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How much time are you spending on administrative work versus time spending time on sales and getting new business?

One of my clients was completely overwhelmed with piles and piles of paperwork; behind on invoicing by 3 – 4 MONTHS; had no clue how much he was bringing in, let alone profiting on each job; and was so stressed about it he was unable to even sleep at night. Once he started working with us, in less than 30 DAYS, we took all of this off his plate, he was able to collect on $25K + worth of overdue invoices and close two new deals totaling over $1 MILLION in revenue!

Your time is so valuable. Let’s make sure you are spending it the RIGHT way.

CLICK THIS LINK TO SCHEDULE A MEETING WITH US SO WE CAN HELP YOU TOO!

https://calendly.com/iskrap

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An Overview of the S Corporation

With tax filing season here and the federal tax code changes in place for over a year, you may have discussed the potential tax advantages of an “S” Corporation election. For some, the pass-through tax treatment and 20 percent deduction on qualified business income might provide significant savings. If you have a business that would benefit from being taxed as an “S” Corp in 2019, now is the time for action! The “S” Corp election filing deadline for existing LLCs and corporations is fast approaching, March 15 is the deadline for all “S” Corp filings.

An “S” Corporation is a corporation for which corporate income, losses, deductions, and credits flow through to its shareholders. To become an “S” Corp, a corporation must file Form 2553 (Election by a Small Business Corporation). The corporation itself doesn’t pay taxes at the corporate rate on its profits. “S” Corporations avoid “double taxation”—i.e., when a corporation’s profits are taxed at the corporate rate, and then some of those profits (those issued as shareholder distributions) are taxed again on shareholders’ personal tax returns.  

Corporations that want “S” Corp taxation must meet certain eligibility criteria. Among the requirements are:

  • Must be a domestic corporation (and not one that is ineligible such as certain financial institutions, insurance companies, and domestic international sales organizations) 
  • May not have more than 100 shareholders  
  • May not have shareholders that are non-resident aliens, partnerships, or corporations 
  • May only have one class of stock 

LLC owners might find that choosing “S” Corp tax treatment will lower their self-employment tax burden.

LLCs that meet the same above requirements regarding the number and type of owners can be taxed as an”S” Corp while remaining organized as an LLC.

Make your appointments today for all your Tax Planning Needs

https://calendly.com/iskrap

IPS Accounting Services & Consulting

Call Us (843) 637-7100

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New Qualified Business Income Deductions; Safe harbor enables many rental real estate owners to claim deduction

WASHINGTON — Today the Treasury Department and the Internal Revenue Service issued final regulations and three related pieces of guidance, implementing the new qualified business income (QBI) deduction (section 199A deduction).

 

The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income.  Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income. 

 

The QBI deduction is available in tax years beginning after Dec. 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.

The guidance, released today includes:

• A set of regulations, finalizing proposed regulations issued last summer, A new set of proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies

• A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes,

• A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction

The proposed revenue procedure, included in Notice 2019-07, allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met.  Taxpayers can rely on this safe harbor until a final revenue procedure is issued.

 

The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations.

 

The QBI deduction is not available for wage income or for business income earned by a C corporation

Let us help you take advantage of all the new business deductions, make your appointment today.

IPS ACCOUNTING & CONSULTING

Helping You Find The Road to Financial Growth

(843)637-7100

https://ipsaccountingservices.com

https://calendly.com/iskrap

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Do I need really need an accounting software?

I recently took over the books for a client who at one point in 2016 and 2017 had four restaurants and didn’t have an Accounting System in place. What do think 💭 happened? Of course he went bankrupt. I’m currently cleaning up the mess from 2017 in order to file his 2017 taxes. This just proves the importance of having some systems in place. I don’t care if you are just starting, too small or this is just a side hustle you need to know your numbers. I’m attaching a link to QBO self employed this system is only $10 per month and it even includes a mile tracker. You can link it to your personal bank account and categorize transactions as personal or business by a simple swipe. Take it from me your accounting is the spinal cord of your business and we all need an healthy spinal cord. Once you are ready to grow you business you can all us for additional resources and help.

IPS ACCOUNTING & CONSULTING

Helping You Find The Road to Financial Growth.

(843) 637-7100.

#entrepreneur #leadership #business #success #businessowner #businesswomen

https://quickbooks.intuit.com/self-employed

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Will I pay Taxes on my investments?

When you’re ready to sell a stock, bond or funds (like those you own with Acorns), you’ll likely have to pay taxes on any profit you made from the sale. If you’ve owned it less than a year, you’ll pay what’s called short-term capital gains tax, which is equivalent to ordinary income tax. But if you wait more than a year before you sell an investment for a gain, you’ll pay long-term capital gains tax, which is usually lower—another reason to hold onto your investments. Taxes may also be owed on ordinary dividends, qualified dividends and distributions. Tax rates for these will vary, and you should consult your tax advisor about your individual situation.

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Breaking News

WASHINGTON ― Despite the government shutdown, the Internal Revenue Service today confirmed that it will process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled. 

“We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period,” said IRS Commissioner Chuck Rettig. 

Congress directed the payment of all tax refunds through a permanent, indefinite appropriation (31 U.S.C. 1324), and the IRS has consistently been of the view that it has authority to pay refunds despite a lapse in annual appropriations. Although in 2011 the Office of Management and Budget (OMB) directed the IRS not to pay refunds during a lapse, OMB has reviewed the relevant law at Treasury’s request and concluded that IRS may pay tax refunds during a lapse.

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Individual Preparation for Tax Season

Here are a few tips we’ve put together to help Individuals in preparation to Tax Season.

Consult a Professional-

You should always consult a tax professional to discuss their tax liability. Be careful in trying to interpret tax code language on your own without professional assistance. Although there are many good tax softwares out there if you are not an accountant’s a tax professional you could leave thousands of dollars on the table.

Consider hiring a professional to give you the advice necessary to lower your tax bills, and give you ideas or options that could help you lower your tax liabilities or even get a bigger refund.

The new TCJA 2018 has been the largest overhaul to tax rules ever, therefore we encourage you to consider seeking professional advice on navigating your tax liabilities and expenses.

Call or make an appointment today.

IPS Accounting Services LLC

(843) 637-7100

https://calendly.com/iskrap

We have put a checklist together to help you get organized.

https://ipsaccountingservices.com/2018/12/29/tax-preparation-checklist/

Here are some highlights of the changes that can help you plan better.

The TCJA roughly doubles the standard deduction:

So for 2018, joint filers can enjoy a standard deduction of $24,000. However, the new law suspends personal exemption deductions and eliminates or limits many itemized deductions. For example, the state and local tax deduction is capped at $10,000 per year, or $5,000 for a married taxpayer filing separately (MFS).

Miscellaneous itemized deductions:

Also, the miscellaneous itemized deductions subject to the 2%-of-AGI floor like tax preparation fees and employee business expenses are eliminated, and for home acquisition debt, if incurred after 12/15/17, mortgage interest is deductible only with respects to up to $750,000 ($375,000 MFS) of such debt. For clients who typically claim the standard deduction, their tax bill will likely decrease for 2018.

Although personal exemption deductions are gone, a larger standard deduction, combined with lower tax rates and an increased child tax credit plus a new tax credit for non-child dependents, may result in less tax. We also found that clients who itemized last year won’t itemize this year, or they may be able to itemize for state, but not federal, income tax purposes. You will need to run the numbers to assess the impact. Depending on the results, you may need to adjust your estimated quarterly tax payments or adjust your tax withholding by submitting a new Form W-4 to your employers.

Optimize a child’s 2018 income under the new kiddie tax rules:

TCJA changed how the kiddie tax is computed. Before 2018, unearned income in excess of a threshold amount was taxed at the parents’ applicable tax rate. Now, the income tax rates for estates and trusts apply instead of the parents’ tax rate. So, the kiddie tax computation is no longer tied to the parents’ return and rates.

The key to planning for the kiddie tax is understanding how a child’s income, both unearned (investment) and earned income is taxed. One of the most beneficial kiddie tax planning strategies is recognizing enough income to take full advantage of the child’s standard deduction or, for long-term capital gains and qualified dividends, the taxable income thresholds within which such income is taxed at a 0% rate.

Revisit qualified tuition plans (QTPs):

QTPs, also called 529 plans, are a great way to ease the financial burden of paying for college. Before the TCJA, earnings in a QTP could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other postsecondary schools. QTPs can now be used to pay for tuition at an elementary or secondary public, private, or religious school, up to $10,000 per year. If you are paying tuition for your children or grandchildren to attend elementary or secondary schools, we encourage you to either set up or revisit their 529 plans.

Bunch charitable contributions:

The TCJA temporarily increases the limit on cash contributions to public charities and certain private foundations from 50% to 60% of AGI. While the AGI limit likely applies to a few of your clients, the doubling of the standard deduction and changes to key itemized deductions will prevent many clients from itemizing in 2018 and beyond. One way to combat this is to bunch or increase charitable contributions in alternating years. We suggest that you up donor-advised funds. This will allows you to claim a charitable tax deduction in the funding year and schedule grants over future years.

Finalize a divorce before 2019 to deduct alimony:

For divorces and legal separations that are executed come into legal existence due to a court order after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse won’t include them in gross income or pay federal income tax on them. So, if deductible/taxable alimony is desired, as it often is when the alimony payor is in a higher tax bracket than the recipient, finalization by 12/31/18 is essential.

Review last year’s 1040:

A review of last year’s Form 1040 is often a great source of tax-saving ideas for you in the current year.

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Business Preparation for Tax Season

Here are a few tips we’ve put together to help Business Owners in preparation to Tax Season.

Consult a Professional:

Small businesses should always consult a tax professional to discuss their tax liability. Be careful in trying to interpret tax code language on your own without professional assistance.

Many business owners/entrepreneurs understand everything about their business, but for the most part, they are not tax or accounting.

Therefore, hire a professional to give you the advice necessary to lower your tax bills, and give you ideas or options that can help your business, while the owner can concentrate their efforts in areas that they might be more comfortable with.

Any federal or state legislation that could potentially change the tax code will take time to enact, so for the upcoming tax season, small business owners should levy their costs and expenses according to the current tax structure.

The new TCJA 2018 has been the largest overhaul to tax rules ever, therefore small business owners should consider seeking professional advice on navigating their tax liabilities and expenses.

Call or make an appointment today.

IPS Accounting Services LLC

(843) 637-7100

https://calendly.com/iskrap

Separate business from personal expenses:

I always suggest that my clients open a checking account just for the business income and expenses. They can draw distributions from that account to their personal account to pay for their personal expenses.

Whenever using a personal credit card for business try to designate one card for the business, we all have several credit cards but if you want to use them for business purposes, try to keep it one just for business. You can pay for this credit card with your business account. This is also helpful she tax season comes you will know that everything charged to that card is for business.

However if you must mingle your personal and business charges into one card make sure you keep good records of personal vs business. This could be tricky so be sure to keep up with it on a monthly basis.

Compliance Starts with Preparation:

For 2018 we suggested that small business owners compare their profit-and-loss margins to the 2017 tax season to avoid underpaying on their taxes.

I always suggest that my clients create a separate bank (Savings) account for taxes and put 10-15 percentage of their income in that account to save it so they are not short on tax day.

According to the IRS, if you will owe more than $1,000 in taxes, you must make estimated tax payments in the amount of 100 percent of last year’s tax liability, or 90 percent of the current year’s liability — whichever is smaller.  

The estimated tax payment method enables small business owners to keep track of their expenses in the buildup to tax filing in April, and offset any costs that occur between this point and their final submission to the IRS.

Acquire business assets:

Under the TCJA’s liberalized Section 179 deduction rules, small businesses can write off the entire cost

of qualifying property rather than recover it through depreciation. The maximum deduction this year is

$1 million (up from $510,000 for 2017). And the deduction is now available for certain tangible personal property used predominantly to furnish lodging and certain improvements to nonresidential real property (roofs, HVAC, fire protection systems, alarm systems, and security systems).

Above and beyond the Section 179 deduction, a business of any size can claim first-year bonus depreciation. The TCJA establishes a 100% first-year deduction for qualified property acquired and placed in service, generally, after 9/27/17 and before 1/1/23. Unlike under prior law, this provision applies to used property as well as new. And unlike the Section 179 deduction, 100% bonus depreciation deductions can create or increase a net operating loss for a business’s 2018 tax year.

“If you were waiting on that new computer system, you may wish to buy it now and put it in service this year and]write it all off, which reduces your overall taxable income.

Adopt a more favorable accounting method:

The cash method of accounting, which lets a business recognize sales when cash is received, is attractive to many small businesses due to its simplicity. For tax years beginning after 2017, the ability to use the cash method is greatly expanded. Any entity (other than a tax shelter) with three-year average annual gross receipts of $25 million or less can use the cash method regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.

Thanks to this favorable rule, a business may be eligible to adopt cash method accounting. You will need to determine whether your clients’ average annual gross receipts are $25 million or less. If they are, and if a change would be beneficial, you can assist your clients in filing the appropriate paperwork with the IRS to change their accounting method.

And finally, the one you’ve been waiting for:

Maximize the Section 199A Qualified Business Income (QBI) deduction:

Perhaps the hottest topic of the TCJA is the new QBI deduction. Individuals who operate a sole proprietorship or own interests in a partnership, LLC, or S corporation may be able to deduct up to 20% of their qualified business income. However, the deduction is subject to various rules and limitations — and they are complex.

Although official guidance continues to be issued on this new deduction, there are some planning strategies that can be considered now. For example, clients can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for clients to convert their independent contractors to employees where possible, but make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits.

We have put a checklist together to help you get organized.

https://ipsaccountingservices.com/2018/12/29/tax-preparation-checklist/

Featured

New Standard Mileage Rates for 2019

WASHINGTON — The Internal Revenue Service today issued the 2019 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

58 cents per mile driven for business use, up 3.5 cents from the rate for 2018,
20 cents per mile driven for medical or moving purposes, up 2 cents from the rate for 2018, and
14 cents per mile driven in service of charitable organizations.

READ MORE…

https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2019

Featured

I’m a Survivor

I have survived many obsticles in my life but there are always some challenges that are harder then others. In the summer of 1993 I survived a horrible car accident, the motor of my car felt on top of my leg shattering it into pieces, when I realized what had happened I never thought I would ever walk again. I had to be taken out on a stretcher and flown on a helicopter to the hospital where they operated on my leg for over 8 hours. I had open wounds and was not able to wear a cast. Therefore for the next six months I had to learn to maneuver a wheelchair and hop on one leg in order to get around.

One of my biggest challenges was coming up with ways to pay my bills because at the moment I was on the process of my second divorce and I had two small children including a 14 month old-baby boy. Prior to the accident, I had two jobs but was unable to keep either one after the accident.

Additionally my insurance had expired a few days before my accident and the guy who took the red light only had a minimum insurance that covered 10k of the 14k I owed on my car that was totaled. Therefore, for the next 6 months I had to use my child support payments to pay the debt on my vehicle.

So how did I get past this horrific experience?

Well I had to endure and tap into my survival skills. My first focus was to not loose my home. I asked my brother to divided it in half and I rented the back end which actually paid for my entire mortgage. I still needs some extra money to feed my kids, so I begged my old employer to lay me off so I could collect unemployment insurance. He agreed because he didn’t have the handicap facilities needed in order for me to go into work with my wheelchair. Lastly I was able to do a full recovery four months prior to the what the doctors had expected because I learned to do the exercises from the rehab center at home.

What did I learn from this experience? I learned to live life to its fullest because you never know what tomorrow will bring. I learned that I was stronger than I thought I could be. I learned that I had the ability to come up with solutions on the spot. Most of all I learned that a mother’s love is capable of everything. For the last twenty five years I’ve had a rod and several screws inside my leg reminding me of this moment and not one day goes by that I don’t remember. I no longer just walk through life I now dance through life enjoying every second that God gives me on this earth.

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What are the Benefits of Outsourcing Your Bookkeeping?

An outsourced bookkeeper is focused on one thing; managing your books.

They aren’t answering the phone, scheduling staff, buying office supplies, or putting out the day-to-day fires.

During the time they work with you each week or month, your bookkeeping is number one on their to-do list; it doesn’t get pushed aside for other responsibilities.

An outsourced bookkeeper is more likely to have a wide range of fiscal experience and knowledge than an in-house person with part-time bookkeeping responsibilities.

They usually works with several clients, giving them multiple points of comparison, and are more likely to know if an expense seems high, or have experience with various vendors and be able to make recommendations.

They can work with you to create better strategies to manage cash flow, reduce expenses and increase profitability.

They may also be able to help you create internal controls to minimize theft or other losses.
An outsourced bookkeeper is better able to tell the owner ‘bad news’ than a staff person with part-time bookkeeping responsibilities. A staff person who works with the owner every day may hesitate to tell them about problems because they don’t want that to reflect on them.
An outsourced bookkeeper is less likely to play office politics.

 

They don’t care what someone else is being paid and aren’t upset because they didn’t get the new desk. Any recommendations they make will be based on what they think is best for the long-term health of your business.

 

An outsourced bookkeeper is less likely, and less able, to steal from you. Generally, an outsourced bookkeeper is NOT (and does not want to be) a signer on your bank accounts, is not processing their own payments or payroll, and does not have a company credit card.

An outsourced bookkeeper may able to act as a liaison with your accountant, identifying possible tax-saving strategies for your particular business or assisting with long range planning.
Working with an outsourced bookkeeper creates a structure that facilitates regular financial review.

 

The owner is more likely to meet with the bookkeeper on a regular basis if they are on-site for only a few hours every week during a regularly scheduled time. Even 15 minutes at the end of each session to go over the big picture can make a difference.

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How do you know if your company is ready for a CFO?

The easiest way to know if your company is ready for a CFO is your company’s growth. If your company is generating revenues of over $6 M or have over 60 employees, it’s probably time to hire a part-time CFO. Mid-sized companies will almost always have a full-time CFO on staff, but a full-time in-house CFO is usually not needed until the mid- to upper stages of small business growth.

However, regardless of company size, if your company is experiencing any of the following symptoms then it is time to consider hiring a part-time CFO.

1 – You don’t have easy answers to your questions

How easy is it for you to make financial or strategic decisions? Most major business decisions require detailed financial knowledge. If your current accountant or financial team is unable to give you the detailed information you need to make important or strategic decisions, it may be time to hire a part-time CFO. A CFO’s primary goal is to make sure your company can engage in a higher level of strategy for sustainable growth. Strategy first and foremost requires access to the answers you need to make educated decisions.

2 – Does it feels like your company is hemorrhaging money – but you’re not sure from where

If it feels like your company spending is out of control and you’re not sure which costs to cut or how to make those cuts, then it may be time to hire a part-time CFO. While the age-old adage of “you have to spend money to make money” is somewhat true, the key to success is strategic spending. Strategic spending often takes financial analysis, projections, and checks and balances that most executives simply don’t have time for.

Having your cash flow analyzed by a CFO can often be one of the most beneficial moves your company can in immediate financial impact. Not only will a part-time CFO help to eliminate unnecessary spending, they will also have extensive knowledge in benchmarks and will have vendor relationships or knowledge that can optimize your existing spends and help keep you competitive in your market.

3 – You’re raising capital? – especially if it’s a series C or later

If you’re raising capital, you may want to have the help of a part-time CFO. This is especially true if you:

  • Aren’t sure how much you need to raise
  • Don’t have a strategy for the right debt-to-equity ratio
  • Are raising a series C or later

A part-time CFO will have extensive experience raising money for companies in similar lifecycle stages and industries. In addition, they will already have the relationships and credibility that can help you achieve your goals. Part-time CFOs not only help determine the right type of financing to acquire (and how much), but they also help answer tough questions during due-diligence, analyze and negotiate contract terms, and can attend meetings to help provide financial expertise and insight.

4 – You have gaps in your AP or AR?

Do you have significant gaps in your accounts payable or accounts receivable?  It may be a sign that something within your systems is out of whack. Are there cash flow issues that need to be addressed? Are there ineffective billing, collections, or payment processes? A part-time CO can help you pinpoint the problem and develop solutions to resolve it.

5 – You feel like your departments lack checks and balances

Does it feel  sometimes like your other departments are operating on a different planet—or acting autonomously?—then it may be time to call in some reinforcement. A successful company requires all pieces of the machine working together smoothly and effectively. If your systems don’t work well together (or at all), then a CFO can help. Far from simple number-crunchers, CFO’s are experienced in the operations and systems that go into an effective organization. From sales and marketing to purchasing or manufacturing, your CFO can help you optimize each department and bring the systems together for a more functional, cohesive whole.

6 – Your Board of Directors is asking tough questions

Is your board asking questions that you don’t have answers to? —whether that’s identifying a problem, addressing a problem, analyzing an opportunity, or validating a decision—then you may want a CFO to help give you the information you need. A CFO can help answer tough questions and can help empower you with the high-level financial knowledge you need to discern your own answers.

7 – You don’t have a long-term financial strategy

It’s highly likely that your forecast has rarely (if ever) been looked at since you first started your company, let alone revised and kept up-to-date. A part-time CFO is pro at making educated financial projections based on your historical data, industry trends, and data from companies in a similar life cycle stage. If you don’t have a long-term financial strategy—or not one you feel you can have confidence in—then a part-time CFO can help you create a realistic financial blueprint to help you achieve your goals.

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Five top reasons you may get audited

 

There are many factors that go into an audit selection, but generally speaking, here are some of the top reasons clients may get audited:

You claimed a disproportionate charitable contribution deduction. Each year, millions of taxpayers claim the charitable contribution deduction. Even under the new tax law, many taxpayers will still be able to claim the deduction. However, your clients will run into trouble if they claimed an amount for the deduction that was too high compared to their income. The IRS has charitable deduction amounts that it deems proportionate for each income level.

You are self-employed. Your clients who are self-employed are more likely to be selected for an audit than your clients who are not self-employed. This is because Schedule C includes so many potential deductions business owners can claim.

For example, if your clients claimed excessive deductions for things like business meals, travel, entertainment, vehicles, or showing a significant net loss, the IRS will more closely scrutinize their returns. Be sure to make your clients aware of the importance of having receipts and detailed records for all business expenses they deducted.

You claim a home office deduction. The home office deduction is for those who use a space in their home “exclusively and regularly for their trade or business.” The IRS is great at finding taxpayers who claimed the deduction fraudulently. It will be difficult for your clients to prove they really did qualify for the home office deduction.

You wrote off a loss for a hobby. Your clients should have reported income for a hobby and may have qualified for some deductions, but they should not have written off a loss from a hobby. The only reason they would have been able to write off a loss is if their hobby was run like a business and they had an expectation of profit.

This is why it is so important to seek professional help.

Call us today for all your accounting needs,

Iskra C. Perez Salcedo

(843) 637-7100

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How “S “” Corporations Can Use an Accountable Plan

How “S “” Corporations Can Use an Accountable Plan:

Deduct Home Office Expenses Working from home

Are you an “S” corporation, that has a home office where you perform some or all of your work from your office for your businesses?

In an “S” corporation, shareholders are considered employees of their businesses, they are limited in the ways they can deduct home office expenses.

As employees, they can only deduct home office and other miscellaneous business-related expenses on Form 2106, Employee Business Expenses, where those expenses are limited to those exceeding 2 percent of their adjusted gross income. These miscellaneous itemized deductions are an add-back for the alternative minimum tax (AMT), so this can put you in AMT land. In contrast, partners in a partnership can deduct unreimbursed expenses directly on Schedule E as unreimbursed partnership expenses.

An accountable plan must meet three requirements to pass IRS muster:

The expenses must have a business connection. The expenses must be incurred while the employee is performing work for the company and must be ordinary and necessary expenses. These can include mileage for business-related driving, meals with clients and out-of-pocket travel expenses. They can also include a portion of mixed-use expenses – that is, those with a personal and business component, such as home office expenses, cell phones and home internet.

There must be substantiation to support the deduction. This can be easily accomplished by submitting a detailed monthly or quarterly expense report with the relevant documentation attached. Apps, such as https://www.expensify.com and https://www.receipt-bank.com simplify this and sync with QuickBooks® Online.

Any excess reimbursements over actual expenses must be repaid promptly. If the S corporation provides an advance to the shareholder for travel expenses, any excess over actual expenses must be repaid within 120 days.

For home office expenses, shareholders can be reimbursed for an allocated portion of their home maintenance expenses, including mortgage interest, property tax, insurance, utilities, home internet, trash, and repairs and maintenance. Any portion of mortgage interest and property taxes that’s reimbursed through an accountable plan must be deducted from the amounts reported on Schedule A.

To qualify as a home office, the area must be used regularly and exclusively for business. The home office portion of household expenses is allocated according to relative square footage. Some employees include a floor plan of the home, with a calculation of the square footage with their expense reports, to add additional credibility to their assertion.

An allocated portion of depreciation for the house should also be included in the reimbursed amount. When the house is sold, the “allowed or allowable” portion of the home office depreciation expense will be recaptured as ordinary income, so clients may as well receive a benefit now.

For some mixed expenses, such as cell phone or internet, allocation on a square footage basis may not be appropriate. The IRS allows a “reasonable” allocation method for these expenses. This can be the actual business percentage calculated on a sample period of a few days or weeks, or another method that can be consistently applied.

Without an accountable plan in place, these reimbursements are taxable income to the shareholder and should be reported on their W-2.

However, with an accountable plan, everyone wins. The shareholder gets a tax-free reimbursement for the home office and other out-of-pocket expenses, while the S corporation gets a deduction for the reimbursed amount.

Call us to schedule your appointment so we can set-up your Accountable Plan for your “S” Corp.

IPS ACCOUNTING & CONSULTING

Helping You Find The Road to Financial Growth

(843)637-7100

https://ipsaccountingservices.com

https://calendly.com/iskrap

IRS releases details on government shutdown

Due to the lapse in appropriations, most IRS operations are closed during the shutdown. An IRS-wide furlough began on December 22, 2018, that affects many operations.

During this period, the IRS reminds taxpayers that the underlying tax laws remain in effect, and all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do by law.

IRS Operations During the Appropriations Lapse | Internal Revenue Service

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