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March 2021

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Tax Tips

 
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Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.


Avoiding an IRS Tax Audit

Just 0.45 percent of taxpayers were audited in fiscal year 2019. Still, with taxes becoming more complicated every year, there is an even greater possibility of confusion turning into a tax mistake and an IRS audit. Avoiding "red flags" like the ones listed below could help.

Red Flags That Trigger IRS Audits

  • Claiming Business Losses Year After Year

    When you operate a business and file Schedule C, the IRS assumes you operate that business to make a profit. Claiming losses year after year without any profit raises a red flag with the IRS.

  • Failing to Report Form 1099 Income

    Resist the temptation to underreport your income if you are self-employed or have a second job. The IRS receives the same 1099 forms that you do, and even if you didn’t receive a Form 1099 when you think you should have, you can't be sure the IRS didn't either. If the IRS finds a mismatch, you are sure to hear about it.

  • Early Withdrawals From a Retirement Account

    In general, if you withdraw money from a retirement account before age 59 1/2, you will need to pay a 10 percent penalty. You will also owe income tax on the amount withdrawn unless you qualify for an exception. Sometimes - but not always - these types of early withdrawals trigger an audit, typically a correspondence audit where the IRS sends you a letter.

  • Excessive Business Expense Deductions

    Too many deductions for your income and type of business, claiming 100 percent use of a car for business, and inflating business meals, travel, and entertainment expenses are examples of excessive business expenses that could raise a red flag. Always save receipts and document your mileage and expenses.

  • Overestimating Charitable Deductions

    Taxpayers that don't itemize can take an above-the-line deduction for charitable contributions made in tax year 2020 on their tax returns of up to $300 for qualified charitable cash donations that reduce taxable income. The maximum amount for 2020 tax returns is $300 (i.e., not $600), even if you are married filing jointly.

    For taxpayers that do itemize, taking disproportionately large deductions as compared to your income could raise a red flag. The IRS keeps records of average charitable donation at various income levels, and even if you inherited a large sum of money and want to donate it to charity, there's a chance you could get audited.

  • Failing to Report Winnings or Claiming Big Losses

    Professional gamblers report winnings/losses on Schedule C, Profit or Loss from Business (Sole Proprietorship). They can also deduct costs related to their profession, such as lodging and meals, for example. Gambling winnings are reported on Form W-2G, which is sent to the IRS. As such, you must report this income. You may deduct gambling losses, but you must itemize your deductions on Schedule A (Form 1040) and keep a record of your winnings and losses. Ordinary taxpayers (recreational gamblers) report income/losses as "Other Income" on Schedule 1 of their Form 1040 tax return.

What To Do if You Are Audited

If you've received correspondence from the IRS in the U.S. mail that indicates that you are being audited, don't try to handle it yourself. Instead, contact the office immediately for assistance.

Taxpayers who have been audited or otherwise interacted with the IRS should know that they have the right to know when the IRS has finished the audit. The right to finality is one of ten basic taxpayer rights - known collectively as the Taxpayer Bill of Rights. All taxpayers dealing with the IRS are entitled to these rights.

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Renting Out a Second Home

In general, income from renting a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. You should also keep in mind that the definition of a "vacation home" is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS. Tax rules on rental income from second homes can be confusing, especially if you rent the home out for several months of the year and use the home yourself.

Minimal Rental Use

However, there is one provision that is not complicated; homeowners who rent out their property for 14 or fewer days a year can pocket the rental income tax-free. In other words, if you live close to a vacation destination such as the beach or mountains, you may be able to make some extra cash by renting out your home (principal residence) when you go on vacation as long as it's two weeks or less. Although you can't take depreciation or deduct for maintenance, you can deduct mortgage interest, property taxes, and casualty losses on Schedule A (1040), Itemized Deductions.

Dividing Expenses Between Rental and Personal Use

A vacation home is considered a residence if personal use exceeds 14 days or more than 10 percent of the total days it is rented to others (if that figure is greater). When you use a vacation home as your residence and also rent it out to others, you must divide the expenses between rental use and personal use. You may not deduct the rental portion of the expenses that are more than the rental income.

Let's say you own a beach house (your "second home") and rent it out during the summer between mid-June and mid-September. You and your family also vacation at the house for one week in October and two weeks in December. The rest of the time, the house is unused.

The family uses the house for 21 days, and it is rented out to others for 121 days for a total of 142 days of use during the year. In this scenario, 85 percent of expenses such as mortgage interest, property taxes, maintenance, utilities, and depreciation can be written off against the rental income listed on Schedule E. As for the remaining 15 percent of expenses, only the owner's mortgage interest and property taxes are deductible on Schedule A.

Tax Reform and Vacation Rentals

Under tax reform, the amount of interest a homeowner can write off is limited to mortgage loan amounts of $750,000 or less for tax years 2018-2025. If you own a second home as well, the two mortgages combined could exceed the $750,000 cap. In addition, property tax deductions (combined with state income taxes) are capped at $10,000.

If you do not rent out your second home, you could be losing out on deductions (taxes and mortgage interest) that lower your taxable income. Therefore, it is prudent to consider renting out your second home as a vacation rental since you would then be able to deduct these expenses and possibly others such as Homeowners Association fees, maintenance expenses, and utilities. Furthermore, you can still use the home 14 days a year (more if you stay there for home maintenance-related activities) and deduct these expenses. Even if you use it more than 14 days a year, you can still deduct these expenses proportional to the amount of rental use.

Net Investment Tax

If you have a rental income, you may be subject to the Net Investment Income Tax (NIIT), a 3.8 percent tax that applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.

Questions?

Tax laws are complicated. If you have any questions about renting out your second home or any other tax matters, please call.

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Tax Breaks for Families With Children

If you have children, one or more of these tax credits and deductions could help your family reduce the amount of tax owed when you file your 2020 tax return. Let's take a look:

1. Child Tax Credit

Generally, taxpayers can claim the Child Tax Credit for each qualifying child under the age of 17. The maximum credit is $2,000 per child. Taxpayers who get less than the full amount of the credit may qualify for the Additional Child Tax Credit (see below). The refundable portion of the credit is $1,400 so that even if taxpayers do not owe any tax, they can still claim the credit. A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older).

2. Child and Dependent Care Credit

If you pay someone to take care of your dependent to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. The credit percentage is reduced for higher-income earners but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable.

Even if you don't have dependent children if you care for an elderly relative and can claim them as a dependent, you might be able to take the Child and Dependent Care Credit. Please call for details.

3. Earned Income Tax Credit

Taxpayers who worked but earned less than $56,844 in 2020 could qualify for this credit, which is worth up to $$6,660 in 2020. Taxpayers may qualify with or without children.

Due to the pandemic, taxpayers can use their 2019 earned income to figure your EITC, if their 2019 earned income was more than their 2020 earned income.

4. Additional Child Tax Credit

This refundable tax credit is for certain individual taxpayers for whom the Child Tax Credit exceeds the amount of income tax owed. The credit is worth $1,400 and may give you a refund even if you do not owe any tax.

Due to the pandemic, taxpayers may be able to use their 2019 earned income to figure this credit if their 2019 earned income is more than your 2020 earned income.

5. Adoption Credit.

It is possible to claim a tax credit for certain costs paid to adopt a child. For details, see Form 8839, Qualified Adoption Expenses.

6. Education Tax Credits

An education credit can help with higher education costs. Two credits are available: the American Opportunity Tax Credit and the Lifetime Learning Credit. These credits may reduce the amount of tax owed. If the credit cuts a taxpayer's tax to less than zero, it could mean a refund. Taxpayers may qualify even if they owe no tax. Complete Form 8863, Education Credits, and file a return to claim these credits.

7. Student Loan Interest

Taxpayers may be able to deduct interest paid on a qualified student loan. They can claim this benefit even if they do not itemize deductions. If you're not sure if the interest you paid on a student or educational loan is deductible, don't hesitate to call.

Questions?

If you have any questions about tax credits and deductions that could benefit your tax situation, please contact the office.

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Small Business Tax Roundup

Tax changes due to recent legislation such as the Tax Cuts and Jobs Act and the CARES Act affect both individual taxpayers and small businesses. In 2020, the IRS issued several guidance documents and final rules and regulations that clarified several tax provisions affecting businesses. Here are five of them:

PPP Expenses Now Deductible

Deductions for the payments of eligible expenses are now allowed when such payments would result (or be expected to result) in the forgiveness of a loan (covered loan) under the Paycheck Protection Program (PPP). Previous IRS guidance disallowed deductions for the payment of eligible expenses when the payments resulted (or could be expected to result) in forgiveness of a covered loan.

The COVID-related Tax Relief Act of 2020 amended the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to say that no deduction is denied and no tax attribute is reduced. Furthermore, no basis increase is denied because of the exclusion from gross income of the forgiveness of an eligible recipient's covered loan. This change applies to taxable years ending after March 27, 2020.

Meals and Entertainment

The Tax Cuts and Jobs Act (TCJA) eliminated the deduction for any expenses related to activities generally considered entertainment, amusement, or recreation for tax years after 2017. While taxpayers may still deduct business expenses related to food and beverages as long as certain requirements are met, certain questions remained.

Recent IRS regulations provided clarification for several of these issues: disallowance of the deduction for expenditures related to entertainment, amusement, or recreation activities, and including the applicability of certain exceptions to this disallowance. The regulations also provide guidance to determine whether an activity is considered entertainment. The final regulations also address the limitation on the deduction of food and beverage expenses.

Like-kind Exchanges of Real Property

The 2017 Tax Cuts and Jobs Act (TCJA) limited like-kind exchange treatment to exchanges of real property. As such, effective January 1, 2018, exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain as like-kind exchanges.

Furthermore, like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment. An exchange of real property held primarily for sale does not qualify as a like-kind exchange.

Under the IRS's final regulations, real property includes land and generally anything permanently built on or attached to land. In general, it also includes property that is characterized as real property under applicable State or local law. Certain intangible property, such as leaseholds or easements, also qualify as real property under section 1031.

Property not eligible for like-kind exchange treatment prior to the enactment of the TCJA remains ineligible. Neither the TCJA nor the final regulations change whether the properties exchanged are of like kind.

Qualified Transportation Fringe and Commuting Expenses

The 2017 TCJA generally disallows deductions for qualified transportation fringe (QTF) expenses and does not allow deductions for certain expenses of transportation and commuting between an employee's residence and place of employment.

Final regulations address the disallowance of the deduction for expenses related to QTFs provided to an employee of the taxpayer, including providing guidance and methodologies to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee's residence and place of employment.

Relief for Developers of Offshore Renewable Energy Projects

Renewable energy projects constructed offshore or on federal land are ordinarily subject to significant delays that can result in project completion times of up to twice as long as other renewable energy projects. These delays threaten taxpayers' ability to satisfy requirements to claim the production tax credit and the investment tax credit.

To address this hurdle, the Treasury Department and the IRS have determined that it is necessary to extend the safe harbor period to up to 10 calendar years after the year in which construction of the project began.

The extension of the safe harbor for these projects provides flexibility for taxpayers constructing renewable energy projects offshore or on federal land to satisfy the beginning of construction requirements despite ordinary course delays that threaten their ability to claim tax credits.

Questions?

For more information about small business tax updates under tax reform, the CARES Act, or the COVID-related Tax Relief Act of 2020, please call.

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Capital Gains Tax on Sale of Stocks

Apps like Robinhood make it easy for everyone to play the stock market. If you're a retail investor who made money last year buying and selling stocks, you may owe capital gains tax when you file your tax return this year. If you lost money, you may be able to deduct that loss and reduce your income.

Here's what you need to know about capital gains tax:

Capital Gains and Losses Defined

A capital gain or loss is the difference between your basis - the amount you paid for the asset - and the amount you receive when you sell an asset. All capital gains (or losses) must be reported on your tax return.

Losses Limited to $3,000

If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return to reduce other income, such as wages. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

Carryover of Losses Allowed

If your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return.

Long and Short Term Gains and Losses

Capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

Net Capital Gain

If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. Subtract any short-term losses from the net capital gain to calculate the amount of net capital gain you must report.

Capital Gains Tax Rates

The tax rates that apply to net capital gain depend on your income, but are generally lower than tax rates that apply to other income such as wages. The maximum tax rate on a net capital gain is 20 percent; however, for most taxpayers a zero or 15 percent rate will apply. If your income is above a certain amount you may be subject to the 3.8 percent Net Investment Income Tax (NIIT) on these capital gains.

Reporting Capital Gains and Losses

Report capital gains or losses using Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040), Capital Gains and Losses to summarize capital gains and losses.

Please contact the office if you need more information about reporting capital gains and losses.

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Tax Credits for Electric Vehicles and Plug-in Hybrids

Tax credits are still available for Qualified Plug-in Electric Drive Motor Vehicles, including passenger vehicles and light trucks. The credit applies to vehicles acquired after 12/31/2009 and is limited to $7,500. State and/or local incentives may also apply.

The credit amount is varied and is based on the capacity of the battery used to power the vehicle: $2,500 plus, for a vehicle that draws propulsion energy from a battery with at least 5-kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt-hour of battery capacity above 5-kilowatt hours.

The credit begins to phase out for a manufacturer's vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009). Phaseouts have been initiated for Tesla, Inc. and General Motors, which means that for tax year 2020, the credit has been reduced to $0. In 2019, the credit was equal to $1,875.

The following requirements must also be met:

  • The vehicle must be new (i.e., not a used vehicle that is "new" to the taxpayer).
  • The vehicle is acquired for use or lease by the taxpayer, and not for resale. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
  • The vehicle is used mostly in the United States.
  • The vehicle must be placed in service by the taxpayer during or after the 2010 calendar year.

The credit is claimed on Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit and reported on the appropriate line of your Form 1040, U.S. Individual Income Tax Return. For vehicles purchased in 2010 or later, this credit can be used toward the alternative minimum tax (AMT).

If the qualifying vehicle is purchased for business use, the credit for the business use of an electric vehicle is reported on Form 3800, General Business Credit.

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Special Tax Rules for Children With Investment Income

Special tax rules may apply to some children who received investment income in 2020 or expect to receive it in 2021. The rules may affect the amount of tax and how to report the income. Here are five important points to keep in mind if your child has investment income:

1. Investment Income. Investment income generally includes interest, dividends, and capital gains. It also includes other unearned income, such as from a trust.

2. Parent's Tax Rate. If your child's total investment income is more than $2,100, then your tax rate may apply to part of that income instead of your child's tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.

3. Parent's Return. You may be able to include your child's investment income on your tax return if it was more than $1,100 but less than $11,000 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents' Election to Report Child's Interest and Dividends, for more information.

4. Child's Return. If your child's investment income was $11,000 or more in 2020, then the child must file their own return. File Form 8615 with the child's federal tax return.

5. Net Investment Income Tax. Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use Form 8960, Net Investment Income Tax, to figure this tax.

If you have any questions about your child's investment income, help is just a phone call away.

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Claiming the Credit for Other Dependents

Taxpayers with dependents who don't qualify for the child tax credit may be able to claim the credit for other dependents. The maximum amount of the credit is $500 for tax year 2020. To take the credit, your dependent must meet certain conditions.

For example, the dependent you are claiming must be age 17 or older and have an individual taxpayer identification number. Other dependents also include dependent parents or other qualifying relatives supported by the taxpayer and dependents living with the taxpayer who aren't related to the taxpayer.

Here are some additional facts about the credit for other dependents:

1. The credit begins to phase out when the taxpayer's income is more than $200,000 ($400,000 for married couples filing a joint tax return).

2. Taxpayers can claim the credit for other dependents in addition to the child and dependent care credit and the earned income credit.

3. The dependent must be a U.S. citizen, national or resident alien.

4. A taxpayer can claim this credit if they claim the person as a dependent on the taxpayer's return.

5. The dependent cannot be used to claim the child tax credit or additional child tax credit.

For more information about this and other tax credits that could lower your taxes this year, please contact the office.

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Unemployment Benefits Identity Theft Scam Alert

During 2020, millions of taxpayers were impacted by the COVID-19 pandemic through job loss or reduced work hours. Some taxpayers who faced unemployment or reduced work hours applied for and received unemployment compensation from their state. As a reminder, unemployment benefits are taxable income and must be reported on tax returns.

Starting in January 2021, unemployment benefit recipients should have received a Form 1099-G, Certain Government Payments in the mail from the agency paying the benefits. The form shows the amount of unemployment compensation they received during 2020. In some states, taxpayers may be able to receive their Form 1099-G by visiting their state's unemployment website where they signed up for account benefits to obtain their account information.

Unfortunately, scammers are taking advantage of the pandemic by filing fraudulent claims for unemployment compensation using stolen personal information of individuals who had not filed claims. Due to these fraudulent claims, payments went to the identity thieves. The individuals whose names and personal information were taken did not receive any of the payments.

Taxpayers who receive an incorrect Form 1099-G for unemployment benefits they did not receive should contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits. It is important to note that individuals who a state has identified as ID theft victims should not have been issued Forms 1099-G.

Taxpayers who cannot obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received. A corrected Form 1099-G showing zero unemployment benefits in cases of identity theft will help taxpayers avoid being hit with an unexpected federal tax bill for unreported income.

Taxpayers do not need to file a Form 14039, Identity Theft Affidavit, with the IRS regarding an incorrect Form 1099-G. The identity theft affidavit should be filed, but only if the taxpayer's e-filed return is rejected because a return using the same Social Security number has already been filed.

Additionally, if taxpayers are concerned that their personal information has been stolen and want to protect their identity when filing their federal tax return, they can request an Identity Protection Pin (IP PIN) from the IRS. An Identity Protection PIN is a six-digit number that prevents someone else from filing a tax return using a taxpayer's Social Security number. The IP PIN is known only to the taxpayer and the IRS, and this step helps the IRS verify the taxpayer's identity when they file their electronic or paper tax return.

Don't hesitate to call if you have any questions about this topic.

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There's Still Time To Make an IRA Contribution for 2020

If you haven't contributed funds to an Individual Retirement Account (IRA) for tax year 2020, or if you've put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15, 2021, due date, not including extensions.

Be sure to tell the IRA trustee that the contribution is for 2020. Otherwise, the trustee may report the contribution as being for 2021 when they get your funds.

Generally, you can contribute up to $6,000 of your earnings for tax year 2020 (up to $7,000 if you are age 50 or older). You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.

Traditional IRA. You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer's pension plan.

Roth IRA. You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Each year, the IRS announces the cost of living adjustments and limitations for retirement savings plans.

Saving for retirement should be part of everyone's financial plan, and it's important to review your retirement goals every year to maximize savings. If you need help with your retirement plans, give the office a call.

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Tax Due Dates for March 2021

March 1

Businesses - File information returns (for example, certain Forms 1099) for certain payments you made during 2020. However, Form 1099-NEC reporting nonemployee compensation must be filed by February 1. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the General Instructions for Certain Information Returns for information on what payments are covered, how much the payment must be before a return is required, what form to use, and extensions of time to file.

Payers of Gambling Winnings - File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2020. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms remains February 1.

Farmers and Fishermen - File your 2020 income tax return (Form 1040 or Form 1040-SR) and pay any tax due. However, you have until April 15 to file if you paid your 2020 estimated tax by January 15, 2021.

Health Coverage Reporting - If you are an Applicable Large Employer, file paper Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you are filing any of these forms with the IRS electronically, your due date for filing them will be extended to March 31.

Large Food and Beverage Establishment Employers - with employees who work for tips. File Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer's Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically your due date for filing them with the IRS will be extended to March 31.

March 2

Health Coverage Reporting to Employees - If you are an Applicable Large Employer, provide Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to full-time employees. For all other providers of minimum essential coverage, provide Form 1095-B, Health Coverage, to responsible individuals.

March 10

Employees who work for tips - If you received $20 or more in tips during February, report them to your employer. You can use Form 4070.

March 15

Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in February.

Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in February.

Partnerships - File a 2020 calendar year income tax return (Form 1065). Provide each partner with a copy of their Schedule K-1 (Form 1065-B) or substitute Schedule K-1. To request an automatic 6-month extension of time to file the return, file Form 7004. Then file the return and provide each partner with a copy of their final or amended (if required) Schedule K­1 (Form 1065) by September 15.

S Corporations - File a 2020 calendar year income tax return (Form 1120S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120S), Shareholder's Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic 6-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe in tax.

S Corporation Election - File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2021. If Form 2553 is filed late, S corporation treatment will begin with calendar year 2022.

March 31

Electronic Filing of Forms - File Forms 1097, 1098, 1099 (except Form 1099-MISC), 3921, 3922, and W-2G with the IRS. This due date applies only if you file electronically. The due date for giving the recipient these forms generally remains February 1.

Electronic Filing of Form W-2G - File copies of all the Form W-2G (Certain Gambling Winnings) you issued for 2020. This due date applies only if you electronically file. The due date for giving the recipient these forms remains February 1.

Electronic Filing of Forms 8027 - File copies of all the Forms 8027 you issued for 2020. This due date applies only if you electronically file.

Electronic Filing of Forms 1094-C and 1095-C and Forms 1094-B and 1095-B - If you're an Applicable Large Employer, file electronic forms 1094-C and 1095-C with the IRS. For all other providers of minimum essential coverage, file electronic Forms 1094-B and 1095-B with the IRS.


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How Compound Interest Can Put Your Money to Work

Compound interest is one of the most intriguing concepts in financial management. Although it can be beneficial for savings and investment purposes, it can also be detrimental if applied to a loan. You’re more likely to enjoy its benefits if you have good credit. Compound growth also increases your net worth more significantly if you keep reinvesting your returns. The more time you dedicate, the higher your growth potential.

With debit cards, you only use the amount in your checking account unless you have an overdraft. Credit cards help you build credit, have better protection against fraud, earn rewards, and provide access to short-term financing. However, most credit card issuers compound your interest daily. Consequently, the longer you go without paying off this debt, the bigger your financial burden becomes.

What is Compound Interest?

This concept refers to the interest you earn on both the principal and previously-received interest. For example, if you invest $100 for three years with 10% interest per annum, you’ll receive $10 in the first year. If you add it to the principal amount, the total will be $110, meaning you’ll earn an interest of $11 in the second year. Your new total will be $121, which will attract $12.10 for the third year of investment. Your total compound interest for the three years will be $33.10.

Compound interest is remarkably different from simple interest, which only charges a fixed percentage on the principal. Using the above example, you’d earn $10 in each of the three years using simple interest, or a total of $30. This amount is lower than the $33.10 compound growth.

When You Start Saving is More Important Than How Much

Time is the magic ingredient when it comes to compound interest. The earlier you begin, the more likely you are to reap the long-term benefits. No matter how small the amount is, the compounding effect will increase it to a sizable fortune.

Let’s use the $100 example at 10% yearly compound interest. By the third year, you’ll have earned $33.10 total interest. By the fifth year, the principal plus interest will be $161.051, which will rise to $214.36 by the end of the eighth year. The more time you dedicate to your investment, the faster and higher your compounded figure grows.

How to Get Started

The following investment and savings options can help you achieve financial freedom by utilizing the concept of compound growth:

1. Roth IRA

This retirement plan is funded with after-tax dollars, meaning you won’t pay tax when you withdraw your contribution. The interest you earn annually also earns more interest in consecutive years through compounding.

2. 401(k)

Unlike a Roth IRA, pre-tax dollars fund traditional 401(k)s. Your employer can also boost your long-term savings by offering to match your monthly contributions. They also grow through compound interest earned from investing in stocks and reinvesting your dividends.

3. SEP IRA

This individual retirement account (IRA) is suitable for self-employed individuals or small business owners. It’s more attractive if you have few or no employees. That’s because the IRS will compel you to contribute on behalf of eligible personnel. A SEP IRA allows a maximum contribution of $6000 per year.

4. 529 plan

This plan allows you to contribute towards future education costs. Withdrawals must go towards select education expenses, or they’ll attract income tax and penalties. The earlier you set it up for your child, the more you’ll have to withdraw when they go to college.

5. Low-Cost Index Funds

These funds offer diversified investment options while charging low fees. Their primary advantage is the power of compound interest that increases your holdings over time. You can either choose to buy stock index funds if you’re younger or bond index funds if you have a low-risk appetite.

6. Automated Investing Services

These digital solutions help you invest through algorithms that trade based on variables such as your age, risk tolerance, and income. Also known as robo-advisors or auto investors, they take away the tedious task of micromanaging your portfolio. You can reinvest your earnings and grow your investment through compound interest.

As you’ve figured out with all the above investment and savings solutions, time is of the essence. No matter how small your initial contribution is, it will grow significantly depending on how early you start.

How a Professional CPA Can Help

While you can participate in most of these plans as an amateur investor, a professional CPA will help you make wiser financial decisions. They have a better understanding of the elements that influence the amount of interest you’ll earn. Other than the time period, such factors include account fees, the interest rate, the amount in your account, and the tax rate. The amount you pay your financial advisor will be more than worth it in the long-term.

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How Quarterly Taxes Work

The IRS requires all individuals with a legitimate source of income to pay taxes. This obligation is easy to fulfill if you’re employed. Your employer will withhold some amount from your salary, then forward it to the federal tax agency.

What if you’re self-employed? As a freelancer, sole proprietor, or part-time business owner, you’re responsible for submitting taxes to the government.

Quarterly taxes refer to estimated amounts that you forward every three months, even though you’ll file annual returns. If you happen to overpay for a particular year, the IRS will refund the excess through Notice CP17.

Who Pays Taxes Quarterly?

All self-employed individuals must pay quarterly taxes, which fall under two categories. The first is the self-employment tax. It consists of Medicare and Social Security. FICA taxes share the burden with the employer, but you’re wholly responsible for your self-employment tax. It makes up 15.3% of your income. Social security accounts for 12.4% of earnings up to $137.700, while the Medicare portion is 2.9% of all gains.

The second category of quarterly taxes is the income tax derived from business income and other self-employed earnings. The IRS provides Form 1040-ES to guide you through the necessary calculations. Your quarterly taxes can rise or fall during the year. For example, your taxable income can increase if you clinch a lucrative contract or reduce if you lose a big customer.

Planning for Quarterly Taxes

You can help ensure your taxes are paid accurately by planning ahead. Additional ways to prepare include:

  • Ensure your bookkeeping is accurate. Some accounting software allows the automatic generation of revenue and expense reports. You can also hire a professional bookkeeper.
  • Create an income statement. Your profit helps estimate the expected taxes. You can also base them on last year’s payments.
  • Pick a payment option. You can either submit your tax via mail with Form 1040-ES or through phone or the IRS2Go app. Other methods are cash, check, ETF, money order, and same-day wire. The electronic federal tax payment system is the best option for businesses.
  • After paying, save the receipt or take a screenshot of the confirmation for future reference.

Multiplying the AGI by the prevailing tax rate gives you an estimate of the income tax owed. Calculate your self-employment tax from your total expected income. Adding the two estimates gives you the cumulative expected annual tax. Divide the figure by 4 to establish your quarterly tax amounts.

How to Pay

Pay your quarterly taxes by the following dates to avoid a penalty for underpayment of Estimated tax:

  • First payment-April 15th
  • Second payment-June 15th
  • Third payment-September 15th
  • Fourth payment-January 15th

If the due dates fall on a holiday or weekend, they automatically move to the next available workday. To determine your quarterly tax, start by calculating the total expected income. Find the adjusted gross income (AGI) by subtracting the appropriate tax deductions.

Avoid High Liability and Penalties

Although it’s a complicated process, the IRS allows you to calculate the penalty for underpayment of estimated taxes via Form 2210. Subsequently, every quarter that you underpaid will attract a fine. These penalties increase if you fail to pay any quarterly taxes for whatever reason. If the amount paid wasn’t enough, all future tax payments will settle these past obligations first.

Circumstances such as natural disasters and other unforeseen events might make you eligible for a waiver if you have underpaid. The best solution is to hire a professional accountant to ensure your financial statements are in order and your taxes are filed on time. A CPA can also reduce your tax obligation by identifying relevant deductions, subsidies, and credits.

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Best Bookkeeping Practices for Your Business

Bookkeeping for a business requires a significant amount of time and resources. Professional and accurate accounting is a crucial aspect of management for small, medium, and large organizations. Following bookkeeping best practices ensures you safeguard the interests of your employees, customers, and other stakeholders. The most beneficial practices include:

Determine Your Accounting Method

You can use one of two accounting processes: the cash or accrual method. The first one recognizes transactions the moment money changes hands for receivables and payables. It’s more suited to smaller businesses that mainly operate on a cash basis due to its straightforward nature. It also helps in managing your cash flow.

The accrual method uses the matching principle to record transactions. It recognizes expenses and revenues immediately when they occur, regardless of whether the parties make actual payments. Although it’s more complicated than the cash method, it’s appropriate for larger businesses that regularly invoice their clients. Some organizations implement a hybrid solution that incorporates aspects of both accounting methods.

Separate Business and Personal Finances

A business and its owner or manager are two separate entities. As such, it is essential to avoid using company funds for personal expenses. The legal consequences of doing so include losing the limited liability protection that some business structures offer. You might also experience cash flow problems, as well as complications with the IRS and state auditors.

It’s advisable to have separate credit cards and bank accounts for personal and business use. This discipline makes your work easier when filing tax returns. There are various accounting software solutions you can use to make such distinctions. Examples are QuickBooks®, Zoho Books®, Xero®, and FreshBooks®.

Evaluate Data Frequently

Avoid complications by ensuring your financial statements are always up to date. Balance them regularly to identify and resolve discrepancies as soon as they appear. To be safe, check your bank transactions every day, evaluate bank statements every week, and ensure all other financial documents are in order at the end of every month.

A monthly evaluation of your business data shows you the main drivers of profitability. Swift action discourages employees, suppliers, and partners from attempting shady practices such as unauthorized payments and fraud. You’ll also avoid any financial penalties that your bank might charge on discovering such actions.

Optimize Chart of Accounts

A chart of accounts is a list of every financial entry in your company’s general ledger. It categorizes all the transactions in a given accounting period in a way that’s easy to understand. Although it’s useful, most organizations maintain an alphabetical format for tax compliance purposes. However, you can optimize it to help you figure out some critical metrics such as ROI and your break-even point.

For example, you can track customer acquisition costs by putting the marketing and sales accounts in one segment. You can also separate General and Administrative (G&A) expenses from industry or product-specific expenses. This move helps you control costs by reducing or eliminating discretionary ones.

Plan for Taxes Year Round

One of the biggest mistakes some business owners make is to ignore taxes until the end of the financial year. You’re more likely to make mistakes if you rush to compile all the information during tax season. It will be also harder to find missing financial statements and settle discrepancies during this short window. To avoid IRS audits and penalties, update all tax-related documents throughout the year.

That means maintaining accurate records of your loans, expenses, revenue, and profit. Accounting software makes this work easy. As you make entries every day, it automatically calculates tax figures for the whole year. Another benefit of being disciplined and organized is that you’re more likely to benefit from tax deductions, exemptions, and credits.

Transform Your Bookkeeping with Professional CPA Services

While these tips can improve efficiency, hiring a qualified CPA to handle your bookkeeping is an even better decision. You can focus on your core duties as these professionals manage your finances. Their knowledge of legitimate tax-saving strategies helps your business save costs and remain competitive.

By studying your books and comparing them with industry data, they can identify trends with long-term growth potential. Investors, suppliers, and other stakeholders are also more likely to trust a business that conforms to accounting regulations. The overall benefits you’ll gain from a licensed accountant outweigh the costs of hiring them and saves you time and money in the long run.

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Cash Flow Management and Your Business

A healthy cash flow is essential to your business for various reasons. It helps you settle debts on time, finance expansion, and manage day-to-day operations. The main objective is to have more revenue coming in than going out.

Smart business owners understand that profits are meaningless without cash. A healthy cash flow allows you the flexibility to take advantage of opportunities and weather economic storms. You’ll also sleep better at night knowing you can pay your employees and continue to generate products or services.

Fluctuations in net cash flow are related to changes in working capital, which affects your cash flow management. Purchases of fixed assets reduce your working capital, and conversely, selling property and equipment improves your working capital and overall cash flow position.

Cash Flow Basics

Cash flow refers to the movement of funds in and out of an organization. There are two main types: positive and negative cash flow. The former is the most ideal and occurs when your company receives more cash than it pays out. Negative cash flow, on the other hand, occurs when you pay more than you receive. Payments include monthly expenses, salaries, and accounts payable, while examples of revenue streams are accounts receivable and sales.

A negative cash flow can eventually spell doom for your business. Other than late payments on utilities and other expenses, it will force you to take loans to bridge funding shortfalls.

It’s easier to track your cash flow if you use the cash accounting method. However, the accrual method provides a more accurate picture of your long-term financial health. That’s because it records all inflows when earned and outflows when incurred.

Tips for Managing Your Cash Flow

Without proper planning, your business might experience negative cash flow even while other financial indicators show growth. The following tips can help you improve revenue while reducing cash outflows:

  • Reduce or eliminate slow-moving inventory: You can do so by offering discounts then use the extra revenue to produce fast-moving products or expand into new markets. This move also reduces storage expenses.
  • Encourage faster payment of outstanding bills: To accomplish this, you can offer discounts to those who settle earlier than the scheduled payment date. It’s essential to send out invoices promptly with a precise due date and notice of late fees.
  • Eliminate unnecessary expenses: Look for cheaper and more efficient equipment alternatives, train employees to improve productivity, and streamline daily operations.
  • Increase sales or product prices where feasible: Revenue-increasing strategies include aggressive marketing, creating new product lines, and offering bundled products. The extra cash will help you acquire higher-quality machinery, manage inventory, incentivize employees, and finance other operations.
  • Improve vendor relationships: It’s in your best interests to pay early for supplies if your vendor offers discounts. You can also negotiate lower prices or more incentives if you’re a long-term customer. If there’s no primary benefit, it makes sense to delay the payment as much as your invoice allows.
  • Consider leasing over buying: By leasing property and equipment, you can free up enough capital to invest in other ventures and finance vital operations. You also benefit from the latest equipment technology that is more efficient at a lower initial cost.

The Importance of Statements and Balance Sheets

A cash flow statement measures inflows and outflows during a given period. This document is a crucial tool for short-term planning. It shows whether you have enough cash to sustain operations and the functions that need more or less funding. The cash flow statement does a better job of helping you create excess cash than the P&L report. Other benefits include better cash budget assessments and working capital evaluations.

A balance sheet takes a snapshot of your company’s health at any given time. It shows the exact quantity of assets and liabilities of your business. You can also make valuable comparisons between debt and assets and compare your financial position to industry peers. Both statements are crucial to assessing your overall financial health.

Outsourcing Your Cash Flow Management

Although you can compile your cash flow statements through accounting software, it’s more beneficial to outsource the task to a qualified CPA. In addition to their years of professional experience, these accountants can identify valuable trends and reduce risks. They can provide crucial tips on how your business can improve investing, financing, and operational efficiency. A professional will also ensure your short-term goals align with your long-term objectives and help you make better business decisions.

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How to Maintain Good Credit

Your credit score is essential to your financial well-being. It makes the difference between high and low-interest rates because lenders use it to determine your ability to service loans. Apart from credit card application, your credit score shows whether you’re eligible for a mortgage, payday, auto, small business, veterans, and student loans. It’s advisable to maintain good credit because it will always be a vital aspect of your financial life.

Credit Basics

Although there are various types of credit scores, the FICO score is the most popular. Issued by the Fair Isaac Corporation, a majority of top lenders analyze it before making lending decisions. It’s a three-digit figure that summarizes your credit report.

You can get your credit score from any of these three bureaus: TransUnion, Equifax, and Experian. These organizations use information submitted by lenders to calculate your score. As such, your credit reports from all three might not always match, since some lenders may not submit the relevant details to all bureaus.

The lowest possible credit score is 300, while the highest is 850. In reality, no one hits these extremes. A good score ranges between 680 and 739, with anything higher being excellent. A poor score ranges from 550 to 619. Lower scores are deemed unacceptable.

What Factors Impact Your Credit Score

Five major factors affect your credit score. The first is your payment history. Lenders will give you a good rating if you’ve serviced your past debt on time. One missed payment is enough to lower your FICO or Vantage Score points. Secondly, lenders monitor the amount of current available credit that you utilize. They tend to judge you negatively if it rises above 30%.

Your credit history length is the third determinant. The longer it is, the more likely you are to have good credit. Another factor is your credit mix, which consists of the various debts that you service. Examples include a mortgage, auto loan, student loan, and credit card. A diverse, well-managed portfolio improves your credit score. Finally, the number of new credit products or inquiries accounts for up to 10% of your FICO score. Borrowers with good credit tend to have as few as possible.

Steps You Can Take

The following tips are guaranteed to improve your credit score:

1. Spend Under Your Limit: Try to keep your credit card balances under 30% of your combined limits. That’s because card issuers usually forward these figures to credit report bureaus at the end of every billing month. Monitor your balance online and reduce it appropriately.

2. Pay on Time: Loans are not the only entries that impact your credit score. Failure to pay utilities such as gas and electricity on time can hurt your ability to borrow affordably.

3. Keep in Touch: Understand the five major factors that influence your credit score and manage them efficiently. Update your contact information so that lenders can find you in case of any miscommunication.

4. Stay Organized: Have a list of all debts, bills, and other financial obligations and pay them on time. Authorize your checking account to make automated payments if possible.

5. Consolidate: Several small debts may seem harmless until the interest piles up. You also run the risk of forgetting some. You can maintain good credit by taking one loan to pay them all off.

6. Check Your Credit Report: Evaluate your credit report regularly to eliminate any errors that might hurt you financially.

Credit Boosting Services

These services allow you to improve your FICO score by evaluating bills that wouldn’t ordinarily be part of your credit report. They include utility, video streaming, and telephone bills. The best examples are Experian Boost and UltraFICO. After connecting your checking account to the service, pick your most ideal financial indicators and wait for positive credit reports.

Take Control of Your Credit

An excellent credit score doesn’t happen overnight. It’s a result of consistently observing healthy financial habits. It also requires discipline to pay off your current debt and avoid unnecessary spending. It’s advisable to implement the above tips steadily instead of taking shortcuts. Although the progress might seem slow at first, the benefits will be worth it. Other than access to affordable credit, you’ll also achieve lasting peace of mind.

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