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An IRS audit is an examination of taxpayers’ returns to verify the accuracy of information such as income, deductions, and the reported tax. Selection can be random as well as by computer screening. The audit process commences with an IRS notice to the taxpayer. Audits are unwieldy for many taxpayers and a misstep can cause unproductive conflict with the IRS. Master Your Money uses its experience to help business and individual clients preclude an audit. Here are some key tips for responding to audits.
Foremost, never ignore the notice because delays can result in the waiver of your rights to object to adverse changes to your tax. Forward the notice immediately to Master Your Money, and in the meantime gather the documents the notice requests or likely involves, which may include, for example: bank statements, credit card statements, auto logs, business expenses, home office expenses, school expenses, proof of dependency, dependent care bills, and other items. There are three types of audits: (a) Correspondence Audits (a/k/a Campus Examinations), the most frequent type of audit, requiring taxpayers to mail records to the IRS, (b) Office Audits requiring taxpayers to personally meet at an IRS Office to review records and other information, and (c) Field Audits where IRS agents visit the taxpayers’ home or business to review records and other information. Audits result in three possible outcomes: no change to the return; agreement with the IRS’s proposed changes to the return; or disagreement with the IRS’s proposed changes. Taxpayers disagreeing with the proposed changes have certain time-sensitive rights to challenge them. Also, beware that you may receive what’s known as an IRS Letter CP2000 notifying you that your return conflicts with financial data reported by third parties, and further identifies the discrepancies with a proposed resolution. While this letter does not constitute an audit, it acts like one and it should be immediately sent to Master Your Money to prepare a response. Take-away: An audit notice is not the end of the world for taxpayers and the risk of adverse outcomes are often reduced by promptly responding to and cooperating with requests. Never ignore a notice or represent yourself. Call Master Your Money for further information concerning ways to avoid audits or for assistance if you receive an audit notice or a CP2000 Letter. Sources: “IRS Explains CP 2000 Letters Sent to Taxpayers When Tax Return Information Doesn’t Match Information from 3rd Parties,” IRS Publication, March 28, 2022. “IRS Audits,” IRS Publication, March 14, 2022. “What People Should and Should Not Do If They Get Mail from the IRS,” IRS Publication, February 24, 2022. “What Should You Do if the IRS Comes Knocking on Your Door?” Forbes, May 24, 2021.
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At Master Your Money, we provide a full range of tax preparation services to help businesses and individuals succeed. Each year, the IRS provides tax inflation adjustments for numerous tax provisions. Below are inflation adjustments for tax year 2022 concerning several key tax provisions of concern to many of our clients at Master Your Money.
35%, for incomes over $215,950 ($431,900 for married couples filing jointly) 32% for incomes over $170,050 ($340,100 for married couples filing jointly) 24% for incomes over $89,075 ($178,150 for married couples filing jointly) 22% for incomes over $41,775 ($83,550 for married couples filing jointly) 12% for incomes over $10,275 ($20,550 for married couples filing jointly)
Takeaway: Knowing the above tax rates and amounts allows better decisions about the proper amount of withholding taxes and estimated payments in your case as well as whether itemizing is better than claiming a standard deduction. At Master Your Money, we provide tax return services tailored to the unique needs of individuals and businesses. Contact us today for an appointment to prepare your 2021 return and to plan your 2022 tax strategy. Sources: IRS Publication – “IRS Provides Tax Inflation Adjustments for Tax Year 2022,” (Last Reviewed or Updated: 15-Dec-2021). IRS Publication – “Topic No. 551 Standard Deduction,” (Last Reviewed or Updated: 21-Jan-2022). IRS Publication – “Topic No. 501 Should I Itemize?” (Last Reviewed or Updated: 11-Jan-2022). IRS Publication – “IRS announces 401(k) limit increases to $20,500,” (Last Reviewed or Updated: 4-Nov-2021). Without a doubt, owning a business can be many things – stressful, exciting, overwhelming, rewarding, exhausting, and liberating.
…And many times, it’s also addicting. When you open one business, you want to expand. That might be a completely new company, because you’ve identified another need, or it could be you simply need to open another unit, or office, or retail location. Either way, expansion is what business is all about. Being stagnant, in business and in life, is death. But just like life, it’s critically important that you take the right actions at the right times to ensure you get the results you want. You don’t make college plans as a kindergartener, and you don’t buy a car unless you have a driver’s license. So any new business venture needs to be thought out, not by the seat of your pants. What’s all this mean? For starters, you need to understand The Job the new venture will do, but then, you have to recognize the best entity structure for it. LLC? Sole Proprietorship (unlikely!), S-Corp, C-Corp, Partnership, and so on. More important than that, you need to be clear not just on what the new company will be doing, but how you’ll separate it from your current business. If, for example, you take profits from the first company to invest in the second, you should clearly document how the money got there and how it will be paid back. The nice thing about this is that money is “free” to use, once you’ve clearly shown how it got there and how it will return. Even with low interest rates these days, it’s handy to not have to fund a venture with someone else’s money. Here’s the thing, though: when you open up that new store, or new business, you have to have clear rules and follow certain expectations with respect to the money it makes and where that money goes. At the same time, you have to remember – most of the smallest companies – the newest ones – are “flow through” businesses. That puts the tax burden on you … or, at least, those taxes flow through to you. So getting clarity on how a new business will act and react – and the financial impact it will have – it important. How do you do that? Talk to me and the team, of course. Now, I understand it’s tax season, and I’m going to be incredibly busy for these next few months, but there IS time to get a plan together, but you can’t waste it. If you’re expanding this year, we need to meet and create a plan on what is going to provide the best value for you and what will keep more money in your pocket. There’s no single best practice in this case, but preparation is the key. Let’s get that call in and get your new business moving! Before we go down the rabbit hole too far, I want you to recognize that I’m as open minded as the next tax professional. There are literally more than 70,000 pages in the U.S. Tax Code, and as such, there are often a lot of opportunities for … shall we say, “interpretive” taxation.
I can’t tell you how many times I’ve heard sketchy half-baked justifications for credits, write-offs, and deductions. And make no mistake – there is a place for them. …But there is also a system for employing them-- and it’s not when you file your taxes! Let’s look at some examples… We’ve all used the “business meals” deduction before, but even that isn’t as sacred as you might think. One law firm partner who bought lunch every day for his team tried to use the rationale of lunch being a business expense and lost his case in Tax Court. Yes, his argument was valid, but the excessive amount he chose to try to deduct proved to be too much for the court to agree with. In another case, a tax preparer who worked from home would, from time to time, book and stay at a local hotel to “get a good night’s sleep” since her clients called at all hours and, during tax season, she was, understandably, very busy. While she could absolutely have deducted that hotel if she was traveling, her rationale – a good night’s sleep – didn’t fly in court, and she lost the appeal. The parents of a young beauty pageant contestant found themselves on the losing side of a tax court case when they tried to do the right thing … sort of. Their daughter won several thousand dollars each year, and they placed that money into a college fund for the child. Unfortunately, they also claimed the prize money as their income, and attempted to take write-offs for the travel and other expenses. Unfortunately, the winnings were the daughters, and any expenses – legally – are also hers. Thus, the parents lost the case and the write-offs. Every one of these examples could, in my opinion, be legally used to some degree IF the people in question had taken the time to speak with their tax preparer and do one of two things: take the legal and proper actions to use the tax laws to their benefit or allow their CPA to get clarity from the IRS on how they can legally and properly use the deductions, credits, and write offs available to them. So before you gamble and lose, take the time to ensure you know what and how to properly document what you’re doing and how you’re doing it. It could be the difference between a big tax bill and a nice refund. Well, here we are, the season of love is back. You’re starting to hear about it at work, people are getting ready to pop the question, and the phones won’t stop ringing here at the office with folks looking for a date.
You guessed it. It’s tax season. Every year, I talk with scores of people – clients and non-clients – about taxes, and every year, 90% of the advice I give out is the same (and many of the people I share that advice with are in the same place as the men and women who asked last year, too). For business owners – new and old – tax season shouldn’t be a stressful time of the year. So why is it? There are a handful of reasons, and every one of them could be avoided.
There are a lot of other reasons and challenges you might face – or learn about – in any given February, but these are the ones I see year after year. If you were paying attention, though, you’ll see how all of them can be avoided with a little planning and preparation. Get organized and get the results you deserve! Master Your Money helps clients reduce taxes. The bell soon tolls for the 2021 tax year. Want to pay less taxes? Get faster refunds? Avoid costly amended tax returns? Consider these tips:
1. 2020 Tax Return. We’ll need your 2020 tax return, particularly if 2021 is the first time Master Your Money is assisting you. Can’t locate you return? Copies are available through your IRS online tax account (see below) or by contacting/logging into the tax software provider you used last year. Last year’s return helps ensure we have the required documentation to accurately prepare this year’s return. 2. Create an Online Tax Account with the IRS. Create an online tax account with the IRS at https://www.irs.gov/payments/your-online-account. You get access to past returns, but also verification of: your Economic Impact Payments so to calculate any Recovery Rebate Credit, estimated tax payments, past amounts owed, payment history, plus other information. 3. Verify Accuracy of W-2s/1099s. By late January, most W-2/1099s are delivered to employees and contractors. Errors can occur in these documents. Upon receipt, review these reports so the issuer can correct errors long before the April 18, 2022, tax deadline. 4. Gather/Review Documents for Common Deductible Expenses. Provide us documents showing payment of these commonly deductible expenses in 2021: (a) mortgage interest (for tax year 2021, couples filing jointly may deduct interest payments on up to $750,000 of qualified home loans for mortgages after December 15, 2017), (b) real estate taxes, (c) IRA contributions (taxpayers under 50 may contribute $6,000 and those 50+ may contribute $7,000), (d) unreimbursed business expenses incurred to perform your job (examples: purchase of computers, office furniture, other equipment, supplies (including COVID related expenditures) as well as marketing/advertising expenses, business mileage (56 cents/mile), and (e) qualifying charitable donations. If you qualify for a home office deduction, you will also need home utilities, repairs/maintenance, and insurance. 5. Children Born or Adopted in 2021. New additions to your family in 2021? Provide us with the social security number for such children to support tax credits. Take-away: Prompt and diligent attention to the above issues will give you the best chance of not overpaying taxes in 2021. Call Master Your Money today to schedule a meeting to discuss other possible ways to reduce your 2021 taxes and the preparation of your return. Sources: IRS Pub.: Your Online Account (December 10, 2021). “What To Know About Tax Deductions for Homeowners In 2021,” Forbes (Aug 10, 2021). IRS Pub.: IRS Online Account Can Help Taxpayers Get Ready to File Their Tax return (April 23, 2021). “6 Tips To Get A Head Start On Your 2021 Taxes,” Forbes Advisor (Apr 8, 2021). At Master Your Money, we provide a full range of tax services to help clients reduce taxes. The individual tax year ends on December 31 so time is short for 2021 tax year strategies, including “gifting” to family members as well as to others. Gifting is tax-free up to a yearly limit on its value – and some gifts, discussed below, are tax-free regardless of value.
What is gift tax? Gift tax, for which donors are generally responsible for paying, is defined as “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” Additionally, the tax, subject to the below exceptions, applies broadly to the transfer by gift of any type of property, including, without limitation, money, bonds, stock, real estate, and other items, along with the use of or income from property, without expecting to receive something of at least equal value in return. Lastly, be aware that the determination of whether the gift tax applies does not depend on whether the donor intends the transfer to be a gift. What gifts are tax-free up to $15,000? Some gifts are tax-free. In 2021, individuals may provide a gift up to a fair market value of $15,000 annually to any individual with no gift tax owed. For married individuals, a spouse may gift twice this amount through gift-splitting, meaning a married couple could, for instance, collectively gift $30,000 to each of their children without triggering a gift tax. What gifts are deemed tax-free regardless of value? Generally, the following “gifts” are deemed tax-free regardless of their dollar value:
In addition, gifts to qualifying charities are deductible for the value of the gift(s) made (less the value of anything received from the charity like books, meals, etc.) Take-away: Gifting is effective for transferring property tax-free up to certain limits and for transferring other specially regarded property tax-free regardless of its fair market value. At Master Your Money, our tax professionals actively advise you about the tax strategies best fitting your specific circumstances. Call us today for a consultation. Sources: “Frequently Asked Questions on Gift Taxes,” (July 30, 2021). “Gift Tax,” IRS Publication (April 2, 2021). “IRS Announces Higher Estate And Gift Tax Limits For 2021,” Forbes (October 26, 2020). Master Your Money provides a full range of tax services to help clients reduce taxes by maximizing deductions. Due to the Covid-19 shutdown orders and to incentivize businesses to specifically patronize restaurants, hard hit by the pandemic, the IRS has increased the deductibility of business meals and beverages. Subject to certain conditions, businesses can claim 100% of their food and beverage expenses paid to restaurants, up from the previous 50% deduction, which still applies to qualifying food and beverage purchases from non-restaurants like grocery stores. What conditions apply to the new 100% deduction? What other tips are helpful to claim the deduction?
In general, beginning January 1, 2021, through December 31, 2022, businesses can claim 100% of their food or beverage expenses, including gratuities, paid to restaurants provided the business owner (or an employee of the business) is present when food or beverages are furnished and the expense is not lavish or extravagant under the circumstances. To get the 100% deduction, the following conditions apply: 1. As usual, to get meals deducted, the meal must have a business purpose. You must be conducting business (e.g. discussing a potential project) with some other individual, be it a contractor/employee or a lead/client. 2. The deduction applies whether you dine in at a restaurant or order takeout from one. Be aware that “restaurant” specifically excludes a business primarily selling pre-packaged food or beverages not for immediate consumption. The IRS specifically excludes grocery stores, specialty food stores, liquor stores, convenience stores, vending machines and kiosks because they are businesses likely to primarily sell pre-packaged items. Also, an employer-operated eating facility, even if operated by a third party under contract with the employer, is not a qualifying restaurant for purposes of the expanded meal deduction. Lastly, remember to properly document your business meals, ideally by: (a) keeping the receipt showing the name of the restaurant, the number of people at the table, and an itemized list of food and drinks consumed and (b) recording the name(s) of the person(s) with whom you had the meal, along with the meal’s business reason. Take-away: The 100% deduction for business meals purchased at restaurants offers a unique tax saving. Accordingly, you may wish to shift the purchase of business meals from grocery stores (only 50% deductible) to restaurants (100% deductible). Master Your Money can guide you in the use of this deduction as well as others. Call us today for an appointment. Sources: IRS Publication - Topic No. 509 Business Use of Home (last reviewed 26-Jun-2021). Notice 2021-25 - Temporary 100-Percent Deduction for Business Meal Expenses (2021). “A New Change In Tax Rules Can Impact Business Meal Deductions In 2021,” Forbes (June 9, 2021). At Master Your Money, we provide tax services to businesses and individuals. Maximizing deductions is a primary objective. Unfortunately, certain common tax deductions for homeownership are currently capped. Property taxes are limited to $10,000 per return ($5,000 for married filing separately) while mortgage interest is only deductible up to $750,000 ($375,000 for married taxpayers filing separately) of mortgages issued after December 15, 2017. On the other hand, these caps often don’t apply for homeowners renting out their residence for as little as 15 days annually.
Here are some examples of the possible tax benefits of renting your residence:
Sources: “Know the Tax Facts About Renting Out Residential Property,” IRS Publication. (Updated May 25, 2021). “Tips on Rental Real Estate Income, Deductions and Recordkeeping,” IRS Publication (January 8, 2021). “Mortgage Interest Deduction: Who Gets It?” The Wall Street Journal (April 3, 2021). Master Your Money provides proactive tax counselling and tax preparation services to businesses and individuals. Several professions have specific rules concerning what business expenses are deductible. Educators, a profession including teachers, instructors, counselors, principals and their aides, are one such profession. When can educators deduct expenses on their returns?
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Mark KrolakMark Krolak is a small business tax strategist and educator, teaching entrepreneurs and newly self-employed business owners strategies to grow their business and stop overpaying their taxes. |