Tax Tips

As you know, most income you earn or receive over the course of a year is subject to being taxed. While in many situations the taxes are paid through withholding, other situations may require you to make estimated tax payments. Most often, this occurs when an insufficient amount of taxes are withheld from your salary, you receive other forms of income, or you own a business. When you don't pay your fair share of taxes, the IRS can subject you to penalties that may quickly accumulate. To make sure you know everything you need to know about estimated tax payments, read over the following information and always consult with a CPA should you have additional questions.

Who Must Pay Estimated Taxes?

As to who is expected to pay estimated taxes, this applies to individuals such as those who have sole proprietorships, partners, and shareholders in S Corporations. In these situations, estimated tax payments are usually made if the expected amount of taxes to be owed when filing a tax return exceeds $1,000.

When it comes to corporations, estimated tax payments need to be made when the amount of taxes owed is expected to be at least $500. Finally, estimated taxes may need to be paid for the current year if your prior year's taxes were more than zero, so keep this in mind as well.

Who Does Not Have to Pay Estimated Taxes?

While you may assume almost everyone has to make estimated tax payments, that is not the case. In fact, you can avoid these payments by simply asking your employer to withhold more of your income for taxes and by filing an updated W-4 form with your employer. If you file this form, pay attention to the line for the additional amount you want withheld, and make sure you enter the correct amount.

In other situations, you will not have to make estimated tax payments if you had no tax liability for the previous year, were a citizen or resident of the U.S. for the entire year, and your previous tax year did in fact cover an entire 12-month period. Since you don't want the IRS to accuse you of avoiding your tax payments, always consult with a CPA if the need arises.

Figuring Your Estimated Taxes

While it can be confusing in some aspects, figuring your estimated tax payments is actually easier than you may imagine. To do so, you'll need Form 1040-ES, which is used by all taxpayers except corporations, which use Form 1120-W. To accurately figure your estimated tax payments, you will be required to first figure your taxable income, adjusted gross income, deductions, taxes, and credits for the tax year. Along with the worksheet contained in Form 1040-ES, the process will be easier if you also use your federal tax return from last year and the income, credits, and deductions from that year as well. Even if these have changed, they will serve as an excellent starting point to give you the help you may need. But since it is likely tax laws may have changed and your own financial situation may also be different, don't rely solely on how you interpret certain IRS regulations. Instead, talk to a CPA to avoid making costly mistakes.

When Should Estimated Tax Payments be Made?

When paying estimated taxes, remember that the IRS divides the year into four payment periods. Once you are ready to make your payments, you can do so by mail, online, or even through your smartphone or other mobile device. In addition, the IRS will give you options to make your estimated tax payments even easier. So long as you make all of your tax payments within the given time period, you can send in payments each week, every other week, or even monthly, depending on what will work best for you and your financial situation.

Penalties for Underpaying Your Estimated Taxes

While the IRS does have penalties that can be imposed on taxpayers who underpay their estimated taxes, these penalties are generally not very severe, and in most cases can actually be avoided altogether. In most cases, taxpayers can avoid financial penalties if the amount owed after subtracting credits and withholdings is less than $1,000, or if the taxes paid for the current year are equal to at least 90% of what is owed.

In addition, penalties for underpaying estimated taxes may also be waived by the IRS if you can show you failed to make payments due to unusual circumstances such as a casualty or natural disaster, you retired upon reaching age 62, or you became disabled in the tax year for which estimated tax payments were to be made. To be sure you can avoid any penalties, always have detailed records that can back up any claims you make, since it is likely the IRS will want to verify your story before waiving the penalties.

Coronavirus Tax Relief

Due to the impact the COVID-19 pandemic has had on people throughout the United States, the IRS and Congress have passed legislation and put new regulations in place to help provide tax relief to those who may have lost jobs or businesses due to the pandemic. Specifically, the CARES Act has a provision in it that applies to self-employed individuals, allowing them to defer part of the Social Security tax. Thus, if you are self-employed, you may be eligible for such relief. To find out how this may help your situation, talk to a CPA as soon as possible.

Along with this information about various aspects of estimated tax payments, the IRS has other programs in place that may provide additional help in making sure you don't have to pay penalties. Yet if you try to sift through the various forms, worksheets, and other information on your own, you are almost certain to make mistakes along the way. To ensure you don't make costly mistakes that could result in penalties or you missing out on important relief opportunities, consult with a CPA today.

While most people are accustomed to being in debt for homes, cars, and other things, being in debt to the IRS is a different matter altogether. Since the federal government does not appreciate it when folks don't pay the amount of taxes they owe, the penalties for tax debt are often severe. Unfortunately, many people try to ignore their tax debt problems, hoping they will magically disappear. Instead, they only get worse. If you are in trouble with the IRS, here are some tips for how to deal with your tax debt.

Make It Your Top Priority

First of all, make your IRS tax debt your top financial priority. Since the agency is allowed to seize your business assets or even your home, it is often suggested that paying off tax debt is a higher priority than paying a mortgage. Thus, rather than find yourself dealing with property liens and wage garnishments for years, get serious about dealing with tax debt and resolve this issue as fast as possible.

Loans and Lines of Credit

If you happen to be a business owner who owes back taxes to the IRS, taking out a bank loan or using a line of credit can sometimes be your ticket to paying off your tax debts. While the interest you wind up paying will probably not be deductible, it should be much less than the interest rates charged by the IRS. In most instances, the IRS charges penalties on unpaid taxes that accrue at .5% per month, or six percent annually. This, coupled with an additional three percent charged on your balance calculated at the federal short-term interest rate, means you will have at least a nine percent interest rate staring you in the face until your taxes are paid.

Retirement Account Loans

Along with traditional bank loans or lines of credit, you can also take out loans from your pension plan or retirement accounts like a 401(k) to pay your tax debt. Though you will lose some investment returns and be subject to paying interest when replacing the money, the difference will be much less than it might be if you continue to carry the IRS debt. However, don't be like many people who panic and simply withdraw money from their retirement accounts without thinking. If you do so and thus make it a taxable distribution, you'll have even more money that needs to be paid back. Consult with your CPA about withdrawal strategies that won’t set you back too much.

Installment Payment Plans

If you have no viable means of immediately paying off your entire tax debt balance, don't give up. Instead, you can work with the IRS to set up an installment payment plan to solve your problem. If you select this option, you can have as much as 72 months to pay back your debt. Also, if the debt you owe is under $10,000, you won't even have to disclose any financial information, since you can set up your plan on the irs.gov website. However, if you owe more than $10,000, the IRS requires you to submit detailed information about your monthly income and expenses. It’s always best to consult with a CPA prior to making any installment payment agreement with the IRS.

An "Offer in Compromise”

Should you feel your financial situation is as dire as it could ever get, you do have the option of making what is known as an "offer in compromise" to the IRS. In other words, you are making a plea to the IRS to reduce the amount of money you owe the agency. While this initially sounds like you can wave a magic wand and suddenly owe thousands of dollars less to the IRS, don't count on it. In the view of the IRS, your financial circumstances would have to be extremely dire for the agency to agree to this option. If you have suffered a catastrophic medical event or lost a job, you may succeed with this. However, if your income is still quite high, don't expect the IRS to cut your tax bill.

If It Sounds Too Good to be True…

While watching television, you have likely seen commercials for companies claiming they can settle your IRS tax debt for pennies on the dollar. Of course, they make it sound oh so easy, and likely have you thinking that their solution is the answer to your prayers. However, as you know, if it sounds too good to be true, it usually is, so be very wary of dealing with these companies. Instead, speak to an experienced and trusted CPA to get experienced advice you know is reliable and truthful.

Is Your Debt Collectible?

While the IRS of course wants the money it says you owe them, it also does not want to waste lots of time, energy, and money trying to collect a debt that may in fact not be very collectible. Ultimately, any decisions made by the IRS as to how to proceed in collecting your tax debt will come down to the current amount of your disposable income, how much equity and assets you own that can be used to pay off the debt, and other related factors. During the COVID-19 pandemic, the IRS has been much more lenient when trying to collect taxpayer debt, but that is not expected to last forever. Therefore, if you have unresolved tax debt, striking while the iron is hot may give you an edge you won't have a few months from now.

If you try to go it alone when dealing with IRS tax debt, you are virtually certain to make an already tough situation much worse. To get your questions answered and embark on a viable plan to solve your problem, consult soon with a CPA whose advice and guidance you can trust.

Whether you are a business owner or an individual, meeting with your CPA is of course important when it comes to your taxes or other financial matters. However, even if you consider yourself to be well-versed in accounting, there are usually a few terms tossed your way that may leave you confused. Rather than sit there and continue to wonder what it is your CPA is talking about and how it will impact your situation, here are 15 of the most common accounting terms explained in easy-to-understand language.

1. Book Value

When you have an asset that depreciates in value, such as a motor vehicle, it of course loses value each year. When your CPA refers to the book value of a particular asset, they are referring to the original value of the asset, prior to any depreciation.

2. Gross Profit

If you own a business, gross profit indicates just how much money your business made prior to the deduction of expenses. To calculate this, the cost of any goods sold is subtracted from your company's revenue over a certain period of time.

3. Income Statement

Your income statement, which may also be referred to as the profit and loss statement by your CPA, is a comprehensive financial statement that contains all revenues, profits, and expenses over a given period of time. The top of the report will display the revenue your business earned, which will be followed by all expenses that have been subtracted. At the bottom, your company's net income will be shown.

4. Liquidity

Should you be needing quick cash, your CPA may be talking to you about liquidity, which refers to how quickly an asset can be converted into cash. As an example, stocks have a greater liquidity than real estate, since stocks can be sold much quicker and thus be liquidated into immediate cash.

5. Trial Balance

If you are discussing your trial balance, this is the listing of all accounts contained in your general ledger. Each account listed will have either a debit or credit balance, and all debits must be equal to all the credits in the trial balance.

6. General Ledger

Used to prepare all of your financial statements, the general ledger is the complete record of all financial transactions conducted by a business. Needless to say, this needs to be quite accurate.

7. Working Capital

As a business owner, expect your CPA to be discussing working capital with you quite often. When this term is used, it refers to the amount of cash you need to fund the daily operations of your business. To arrive at this figure, your CPA adds together your inventory and accounts receivable, then subtracts your accounts payable.

8. Cost of Sales

If you have sold goods or services during a specific accounting period, then you will also have what is known as cost of sales, which is the costs that are associated with producing whatever goods or services you sold.

9. Return on Investment

In many instances, your CPA will refer to the return on investment, or ROI, when discussing how much profit your business made within a certain accounting period. However, it is also used when discussing the financial returns on other aspects of business. As an example, if you spent $5,000 on a marketing campaign and it produced $10,000 in profits for your company, your CPA would tell you the ROI is 50%.

10. Accounting Period

No matter the type of business, it has a specified accounting period. Thus, when your CPA refers to this, it means the timeframe in which your company's financial activities are tracked. This can be done monthly, quarterly, or annually, with most businesses choosing the monthly option. However, even if your business uses monthly reports, your CPA may recommend you also take advantage of quarterly or annually reports.

11. Allocation

While confusing to many people, allocation is actually quite simple once explained to you by your CPA. In its simplest terms, allocation is when funds are assigned to certain accounting periods or accounts. As an example, some operating costs such as insurance may be allocated over a period of several months, while certain administrative costs may be allocated over various departments.

12. Cash Flow

Should your CPA start talking to you about how much money is coming in and going out from your business, they are talking to you about cash flow. To arrive at this figure, your CPA will subtract the ending cash balance from your beginning cash balance. If the result is a positive number, you have more cash coming in than going out, which is always a good thing.

13. Variable Costs

When you have costs that fluctuate due to the volume of sales, you have what are known as variable costs. Since these are expenses that are incurred so that products can be produced for sale, it often refers to additional costs linked to raw materials.

14. Liabilities

If a company has a debt it has not yet paid, it is referred to as a liability. With most businesses, this term will reference such debts as loans, payroll, and accounts payable.

15. Business Entity

Last but not least, business entity means the legal structure of your business, with the most common being partnerships, sole proprietorships, and limited liability corporations (LLC).

Since it is so important for you to know all you can about your finances, having a better understanding of various financial terms regularly used by your CPA will help you out in many ways. Of course, should you have any questions during your meeting or at any other time, never hesitate to contact your CPA. By doing so, you'll get much-needed peace of mind.

If there is one thing you as a taxpayer want to avoid, it is being audited by the IRS. While the chances of it are usually very slim, there are certain red flags that do get the attention of IRS officials now and then. Whether it is tax returns for individuals or those connected to a business, an IRS audit will be very detailed, time-consuming, and could potentially lead to criminal charges being filed against you, depending of course on the alleged violations. Rather than have these circumstances occur, it is always best to work closely with your CPA so that you will be aware of these nine red flags that can trigger an audit.

1. Reporting Incorrect Taxable Income

Whether you are a full-time employee or self-employed, reporting an incorrect taxable income will get the attention of the IRS. Since the agency receives copies of whatever W-2 and 1099 forms you receive, it will know exactly how much income you earned. When a discrepancy occurs on your tax return, expect the IRS to start asking questions.

2. Large Donations, Small Income

While making large donations to various charities is always a great thing to do, it will be a red flag to the IRS if you are doing so while reporting a very small income. Since these two things are generally not compatible, you should keep all receipts associated with your charitable donations, and also work with your CPA to ensure you follow IRS guidelines for your donations.

3. Deducting High Business Expenses

If you are a business owner or perhaps a salesperson who regularly takes clients to dinner to finalize important deals, expect the IRS to carefully scrutinize the business expenses you claim as deductions on your tax return. While it is acceptable for you to deduct as much as 50% of the cost of a reasonably-priced business dinner, doing so over and over for large amounts will always be a red flag to the IRS.

4. I Use My Car for Business

One of the oldest red flags for potential audits, stating that you use your car for business purposes will likely have the IRS asking you many questions along the way. To prove your tax return is correct, you should keep detailed records of your mileage as well as dates and times for when you used your car for business. If you can, also write down your starting and ending destinations, since these can lend more credibility to your deductions.

5. Nothing but Round Numbers

While your CPA would love to see a perfect world where everything wound up equaling nice, round numbers, they know that's not how the world works. Unfortunately, the IRS knows this as well, which is why when you always submit tax returns that contain figures such as these, you ensure the red flag rises at the IRS office. In these situations, the IRS will probably think you are either pulling figures out of thin air, or at the least are keeping horrible records of your transactions. To avoid an audit, provide your CPA with all available receipts, since this will let them use the actual numbers on your forms.

6. Your Business Always Loses Money

While it is not unusual for a business owner to report their business lost money now and then, doing so year in and year out will garner the attention of IRS agents. Thus, if you have a full-time business and have reported on your tax returns that your business has lost money for at least three of the past five years, you can probably expect to be audited. To make sure all goes well in the end, have as much documentation as needed to show your business has simply hit a rough patch, and is usually profitable.

7. Unforced Errors

Hey, mistakes happen, even on tax returns. Depending on the type of form you are using when filing, how many deductions you may be claiming, and so forth, it's always possible to make an unforced error on your tax return. From claiming an incorrect tax credit to filing under the wrong status, these types of errors may get you more attention from the IRS than you anticipated. Fortunately, if you work with a CPA when filing your taxes, they can carefully check your returns with your records to ensure no mistakes are made prior to filing.

8. The Home Office

Should you simply have a computer positioned on a desk in your home, this does not constitute an official home office in the eyes of the IRS. However, this doesn't stop people from trying to abuse this deduction each and every year. To be in the clear when claiming a home office, you need to have an area of your home that is used for the majority of your work and for little if any personal use. Should questions arise, listen to the advice of your CPA.

9. Dramatic Change in Your Income

In today's topsy-turvy world, it is of course always possible you could have a dramatic change in your income, either for the better or for the worse. If this should occur and the IRS starts taking a look at your previous tax returns, it may want some answers from you as to what has transpired. This is especially likely if you have made large cash deposits into your bank account recently, so be prepared for additional scrutiny. To protect yourself, keep all records and documentation related to your change in income, and also discuss your situation with a CPA you know and trust.

While most people assume an IRS audit automatically means large fines and possibly criminal penalties will follow, this happens far less often than is realized. Instead, having the proper documentation and being honest about any mistakes or discrepancies will usually help to clear up the matter. By doing so and hiring a CPA who is experienced in these matters, tax season can be one filled with relaxation rather than apprehension.

When the time comes and you decide to hire someone to work for you as a housekeeper, nanny, caregiver, or similar job at your home, it’s vital that you understand the tax implications associated with such arrangements.  While some people who are employers in these situations don’t pay attention to the tax side of things, this is a mistake that may lead to stiff penalties from the IRS.  Rather than create this situation for yourself, here is what you need to know when hiring household help.

Employee or Self-Employed?

To begin with, you should determine whether the person who will be working in your home is legally defined as an employee or as a self-employed individual.  In general, if the worker you hire controls how their work is done or is provided to you by an agency, yet still has control over how the work is done, they are not your employee.  However, if you hire someone and still maintain control over their daily actions while on the job, you more than likely have yourself an employee in the eyes of the IRS. 

Providing Equipment and Supplies 

Along with the question of who maintains control over the job duties, determining who provides various equipment and supplies also makes a difference.  As an example, if you hire a person to be a nanny and perform light housework, who follows your specific instructions about their duties and uses equipment and supplies you provide, they may be considered to be your employee.  However, if you hire someone to perform lawn care services who uses their own equipment and supplies, they are probably not your employee.

Employment Eligibility Verification

Whether you hire an employee temporarily, have them live-in at your home, or they work for you on a long-term live-out basis, you are responsible for verifying they are either a U.S. citizen or an alien who is legally allowed to work in the United States (unless you hire through an agency).  To do so, you and your worker must complete Form I-9, USCIS Employment Eligibility Verification.  Once your worker fills out their part of the form and you verify their documents, you complete the employer part of the form.  Upon doing so, do not send the form to USCIS.  Instead, keep it for your records. 

Severe Consequences

While Form I-9 may not sound terribly important to you, it is, in fact very important.  Under U.S. law, it is illegal for any person or company to knowingly hire or continue to employ any person who is not legally authorized to work in the United States.  If you do so and are caught by authorities, you could face severe penalties from the IRS and possibly even face criminal charges.

Employment Taxes

When you have any type of household employee, you may be required to withhold both Medicare and Social Security taxes, as well as federal unemployment taxes.  Under current regulations, if you paid your employee cash wages exceeding $2,200 in 2020, you are required to withhold and pay Medicare and Social Security taxes.  In addition, if you paid at least $1,000 in cash wages to your employee during any quarter of the calendar year in either 2019 or 2020, you are required to also pay the federal unemployment tax.  Should none of these apply to you, it is possible you may still be required to pay state unemployment taxes. Consult with your CPA for details. 

Social Security and Medicare Taxes

As for Social Security and Medicare taxes, you as an employer are required to pay in not only your share as the employer, but also your employee's share of the taxes.  Currently, as the employer, your share totals 7.65 percent, which is broken down into 6.2 for Social Security and 1.45 for Medicare.  The amount is the same for your employee, so keep this in mind when paying the taxes.  While you have the option of either withholding your employee's share from their wages or paying it directly out of your own funds, you should not count wages you pay to your spouse, your parent, or any child you have who is under age 21 as Social Security and Medicare wages. 

Exceptions to the Rule

As with many tax-related matters, there are of course exceptions to the rule regarding the payment of Social Security and Medicare taxes with regard to payments made to a parent or an employee who is under age 18 at some point during the course of the year.  Regarding a parent, these wages should be counted if they care for your child and the child is under age 18 or suffers from a physical or mental condition requiring personal care from an adult.  In addition, you can only count these wages if you are divorced and have yet to remarry, are widowed or a widower, or are married but have a spouse whose mental or physical condition prevents them from providing childcare.  As for employees less than 18 years of age, wages should only be counted if this job is their primary occupation, which would not be considered the case if the person you employ is a student. 

Maximum Taxable Earnings

Should the Social Security and Medicare wages of your employee reach $137,700 during 2020, any wages paid the remainder of the year should not be counted as Social Security wages when figuring the Social Security tax.  However, wages should continue to be counted toward the figuring of Medicare taxes.  Also, be aware that meals and lodging provided by you at your home to your employee for your convenience and as a condition of their employment are never counted as wages in these situations. 

Needless to say, the tax issues involved when hiring household help can be complex and confusing.  To make sure you don’t make costly mistakes along the way, it is best to consult with a CPA who can advise you on how to proceed in these matters.  In doing so, both you and your employees or contract workers can have peace of mind.

With the recent coronavirus outbreak, discussions of paid leave, and states of emergency, more attention has been paid to sick time and paid time off than ever before. If you’re a small business owner with just a few employees, you might not have an official sick time policy. Or, you might not have paid much attention to tracking employees’ time off, relying on the honor system.

A lot has changed in the past few weeks. With a focus on self-isolation and quarantine, you might have realized that it’s time to look at your policies on sick time and absences. 

What Does the Law Say about PTO?

The Fair Labor Standards Act governs small businesses labor policies. While companies with fifty or more employees must offer up to 12 weeks of unpaid leave to some employees, there’s no requirement to give them paid time off or vacation. It’s up to the employer’s discretion.

However, state and local laws may mandate sick time - such as in the city of Minneapolis, which requires that employers offer sick and safe paid time off for part-time employees. Always check the laws with your local labor department when writing human resources policies. 

Even though there is not a legal requirement to offer PTO, many businesses know that PTO attracts qualified workers, keeps them motivated and engaged, and protects the health of their overall workforce. Offering sick days and vacation time is just good business, which is why employees have come to expect it. 

When you first started, you might not have written formalized policies. But, if you grow, they will become necessary. 

What Should go Into a PTO Policy?

Given that it’s up to your discretion how much PTO to offer employees, as long as you are in compliance with state and local laws, you can formulate your own PTO policy. In it, you should include information on who receives paid time off, how hours accrue, and how many hours employees are eligible to receive annually. 

Here are a few questions that your policy should answer so that you know how to account for the PTO your employees earn and use properly.

Who Receives PTO, and When?

A comprehensive PTO policy should first address who’s eligible for PTO. 

Will you only offer it to salaried employees, or will hourly workers be eligible? Then, ask yourself when they can take the PTO and if they need supervisor approval. If your business would be severely disrupted if all four hourly workers took the same day off, you might want to require supervisor oversight and approval of PTO requests. 

When they take PTO also relates to years or months of service. Will you only allow a new employee to start taking time off after they’ve been with you for six months? 

How Will Hours Accrue?

Do you want to track accrued PTO by hours worked or years of service? Does a new employee receive all their PTO benefits on their start date? If they earn PTO as they work, you’ll have to track hours. For some businesses, this doesn’t make sense. 

Does Vacation Time Carry Over?

Will vacation time carry over? This is one of the biggest questions, from an accounting perspective, that you must answer. If employees can carry over accrued vacation, you will carry that liability on the books from year to year. It adds a layer of complication to closing the books at year-end. 

Will you pay out employees for unused time off? 

If an employee quits and hasn’t used five hours of vacation time, will you pay them for those hours? Again, this has accounting and cashflow implications. Accrued PTO is a liability on your Balance Sheet, so it’s important to track it accurately. And adding an extra ten hours of pay to a last paycheck could harm your ability to pay suppliers one week. 

What about Longer Absences?

If you have decided to revisit your sick leave policy in the light of coronavirus, consider the following; will you allow employees to work from home? If an employee goes negative on sick time or PTO, how will you handle it? It’s important to answer these questions before they become an issue. 

Accounting for Sick Time

Accrued PTO is a liability on your balance sheet. As employees earn hours, you must increase this liability. 

For example, if you have a policy where they earn one hour for every eight hours worked, at the end of a 40 hour week, you would record 5 more hours of PTO in your liability account. Proper time tracking is essential, both for accruing and using PTO.

When an employee takes a sick day or goes on vacation, it reduces the liability. Note that you only need to record a liability if the employee earns the vacation time in one period but defers using it until another - if they use it as they earn it, it rolls into compensation. 

When booking accruals, you can factor in anticipated forfeitures. Many PTO policies state that employees must have been with the company for a certain time to take vacation. If you’ve been dealing with a high turnover rate and PTO forfeitures, then it wouldn’t make sense to book 100% of the vacation that new employees accrue. Your accountant can help calculate a forfeiture rate.

Small or large - no matter your company size, there are many variables you must consider when formulating a PTO policy. Paid time off and sick leave impacts everyone in your organization, and also has a financial impact. It will appear on your balance sheet and affect your cash flow. 

A documented sick time and PTO policy, fairly applied to all employees, protects you from lawsuits, and helps your business keep running smoothly. 

Getting a divorce can be one of the most stressful times in your life. In addition to the emotional toll, it costs, on average, $15,500. As you split your assets, including cars, homes, and retirement accounts, don’t forget to think about the financial implication of your custody decree.

There are financial considerations related to your children that go beyond child support and that you would be wise to include them. From everything to the federal dependent tax credit to your daughter’s piano lessons, here’s what you should think about when it comes to kids, divorce, and taxes.

Child Tax Credit

The child tax credit allows you to claim an annual credit for any dependents in your home. It can be up to $2,000 per child and $500 per qualifying dependent. For many families, this is a big help on their tax return. Once your divorce has been finalized, however, you’ll be filing singly. So, who takes the child tax credit on their taxes?

For simplicity’s sake, most couples with 50/50 custody agree to trade the deduction off every other year. The father gets the deduction in odd years, the mother in even years, for example. If, however, custody is not 50/50, the parent who has more time also usually gets the deduction.

In some instances, if there is a large income discrepancy, the parent who makes a significantly higher income could cut a deal with the other parent. In order to keep the child tax credit every year, they may offer more money in the settlement or higher alimony payment.

Another thing to consider is whether or not the deduction should be tied to child support. If it’s an odd year and the father gets the dependent care deduction, but he’s behind or hasn’t paid child support, you can put in your decree that the mother can take it that year. Discuss all options with your lawyer before agreeing to a plan.

Daycare or Afterschool Care

If your children are young, and still in daycare, or need before and after school care, don’t forget to include these costs and their associated deduction in your decree. While the expenses can be split evenly, in some states (such as Minnesota), they’re often divided up by either the parent’s income levels or custody time. If your ex makes significantly more than you do, they’ll pay more for daycare.

The federal government does allow you to deduct either daycare or before and after school care expenses. Your deduction amount will be a percentage of the total, and that percentage is based upon your income. If you live in a state with income taxes, talk to your accountant about both limits and deductibility of daycare and afterschool care. It varies by state and could depend upon your income.

And don’t forget about the summer! While overnight camps aren’t tax-deductible, summer day camps for children under the age of 13 that allow you to work can be deducted.

Extracurricular Activities

Even if you’ve been splitting costs amicably during the divorce, it’s a good idea to put everything in writing. If your son loves his swimming lessons, ask your lawyer to include in the decree that he’s allowed to continue them for as long as he wants. Also, include any other sports, or other opportunities, you want your children to experience.

This language can be broad, such as “one additional afterschool activity,” if your child hasn’t chosen a sport yet. But it should provide for both continuing or starting new activities and cover who will pay for them. It’s an unfortunate reality that some parents choose to become petty about money once they’ve split. A good co-parenting relationship can change once your ex-spouse remarries, and they could decide to stop splitting bills they once paid without argument.

Negotiate to add clauses about extracurricular activities, transporting your kids to them, and who will pay. If you’re concerned about the cost, you can set a cap on quarterly or annual expenditures. The IRS considers extracurricular activities to be personal expenses, and will not allow you to deduct them. But it’s still not something to overlook for your own peace of mind.

Further Education

While you can’t always get the other party to agree to who will pay for college or education beyond high school, it’s good to think about adding it to your decree. Some parents decide to split the costs 50/50, others agree to split three ways between the parents and the child. Either parent can deduct up to $4,000 of higher education tuition and fees, so it’s something else to address with your lawyer.

The Final Decree

Divorce is a complicated, messy business. Depending upon your children’s ages, you might have to live with the final decree for years to come. Talk with your lawyer and your accountant about every financial aspect of raising your children that you should include. Going back to court to address an omission can be quite expensive.

Tax laws also change, as do deduction limits and percentages. While you can’t predict what the government will do in the future, you can have your lawyer draft language which leaves room to re-negotiate at certain milestones. You can tie reassessments to kindergarten, high school, college, or other times when it might make sense to revisit your original agreement.

Does it sometimes feel like your accountant is speaking an alien language? You hired a CPA in the first place so you could benefit from their many years of experience and expertise. Obviously your CPA knows more than you do when it comes to taxes and taking advantage of the most beneficial financial strategies. But at the same time, you do want to understand what they’re trying to help you with and what they need you to do on your end of the finances. Learning a few common accountant terms will really help you to get a firmer grasp on your own financial situation while enabling you to more efficiently communicate with your tax professional.

1. Cash Basis Accounting and Accrual Basis Accounting

One of the first questions your CPA will ask is if your business operates on a cash basis or accrual basis. Newer business owners often take on a “deer in the headlights” look because they don’t know what the terms mean. These terms simply refer to the timing of when you record your business income and expenses. If you use cash basis accounting you record income when you actually get paid and expenses when you send the payment. With accrual basis accounting, you record the income as soon as you earn it and expenses when they’re incurred. Depending on your organization type, there are certain advantages to using either cash basis or accrual basis accounting, so consult with your CPA about which one works best for your business.

2. Balance Sheet 

Have you ever gotten a call from your CPA and they say they don’t like the looks of your balance sheet? If you only knew what a balance sheet was you might not like it either, but you don’t so you just nod and say “Oh.” The balance sheet is a snapshot of your financial position at any point in time. The balance sheet takes into account your assets and equity minus your liabilities. The balance is your net worth. It’s valuable for diagnosing cash flow problems in addition to other things. 

3. Depreciation 

Depreciation is a simple word with a complex meaning. Most people know that a car depreciates in value the moment you drive it off the lot. But when your CPA starts talking about spreading out the depreciation on your assets over time do you really know what they’re talking about? Depreciation is a loss of value over time. Things like expensive business equipment and fleet vehicles are often depreciated over several years’ tax returns as a tax saving strategy. You may also hear your accountant talk about accelerated depreciation, straight-line depreciation and accumulated depreciation. Calculating depreciation on an asset can be complicated, so it’s best left to your tax  professional.

4. Fixed Costs 

Just as your grandmother may have a fixed income, your business has fixed costs. Fixed costs are those that remain the same no matter how much or how little business you do. Examples of fixed costs include rent and salaries. If your CPA advises you to reduce your fixed costs, you’ll need to make a major change such as move your business location.

5. Journal Entry 

Do you hear the words journal entry and get an image of Bob Cratchit penciling in the ledger in Ebenezer Scrooges’s office? You’re not entirely off base. When accounting practices first began, numbers were entered into journals called ledgers. Later on, those ledgers took the form of those wide green and white-striped books you can still find in many office supply stores. Modern accounting is done with software on a computer, but the ledger entries are still called journal entries. And even if you use an accounting software at home and never see a “journal,” it’s still there, operating in the background. Don’t worry, though. You don’t need to know how to make a journal entry by hand – your CPA can take care of it for you.

6. Acid Test Ratio 

If your CPA talks about wanting to do an acid test, don’t worry. It’s not rocket science. An acid test ratio, also called a quick test ratio, measures the relationship between  business’s current assets that can be quickly liquidated and the business’s liabilities. The acid test ratio is frequently used in conjunction with the balance sheet to study the health of the business’s cash flow.

7. Comfort Letter 

If you applied for a business line of credit and they ask for a comfort  letter, don’t worry; your CPA will know exactly what this is. A comfort letter is a letter supplied by your CPA to an underwriter to make a declaration about the stability of your company’s financial position. It’s basically used to allay concerns about your financial stability. Just pass on the request to your CPA and they’ll take care of it for you.

8. Debt-to-Equity Ratio 

The debt-to-equity ratio is is another measurement that can be used to help assess the stability of your business. This ratio calculates the relationship between your company’s debt financing and your company’s equity financing. This ratio will reveal if you’re over leveraged or under leveraged so you can  make the necessary adjustments.

9. Retained Earnings

Don’t get too excited if your financials show that your retained earnings are some astronomical figure. Retained earnings are earnings that have been accumulated by the company and are being retained for future needs or owner distribution. In other words, that money is earmarked for something in particular. 

10. Predetermined Overhead Rate 

The predetermined overhead rate is calculated and used prior to the end of an accounting period to estimate and assign overhead costs related to products  your company sells, departmental jobs or operating units.

Understanding these ten accountant terms will not only help you better understand what your CPA is saying; they will also help you to make smarter business decisions by enabling a fuller comprehension of how your CPA views your company financials. At the end of the day, working in synergy with your CPA is healthy for you and and your business concerns.

Travel and entertainment are legitimate deductions, but few business owners take full advantage of them. One reason may be that they fear that the deduction will be challenged by the IRS and they’ll have to undergo the scrutiny of an audit. Another reason may be because the owner is unsure of how to take the deductions or what’s allowed and what’s not allowed. To be clear, travel and entertainment are allowable deductions. the IRS understands that much of business is conducted over drinks, meals or on the golf course. Travel is also an obvious necessary to conduct business. If you’ve been hesitant about taking travel and entertainment deductions, here is a guide to maximizing the benefits of these deductions.

What’s Really Allowed?

The first thing is to feel more confident about what’s really allowed with travel and entertainment expenses. That will enable you to recognize the expense when it occurs and to fully take advantage of every possible deduction.

Travel Expenses Allowances

Travel expenses related to your business activities are allowed in the following two categories:

1. Travel to and from business activities

2. Meals and related expenses relating to the travel you do for business.

For example, if you are an engineer, and you have to visit construction sites to monitor work, all your travel expenses to and from the job site are deductible. If you drive there, you can deduct your mileage. If you fly there, you can deduct the price of your airline ticket.

When you are away from home traveling on business, you can’t make meals for yourself, so you’re allowed to deduct meal expenses. Say you’re staying in a hotel during your business trip. The hotel and room service charges are tax deductible. You have to get your suit pressed for your meeting, so that’s deductible, too. The tip you give to your taxi driver that takes you to the meeting is also deductible. The tip you give to the waitress who serves your meals while you’re on your business trip away from home is deductible, as well as the drinks you order while waiting for your meal. Note that these things are deductible while traveling away from home on business, not necessarily while you’re having meals outside the home where you live.

Travel Expenses Not Allowable

There are some business travel expenses that aren’t allowable, or that might be questionable. For example, if it’s raining when you leave your hotel to go to your meeting and you buy an umbrella, that may not be deductible. If you buy reading material to keep you occupied because your client is running late for the meeting, the book or newspaper likely  isn’t tax deductible.

Meals Expenses Not Allowable

If you eat lunch at home to prepare for a meeting, that cost isn’t deductible. If you buy a snack to eat in the car on the way to your meeting that’s near your home, that’s likely not deductible.

Maximizing Entertainment Tax Benefits

It’s very important to understand what’s allowed as an entertainment deduction and what isn’t. Knowing this will help you take advantage of allowable deductions and feel more confident about how you spend when you’re with clients.

The first thing to remember with entertainment deductions is that the entertainment must be directly related to your business or directly associated with it. And the entertainment expense must be substantiated with receipts.

The second thing to remember is that only half of what you spend on entertainment is deductible. And, they must be reasonable and not overly lavish.

For example, if you buy tickets for you and your client to attend a sporting event and you talk about business beforehand or after, you can deduct half that cost. But if you go out of your way to book a charter flight to the Bahamas for you, your client and your client’s family, that’s definitely going to get some scrutiny.

If you belong to a country club so you can network with prospective clients, your club membership isn’t deductible. But if you pay for a one-day pass to a club so you can entertain your client on the golf course, that’s deductible.

When You’re Not the Owner

Finally, if you are the employee and not the owner, you may get reimbursed for business expenses through your employer. In that case no travel and entertainment expenses are directly deductible on your tax return, except ones that aren’t reimbursed. For those, be sure to keep your receipts and submit them to your tax professional for closer inspection at tax time.

Extra Tips For Maximizing Benefits

If you really want to make sure you’re getting all the advantages you’re entitled to, here are three extra tips:

1. When in doubt, add it to your list of deductions and keep your receipts. Your tax professional can make the final decision on whether or not to deduct it. But if they do, they’ll have the receipt to back it up.

2. Don’t mix business and pleasure. Avoid running errands to and from business meetings. Don’t invite your spouse or kids to business meetings unless it’s that kind of event. Don’t use your business credit card for personal items. Have separate loyalty cards for business and personal.

3. Get tip receipts. If you tip in cash on business trips, ask for a receipt. Business hotels are accustomed to this practice. For restaurants and taxis, you may have to ask for a receipt.

You’re entitled to take tax deductions for travel and entertainment but the key to maximizing this benefit is to know the rules and follow the rules. As long as you stay within the law you never have to worry, even if you do ever get audited. Your receipts will back up your returns. And remember, your tax professional is always a good resource if you ever have any questions about whether or not an expense is an allowable deduction. All you have to do is ask.

As we get deeper into the 2019 tax season, some taxpayers are experiencing a delay in receiving their tax refunds.  The old adage that if you are expecting a refund you should file early seems to be coming under fire a bit in recent years, but none so much as the 2019 tax season.  But why?

The delay has little to do with the 2019 tax season itself.  The IRS processes returns on a first come, first served basis and  identity theft has been an increasing issue in the last few years.    If the thief obtains your information, they  want to file as soon as possible to get their fraudulent version of the return in to the IRA before your actual return is sent.  The upsurge in identity theft filing has increased so much that Congress passed a law (Protecting Americans from Tax Hikes Act) that forced the IRS to delay any tax returns that contained certain deductions.  These deductions were determined to be most likely and easily targeted by identity thieves.  The two biggest of these deductions are the Earned Income Tax Credit (ETIC) and the Child Tax Credit.

The Earned Income Tax Credit provides support to low- and moderate-income workers equal to a percentage of their earnings up to a maximum (that varies by family size) until it reaches a phase-out threshold.  The Earned Income Tax Credit assists families with children far more than workers without offspring.   The Child Tax Credit is a credit that provides up to $2,000 per qualifying child, with up to $1,400 of the credit being refundable.  With the elimination of the dependent exemption in accordance with the Tax Cuts and Jobs Act of 2017, these two deductions may become more widely used.  By law, the IRS must hold returns with these deductions until at least February 15th of each year.  However, for the 2018 tax year filings, the IRS has stated that it will hold these until at least February 27, 2019.  According to the IRS, returns that are filed after this date that contain these deductions will not be delayed. 

Another reason for the delay in refunds comes from the government shutdown that occurred and carried on  into the early part of 2019.  This affects tax return filing because 2018 had numerous tax reform changes.  The tax reform is only part of the equation causing a delay in returns.  Another part comes from integrating those changes into the tax software and forms used by taxpayers to file their returns.  While the IRS began accepting tax return filings on January 28, 2019, much of the software still had to be upgraded  with updated forms.  Additionally, while the government may be at full capacity again with staffing, it still must wade through the backlog of work that piled up during the shutdown.

Additionally, the IRS is operating with a  decreased budget and staff.   This will create delays in  processing returns and refunds and  also in helpdesk and support calls.  The good news is that  the IRS projects less audits for taxpayers going forward, but the delay in refunds will impact  many taxpayers.  Paper filed returns will take even longer to prepare and process and can have an expected delay of up to seven weeks, rather than the normal four to six week turn around.

States are also reporting delays in producing tax refunds this year, due to  the government shutdown, as states often look to the federal tax codes for guidance and may even have laws that are affected by federal regulations.  States need to receive Federal rulings before they can add new laws to their tax code, and this is delayed when the government is not in session.  Most software will allow the taxpayer to complete the state filing but will notify the taxpayer of any delays in processing.

While it still may make sense to file early to avoid as much of the backlog as possible, even with the potential delays, most taxpayers with business returns will not file until after March 15th in order to take advantage of the new 199(a) deduction.

So how long will a taxpayer have to wait for their refund?  The IRS is still estimating that it will take around twenty-one days for most taxpayers to be issued their refunds.   If you feel that your refund is taking more time than even the expected delay, there are a few things you should do.  First,  verify that your return was received by the IRS and/or state.  If it was filed electronically, the software will have an electronic acceptance verification.  If you manually filed it, it is important to have a tracking format put on the return. Of course, if you filed a paper return, it will need to be manually entered on the IRS’s end and that will take time depending on the backlog of returns for the IRS to work though.  The next step would be to go to the Where’s My Refund page on the IRS website to verify the date of your expected refund.  If there is another reason for the delay, it would be a good idea to check in with the IRS or have your tax preparer do so.  It is possible that there is an error in your return that is holding up the refund.

A participating tax return preparer create a Tax Refund Anticipation Loan for you, which is an advance on your tax return refund.  In most cases, you receive a portion of your tax refund upfront in exchange for signing over the return to a company and for a fee.  Another method of receiving your refund faster is have it direct deposited into your bank account when submitting your return.  This will eliminate the need to wait for the mail to deliver your refund check and for the bank to cash it.

The bottom line is - your refund will take more time than usual this year, regardless of how you file.