is unable to work due to lack of childcare, has a reduction in pay (or self-employment income), or has a job offer rescinded or start date for a job delayed, due to COVID-19.
Business closures or reduced hours. Closing or reducing hours of a business owned or operated by the individual, the individual's spouse, or a member of the individual's household, due to COVID-19.
Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before Dec. 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans, and others.
Loans are not available from an IRA. Individuals who were eligible to take coronavirus-related withdrawals until September 22, 2020, were able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan if their plan allows.
For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period. Taxpayers should check with their plan administrator to see if their plan offers these expanded loan options and for more details about these options.
The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $12,000 coronavirus-related distribution in 2020, you would report $4,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.
In summary, coronavirus-related distributions:
Before withdrawing funds from a retirement account please call the office and speak to a tax professional. While you may be able to minimize or avoid the 10 percent penalty tax using one of the exceptions listed above including those under the Cares Act, remember that you are still liable for any regular income tax that's owed on the funds that you've withdrawn and you may be liable for more tax than you anticipated when filing future tax returns.
With health care, housing, food, and transportation costs increasing every year, many retirees on fixed incomes wonder how they can stretch their dollars even further. One solution is to move to another state where income taxes are lower than the one in which they currently reside.
While federal tax rates are the same in every state, retirees may find that even if they move to a state with no income tax, there may be additional taxes they're liable for including sales taxes, excise taxes, inheritance, and estate taxes, income taxes, intangible taxes, and property taxes. Retirement benefits are also treated differently in every state and many retirees also have additional income from a job.
Even if you're not retired yet, if you are working remotely due to COVID-19 and are close to retirement age you may also be considering whether to make a move right now.
If you move to a different state but are still working for an employer in the state you formerly resided in, you will be subject to income tax in that state (as a nonresident) because your employer is located there.
If you're thinking about making a move to another state, here are six things to keep in mind:
Retirees planning to work part-time in addition to receiving retirement benefits should keep in mind that those earnings may be subject to state tax in certain states, as well as federal income tax if your combined income (individual) is more than $25,000. Combined income is defined as your adjusted gross income + nontaxable interest plus 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you see this scenario in your future, it may be in your best interest to consider a state with low income tax rates (Pennsylvania, Arizona, or New Mexico for instance) or no income tax such as Florida, Nevada, Alaska, Washington state, or Wyoming.
Retirement typically income includes social security payments, retirement plan distributions, and income from pension plans. Income tax rates for Social security payments and income from retirement plans and pensions vary for each state. Some states do not tax this income at all, while in other states, a portion of pension income is exempt, while other states tax pension income in its entirety. State tax laws, like federal tax laws, are always changing. Please call if you have any questions about tax law changes in your state
Even if you live in a high-tax state, many offer significant tax benefits for senior citizens.
In 2020, thirteen states tax Social Security income in addition to taxing social security income at the federal level; however, there may be exceptions depending on age or income level. Some states treat the taxation of social security benefits the same as federal taxation. Moving to a state that doesn't tax Social Security is tempting, but keep in mind that tax rates on Social Security payments are just one factor to consider.
Despite a decline in property values, property taxes have not decreased for most homeowners. Some states, however, offer property tax exemptions to retirees who are homeowners and renters. Again, this varies by individual state.
State and local sales taxes may or may not be a factor in the overall decision about where you decide to retire, but keep in mind that only five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not impose any sales or use tax.
Estate tax may or may not matter, depending on your estate and whether you care about what happens to your estate after you die. Like other state taxes, estate tax varies depending on which state in which you reside. In some states, there is a tax on estates below the federal threshold amount ($11.58 million in 2020). Many states have no estate tax whatsoever, including North Carolina, Delaware, Florida, Kansas, Oklahoma, and Arizona.
When it comes to retirees, relocating, and taxes, there are several factors to consider - including the overall tax burden. As you've read here, not all states are created equal. If you're thinking about retiring to another state, please contact the office and make an appointment with a tax professional who will help you figure out which state fits your particular circumstances.
Under the Affordable Care Act, certain employers - known as applicable large employers - are subject to the employer shared responsibility provisions. You might be thinking about these topics as you make plans about 2021 health coverage for your employees.
If you are an employer that is subject to the employer shared responsibility provisions, you may choose either to offer affordable minimum essential coverage that provides minimum value to your full-time employees and their dependents or to potentially owe an employer shared responsibility payment to the IRS.
Here are definitions of key terms related to health coverage you might offer to employees:
Affordable coverage: If the lowest cost self-only only health plan is 9.5 percent or less of your full-time employee's household income, then the coverage is considered affordable. Because you likely will not know your employee's household income, for purposes of the employer shared responsibility provisions, you can determine whether you offered affordable coverage under various safe harbors based on information available to you as the employer.
Minimum essential coverage: For purposes of reporting by applicable large employers, minimum essential coverage means coverage under an employer-sponsored plan. It does not include fixed indemnity coverage, life insurance, or dental or vision coverage.
Minimum value coverage: An employer-sponsored plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.
Please call if you have any questions or need more information about the employer shared responsibility provisions.
Final regulations have been issued by the Treasury Department and the Internal Revenue Service implementing the 100% additional first-year depreciation deduction that allows businesses to write off the cost of most depreciable business assets in the year they are placed in service by the business.
The 100% additional first-year depreciation deduction was created in 2017 by the Tax Cuts and Jobs Act and generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances, and furniture generally qualify. While the bonus depreciation has been around for a while, the TCJA amended it to include certain used depreciable property and certain film, TV, or live theatrical productions and increased the first-year depreciation deduction to 100 percent (up from 50 percent).
The deduction applies to qualifying property (including used property) acquired and placed in service after September 27, 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property.
Additionally, the final regulations provide rules for consolidated groups and rules for components acquired or self-constructed after September 27, 2017, for larger self-constructed property on which production began before September 28, 2017.
To claim the deduction, taxpayers should use Form 4562, Depreciation and Amortization (Including Information on Listed Property). For more information about this and other TCJA provisions, please call.
People who are not eligible for a Social Security number must use individual taxpayer identification numbers (ITINs) if they have tax filing or payment obligations under U.S. law. Periodically and under certain circumstances, these ITINs expire and should be renewed as soon as possible to avoid unnecessary delays related to tax refunds next year.
ITINs that expire on December 31, 2020:
Affected taxpayers will receive a CP48 Notice, informing a taxpayer that the ITIN should be renewed before the end of the year. This notice explains what actions a taxpayer will need to take to renew the ITIN if it will be used on a U.S. tax return filed in 2021. If a taxpayer has an ITIN number that has already expired and expects to have a filing requirement in 2021, they can renew any time.
Taxpayers with an expiring ITINs have the option to renew them for their entire family at the same time if they have received a renewal letter from the IRS. Family members include the tax filer, spouse and any dependents claimed on the tax return.
How to renew a ITIN
To renew an ITIN, a taxpayer must complete a Form W-7, Application for IRS Individual Taxpayer Identification Number and submit all required documentation. Taxpayers submitting a Form W-7 are not required to attach a federal tax return; however, they must still note a reason for needing an ITIN on the form.
Avoid these common errors when renewing an ITIN:
If you need assistance renewing an expiring ITIN, don't hesitate to call.
Businesses that receive cash transactions of more than $10,000 must report these payments to the IRS. Now businesses can batch file their cash reports; this is especially helpful for those required to file many forms. Let's take a look at several key points that taxpayers should know about reporting cash transactions.
How the IRS defines cash
Cash includes coins and currency of the United States or any foreign country. For certain transactions, it's also a cashier’s check, bank draft, traveler's check, or money order with a face amount of $10,000 or less.
Businesses must report cash of more than $10,000 that they receive:
Reporting these payments
Taxpayers report cash payments by filing Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
Filing electronically is encouraged; however, to e-file, a business must have an account with the Financial Crimes Enforcement Network's BSA E-Filing System. E-filing is free, secure, and typically a more convenient and cost-effective way to meet the reporting deadline. Filers will receive an electronic acknowledgment of each form they file. Businesses can also paper file Form 8300 and send it to the IRS at the address listed on the form.
When to file
Form 8300 must be filed within 15 days after the date the cash is received. If a business receives payments toward a single transaction or two or more related transactions, they should file when the total amount paid exceeds $10,000.
If you have any questions about reporting cash payments or need help setting up an account with the BSA E-Filing System, please contact the office.
Last month, the concept of time tracking in QuickBooks was introduced. As a reminder, using the software's tools makes it possible to record individual blocks of time that employees have worked and include them in payroll and billing customers when necessary. Each step required to set up QuickBooks for time tracking was discussed as well as the process of creating individual time entries and a completed record for billable time should look something like this:
QuickBooks offers another way to enter time records that is especially useful if you have multiple employees and a lot of work hours to track. Open the Employees menu and select Enter Time | Use Weekly Timesheet. You can also get there by clicking the down arrow next to the Enter Time icon on the home page. This screen resembles a paper timesheet, with columns for all of the information you would enter if you created a single activity.
At the top of the screen, click the down arrow next to Name and select the correct employee. To the right of that is the Week Of field. If you need to change the dates, click the small graphical calendar, then click anywhere in the correct week. If you have already created individual records for that employee during that week, the information for each will appear in the corresponding date column at the end of the row. And anything you enter on the Timesheet will also appear as an individual entry.
To create a new entry on the Timesheet, click the down arrow in the Customer column and select the correct Customer:Job. Next, choose the Service the employee provided by again clicking the down arrow in that field. You want to be sure that the Payroll Item code is the right one, so choose carefully there; the WC Code (Workers' Comp) should fill in automatically. Enter Notes if you'd like, then the number of hours the employee worked for that customer for that service in the date column. Be sure to click in the Billable box to create a checkmark if the service was billable.
Totals for each column appear at the bottom. Save the Timesheet and repeat the process for any other employees as needed. These hours will now be available to you when you run payroll and bill customers.
QuickBooks makes it easy for you to see the time data you've entered. It offers four pre-formatted reports that tally this information in different ways. Open the Reports menu and select Report Center. Locate Jobs, Time & Mileage in the left vertical pane and click on it. Scroll down to the Time heading to see these four reports. They are:
When you open a report, you can double-click on any number in the Duration column to see the underlying detail.
When you create an invoice for a customer who needs to be billed for services provided, QuickBooks displays this message:
QuickBooks offers another way to bill for time and expenses that allows you to create invoices in batches. Open the Customers menu and select Invoice for Time & Expenses. In the window that opens, specify your Date Range, and make sure the Template showing is the one you want.
Click in the column in front of each Customer:Job you want to bill and then click Next Step. You can Review Billables to see details and Edit Options by clicking on those buttons. Click on Create Invoices and make sure each customer's Preferred Send Method is correct in the next window before dispatching them.
QuickBooks' time tracking tools may be all your company needs, but if you find them lacking, please call to discuss adding TSheets, an integrated solution that adds more advanced features. As always, don't hesitate to call if you need help using any of QuickBooks' own tools or with any other accounting needs.
Employees who work for tips - If you received $20 or more in tips during September, report them to your employer. You can use Form 4070.
Individuals - If you have an automatic 6-month extension to file your income tax return for 2019, file Form 1040 and pay any tax, interest, and penalties due.
Corporations - File a 2019 calendar year income tax return (Form 1120) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in September.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in September.
Employers - Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2020. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 10 to file the return.
Certain Small Employers - Deposit any undeposited tax if your tax liability is $2,500 or more for 2020 but less than $2,500 for the third quarter.
Employers - Federal Unemployment Tax. Deposit the tax owed through September if more than $500.
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